Rail in chaos
Crisis-stricken Northern Rail is the latest rail franchise to be in chaos, making headlines and exposing problems that major UK transport operators are facing. Unusually adverse weather and challenging market conditions were also blamed for the disappointing performances recently, but the real reasons are more complicated.
Although there has been some revenue growth and an increase in the number of passengers, UK trains have been making headlines due to strikes, cancellations and driver shortages – all seemingly problems of the operators own making.
UK rail time tables change moderately every year, this year a new schedule was introduced aiming to improve the service but ended up in chaos instead.
In the past, growing numbers of passengers and subsidies from government, meant rail franchises were attractive to UK transport groups.
Their bids came with promises to provide better and improved service for passengers.
However, they can’t seem to deliver their promises.
In May, UK Transport Secretary Chris Grayling announced that the East Coast main line, run by Stagecoach Group PLC (LON:SGC) and Virgin since 2015, will be brought back under public control. Grayling said Stagecoach “got its numbers wrong” when bidding for the franchise and that the contract would end earlier than expected.
Buses under pressure
Buses, too, have their problems
Fuel costs have been rising at their fastest in nearly two decades, boosted by weaker pound, causing strain on bus operators.
An inability to hire enough staff has added to the problems the bus operators have been facing lately.
And UK regional buses were affected by unexpectedly bad weather, causing for example a 2.5% decline in Stagecoach revenues.
Disappointing numbers from both bus and rail revenues have contributed to weak share prices for the major UK transport groups as analysts have downgraded.
Collapsed share prices and dividends
FirstGroup PLC (LON:FGP) which operates South Western Railway shares collapsed in May as it reported a 5% fall in underlying full-year profits and replaced its chief executive a month after it rejected two approaches from a private equity firm.
David Madden, Market Analyst at CMC Markets UK, said: “FirstGroup has been muddling along since 2013 – when it raised £615 million from a rights issue, and it hasn’t paid a dividend since then.”
Despite a disappointing trading update, Stagecoach held its interim dividend unchanged, but analysts at Liberum said further disappointments, if combined with a failure to win new profitable rail franchises, could put its dividend at risk.
Go-Ahead Group PLC (LON:GOG) was confident its full-year results would be “slightly ahead of its previous expectations” but Deutsche Bank said it too might not have enough free cash flow to cover dividend payments over the next three fiscal years, due to the absence of future rail franchise wins.
As more people commute to cities every day, the ability to rely on the transport operators becomes crucial. Transport groups will have to find a way to solve its problems or face losing customers.