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Rail arm steers First's profits(Scotland on Sunday Via Thomson Dialog NewsEdge)FIRSTGROUP, the transport operator, is expected to reveal a growing performance gap between its expanding railway operations and its bus arm, which is suffering from soaring fuel prices. Moir Lockhead, First's chief executive, is expected this week to reveal a rise in rail profits but a sharp dip in earnings from the bus division. Profits from trains are due to show a 10 per cent lift to GBP 70m, while UK bus profits are down 9 per cent to GBP 97m. The bus division is now coming under pressure from analysts who would like to see some of the bus businesses curtailed. FirstGroup won the Thameslink Great Northern and Great Western franchises earlier this year, although it did not start running them until April. The wins boosted its share of UK rail passenger revenue from 15.3 per cent to a market-leading 23.2 per cent, according to company estimates. First plans to install ticket barriers at 11 stations on the Thameslink commuter network, renamed Capital Connect, to catch fare dodgers and raise revenues. This approach generated extra profits at First ScotRail, the franchise won from National Express in 2004. Some sceptics have questioned the value of the new franchises, suggesting that First overpaid when it bid GBP 2bn for them. But the company is confident it can squeeze additional profits from them. The Aberdeen company has also taken steps to improve its underperforming UK bus business, where revenue growth, driven mainly by fare increases, is running at between 7 per cent and 10 per cent a year. First has cut the amount of time buses spend out of action and is renegotiating deals with local authorities. But First's efforts have been undermined by the rising price of fuel. Gert Zonneveld, an analyst at Panmure Gordon, said: "Cost pressures should ensure that operating margins for the UK bus division are likely to decline this year and next. Cost savings will be achieved, but we do not see this preventing margins falling." He added the cost of above-inflation wage rises were also putting pressure on the division, although First has got around manpower shortages by recruiting 1,000 drivers from Poland. Some of FirstGroup's worst- performing bus companies are coming under scrutiny in the City. Damian Brewer, an analyst at JP Morgan, said: "Operations in the Scottish Borders and in Devon and Cornwall... lose GBP 5m-GBP 7m per year. With ScotRail and Great Western rail contract hurdles now cleared, FirstGroup can now move on and rationalise these operations, either to ensure break even or possibly to exit." The company's US arm, which runs school buses, has grown rapidly since First entered the market in 1999, but JP Morgan expects profit growth over the next two years to be held back by fuel costs. Analysts believe First may acquire a few bus companies in the UK and US as the industry consolidates. Citigroup's Roger Elliott said: "Sector consolidation is a popular topic as the UK bus barons retire. "We see the most likely corporate activity in the sector as a merger of equals, given that any of the UK bus and rail stocks would struggle to fund an acquisition of a peer and we do not see a private equity angle to this sector, given the political and regulatory risks, the limited leverage that UK rail profits can support and the dearth of exit possibilities." JP Morgan estimates First made a pre-tax profit of GBP 156.5m in the year to March, up just 0.5 per cent on the year before, on turnover up 11 per cent to GBP 3bn. Citigroup, which uses a different profit basis, predicts a pre-tax increase to GBP 170m, up 0.6 per cent. |