Why are Britain’s bus and rail companies struggling to make money?

The rail system isn’t working for anyone, says Liberum’s Gerald Khoo, while the high street’s decline means fewer people are taking buses

Car ownership isn’t helping either

FirstGroup PLC (LON:FGP) became the latest UK transport company to be dragged through the mire on Monday.

Activist shareholder Coast Capital Management, which last week upped its stake to 9.77%, has proposed getting rid of six of FirstGroup's current eleven board members, including new chief executive Matthew Gregory and chairman Wolfhart Hauser.

The US hedge fund had previously called for the board to step down last November.

READ: Activist calls for FirstGroup board to step down

The fallout has marked another blot on the transport industry as those in the sector find profits increasingly hard to come by.

Last year, FirstGroup posted a pre-tax loss of £326.9mln, while it fell to another loss in its recent half-year results. Rival Stagecoach Group plc (LON:SGC) also slumped to a pre-tax loss of £22.6mln in the first half of its current financial year.

Things have got quite messy as well: Stagecoach is suing the Department for Transport after it was disqualified from bidding for the East Midlands rail franchise.

A second legal challenge has also been filed, this time by Arriva, which, like Stagecoach, is unhappy at the way the franchise was awarded to Dutch firm Abellio.

So what’s going on with the UK transport system? Why are these unhappy companies finding it so hard to make money?

'Rail system is broken'

Liberum analyst Gerald Khoo thinks there a number if reasons, in both the rail and bus industries, that are making it harder for those operating in the sector.

“You’ve got a rail system that doesn’t work for anyone,” he explains to Proactive, “the risk/reward is totally out of line.”

He adds that passengers and the government think train tickets cost too much, but those operating Britain’s train network still can’t make much money.

High street woes hitting bus demand

“As for bus, stagnant volumes both in and out of London are a challenge,” says Khoo.

The number cruncher believes the well-publicised decline in footfall on UK high streets has been “unhelpful”, but he reckons a bigger contributing factor to fewer people using buses is due to rising car ownership.

Since the beginning of the Second World War, the number of licensed vehicles has increased in almost every year. At the end of 2018, there were just over 39mln cars registered on UK roads.

With more people driving, the demand for public transport is easing at a time when companies – and the government – are having to make huge investment’s into the country’s infrastructure.

Quick facts: FirstGroup

Price: 117 GBX

Market: LSE
Market Cap: £1.42 billion

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