East Coast fiasco sends National Express off the rails

NATIONAL Express has paid the price for its failure to make a go of the East Coast rail franchise recording an £83.5m loss.

The Birmingham-based transport group saw normalised pre-tax profit fall from £202.4m in 2008 to £116.2 in 2009.

The bus, coach and train operator fared a little better in reducing its £1.2bn debt mountain by £520m thanks to a refinancing operation but overall it was a very difficult year for the group.

In addition to the disastrous East Coast franchise, the company had to contend with recession, the departure of former chief executive Richard Bowker, high fuel costs, lower passenger  levels and a series of takeover threats.

When National Express (NEX) won the East Coast main line rail franchise in 2007, it was expected that passenger revenue would increase by around 10% a year, based on increasing passenger numbers and fare yield.

However, with the onset of recession this quickly became unrealistic. Far from growing passenger numbers, up to November 2009, annual passenger revenue on the franchise declined by 2%.
 
It said that despite service improvements the franchise quickly became loss-making and to stop it from dragging down the rest of the group, the company decided to hand the franchise back to the government.

However, the group had already provided £40m in cash to cover operating losses and paid £31.4m in a performance bond to the government.

£56.3m of the year on year fall in the group’s normalised continuing profit before taxation has been written off as directly attributed to the East Coast franchise.

The East Coast issue has been resolved with the handover of the franchise to government and the company now wants to draw a line under this and focus on its core bus and coach operations.

In contrast to the failed East Coast service, its retained rail franchises National Express East Anglia and c2c improved profitability and established record operational performance levels.

Better news came from the group’s UK Coach business which improved profitability by over 25%, despite fewer passengers travelling. The performance of its Spanish operation was also resilient.

The bus operation has been hit by rising unemployment, especially  in the West Midlands, although the situation outside the UK was also difficult with rates in Spain climbing to around 20%.

The UK Bus business saw profits down from £40m in 2008 to £20.8m, impacted by increases in fuel and pension costs, together with significantly higher regional unemployment, especially in the West Midlands.

Delivering improvements to the UK Bus operation will be high on the group’s list of priorities for 2010.
 
In North America, 2009 was a disappointing year, with normalised operating profit down to £25.3m from £32.5m
in 2008, despite currency benefits.

Nevertheless, it said it remained confident that its investment programme would help it reduce costs and improve revenue.

The UK Coach business opened the Birmingham Coach Station on time and ready for Christmas travellers. The £15m investment symbolises the style of modern coach travel now on offer with its leather seats and onboard Wi-Fi.

Despite incurring a £2m loss on the sale and lease back of the building, it has transformed a run-down bus terminus into a flagship that air travellers could envy.

It will also become the group’s new corporate head office during 2010, with associated cost savings from closing our current office in London.
 
In its Full Year results statement today, the group said: “Although the overall financial performance of the group was disappointing after a record 2008, 2009 was a year when we made real progress in resolving many of the difficult challenges which emerged as the recession unfolded.”

John Devaney, group chairman, added: “Whilst 2010 will be another challenging year in a difficult economic environment, we are focused on delivering margin improvement through cost reduction, continuing strong cash generation, and building on the foundations that we have laid in 2009.”

The group is now banking on new chief executive Dean Finch being the man to drive forward the recovery strategy and add value to the business.

Looking ahead, it said it expected 2010 to be another challenging year. Low price inflation would leave limited scope to grow fare yields, and all businesses would continue to focus on cost reduction to manage limited or zero passenger volume growth.

“This, together with lower fuel costs and selective revenue growth opportunities, is expected to improve overall margin and should enable us to drive shareholder value,” it said.