Wednesday, UK-based train and bus operator National Express Group Plc (NEX.L) said that its profitability in the first half of fiscal 2009 will be adversely impacted, primarily in the East Coast rail franchise, which is expected to lose over GBP 20 million. Further, the company said it would work with the Department for Transport to ensure an orderly handover of East Coast franchise, if warranted. Group revenue for the first half is expected to increase 5%.
In addition, National Express said that its Chief Executive Officer Richard Bowker is resigning to take up a position as Chief Executive Designate of Union Railway in the UAE. The company appointed John Devaney as Executive Chairman, and Ray O'Toole as Chief Operating Officer.
The company said its group revenue was benefited from currency movements impacting the revenues of overseas operations and offsetting the exited rail franchise in the prior year.
In its trading update, National Express noted that trading conditions throughout the six months remained challenging, and all of its businesses experienced difficult conditions, mainly in reduced passenger volumes and in lower growth in yield. The company projects higher hedged fuel costs to add GBP 11 million of cost in the first half year, while increased pension costs will add a further GBP 3 million.
On a geographical basis, the company expects total revenue from Spain in local currency terms to increase 2% in the first half year. According to the company, strong performance by recent acquisitions helped offset a 2.8% reduction in underlying revenue in the existing business. In the region, long distance revenue has been impacted by a reduction in weekend travel and continued competition from high speed rail on a selected number of routes. However, the adverse revenue impact in Spain has been offset by increased productivity, with kilometres operated reduced by 3.9%. National Express added that the region's cost savings efforts, together with the benefit of the stronger Euro on profit translation, will offset the majority of the adverse profit impact of lower underlying revenues and higher fuel costs.
In North America, the first-half underlying revenue grew 5% in local currency, reflecting school bus business that has remained robust through the period. Meanwhile, there has been a slowing in other field and out of school trips, which are a smaller part of the product offering but are more exposed to economic slowdown. The company added that the impact of the stronger dollar should see first-half profitability broadly in line with 2008 levels in Sterling terms.
National Express said growth in its UK Bus and Coach slowed during the second quarter, with underlying revenue growth across the first half of 2.2%. The West Midlands Bus business has shown some weakness, reflecting a slowing in the regional economy, however, improved integrated transport opportunities, together with the company's travel card scheme, supported by strong cost control, are expected partly to offset the adverse impact. However, the company noted that Bus profitability will be reduced due to higher hedged fuel costs, and higher pension costs. In the Coach business, the company said it has seen no underlying growth in the first half.
UK Rail continued to experience declining revenue growth rates in the six months, in common with the rest of the UK industry, the company said. Underlying growth in the East Anglia franchise or NXEA was 5%. The company noted that its East Coast franchise, operated by National Express' subsidiary NXEC Trains Ltd, has been most impacted by the challenging economic environment, with a mere 1% growth in underlying revenue, with fewer passenger journeys and lower yield growth. NXEC is expected to record a loss of over GBP 20 million in the first half year. Commenting on the pre-close statement, John Devaney, executive chairman said, "Our performance in the first half year has been resilient across most of our businesses, with the exception of the East Coast rail franchise. We are achieving success in managing our operations, supported by 'self help', despite the challenging economic conditions." The company noted that it is successfully implementing a planned Group-wide cost reduction programme which is expected to yield annual benefits of over GBP 40 million.
Regarding its East Coast franchise route between London and Edinburgh, the company noted that discussions with the UK Department for Transport, or DfT, have not secured an improved outlook for the franchise, due to which the loss-making East Coast rail franchise will continue to be supported by National Express in line with its franchise support commitments until the committed funding is fully utilized, expected to be later in 2009. The company said it would work with the DfT to ensure an orderly handover in the event that the Secretary of State for Transport re-assumes control of the franchise.
Devaney added, "Following lengthy negotiations with the DfT concerning East Coast, in which our excellent operating performance has been fully recognized, it is disappointing that it has not been possible to find a solution that protects the best interests of all stakeholders. Our clear legal advice is that the Group's financial obligations to the franchise are clearly defined and limited. We will continue to support East Coast to the full extent agreed with the DfT at the time of entering into the franchise until the committed funding is fully utilized. We remain committed to the rail industry and will continue to run the rest of the franchises within our Group as before, with the aim of maximizing shareholder value."
Further, National Express said that Richard Bowker CBE, group chief executive, has informed the Board of his intention to leave the company, in order to take up a position as Chief Executive Designate of Union Railway in the UAE. Bowker will leave the company on August 31, 2009 and will stand down as a Director on July 10, 2009.
The company also said that John Devaney, currently Non-Executive Chairman, would become Executive Chairman, and Ray O'Toole, currently Chief Executive, UK Division would become Chief Operating Officer, while the Board identifies a suitable successor for Bowker.
NEX.L is currently trading at 283.50 pence, down 26.00 pence or 8.40%, on a volume of 2.76 million shares.
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