FirstGroup sees £50m government support for recession-hit rail

FirstGroup's First Great Western rail franchise has had £50m in support from the Government because the recession has pushed revenues down below the contracted target.

The company's profits from its rail division dropped by more than 20 per cent to £94.2m last year, although revenue rose 9.5 per cent to £2.1bn.

Although the bus division remains stable – with passenger revenues up 7 per cent on volume increases of 2 per cent – the recession has taken a significant bite out of rail travel in and out of London.

First Great Western, which operates from Paddington to the West Country and Wales, saw 9.6 per cent passenger revenue growth in the year before last, despite performance problems. But last year, even with significant improvements, the number dropped to just 6.1 per cent. Similarly the Capital Connect London commuter service's 13.5 per cent growth dropped back to 8.6 per cent, while TransPennine Express and ScotRail both lost less than a percentage point each.

The regional rail franchises let by the Department for Transport (DfT) include a "revenue cap and collar" arrangement whereby companies that outperform their target share the excess profits with the Government, and those that fall below receive support. TransPennine Express overperformed last year, so 75 per cent of all profits more than 25 per cent above the target were handed over to the Government. Meanwhile, First Great Western's £50m subsidy represents 80 per cent of the revenue shortfall below 94 per cent of the target.

FirstGroup is not the only train operator to be feeling the pinch. But it is the first to receive government support, because the mechanism does not kick in until part-way through the franchise deal, generally about four years. FirstGroup's own Capital Connect service also missed its target in the financial year to the end of March. And although not eligible for financial assistance until the current year, it expects to be claiming support over the next 12 months.

Similarly, National Express has been in talks with the DfT since early this year in an attempt to renegotiate the terms of its East Coast rail franchise in the light of current economic conditions. Under the current deal, the company will not be eligible for government support until 2011 although a trading statement earlier this month showed only 0.3 per cent growth, compared with the 9 to 10 per cent set out in the franchise agreement.

FirstGroup's exposure to fluctuations in passenger numbers is balanced out by the 50 per cent of its revenues from contract business, the majority of which is in the US. The company operates 60,000 yellow school buses across the country, in a market estimated to be worth $22bn (£15bn) per annum. Revenue from the school bus business alone was up 41 per cent last year, and profits rose by 57 per cent. Despite a dip in passengers on the Greyhound bus services, overall US revenue was up 73 per cent to £2.9bn and profits rose by 111 per cent to £140m.

Overall group revenues grew by 31 per cent to £6.2bn and adjusted operating profit was up 38 per cent to £371m, buoyed by strong performance from the US business. "The group has delivered a robust performance during the year despite a turbulent macroeconomic backdrop," said the chief executive Sir Moir Lockhead. "The group continues to benefit from a diverse revenue stream which is balanced between contract-backed and passenger revenues."