US 'yellow school bus' budget cuts add to cost pressures on Firstgroup

The company said First Student's disappointing performance followed school budget cuts, exacerbated by severe weather in America this winter.

Margins, which have been squeezed due to higher labour costs following route changes, are expected to remain under pressure this year, it added.

But updating investors on its performance ahead of annual results on 11 May, FirstGroup said it expected to meet earnings targets for the year to 31 March.

It said: "We remain encouraged by improving trends in some of our markets. However, the trading environment for First Student remains challenging."

FirstGroup said it expected "moderate earnings growth this financial year" and the board intended to increase dividends by at least 7 per cent a year while still reducing the company's debt pile.

The yellow bus business, which runs 70,000 vehicles across the US and Canada, has been battered by school boards continuing to face budget pressures.

And labour costs have risen partly from route changes as schools look to reduce their overall transportation costs.

The rail division, which runs the franchises Capital Connect, Great Western, ScotRail and TransPennine Express, grew passenger revenues by 5.1 per cent over the financial year.

The company added: "We remain encouraged by the strong demand for services that has continued to develop throughout the course of the year."

In the bus division, which operates a fleet of 8,500 vehicles and runs one in five of all UK local bus services, passenger revenues increased by 1.4 per cent on a like-for-like basis.

Broker Investec Securities left its profits forecast for FirstGroup this year unchanged at 288 million yesterday but lowered its estimate for 2012 due to the ongoing school bus weakness. It now expects profits of 290m, down from 310.3m previously.

Jonathan Jackson, head of equities at Killik & Co, said FirstGroup could benefit from higher fuel prices, as people leave their cars at home and switch to public transport, while the group has increased its fuel hedging and is covered for about 70 per cent of its needs in 2011/12. Other analysts said the higher fuel prices had been pushing down FirstGroup's share price since the start of the year.

Jackson said the ongoing difficulties in the school bus market were "disappointing" and were likely to "hang over the share price for a while."

But he said that at the current price, and with the promise of an increased dividend, Killik was maintaining its "buy" recommendation. He said increased efficiencies should help the group cope with a 20 per cent reduction in government subsidies announced in the comprehensive spending review.