Fuel rise could drive people on to buses

Apr 26 2008 by Iain Laing, The Journal

TRANSPORT group Go-Ahead saw its share price bounce back 14% yesterday after saying it was offsetting rising fuel costs with fare increases and greater efficiency.

The Newcastle bus and rail firm eased worries over passenger demand and the impact of rising oil prices and said it expected full-year figures to be in line with expectations and “significantly ahead” of last year’s record results.

Two months ago, Go-Ahead shares fell a similar amount as investors reacted to possible signs of slowing growth at its Southern and South Eastern rail franchises.

But the company said yesterday that growth in rail passenger numbers had remained strong in the first part of this year, with the underlying performance in line with the 13.2% revenue improvement seen in the previous six months. The bus division, which runs more than 3,600 vehicles, also performed in line with expectations, with double-digit revenue growth.

Finance director Nick Swift said: “Fuel has clearly gone up, but actually it’s not a huge part of our cost base and in due course we should recover this by doing a few things to improve efficiency and [implementing] some fairly modest fare increases.”

He said there would be a “reasonable increase” in overall group profit, although full-year operating profit for the rail division was likely to be lower than last year because of reduced subsidies and dearer fuel.

Analysts’ median forecast, after a profit warning from Go-Ahead on February 15, is for the company’s earnings before interest and tax to rise 2.4% to £121m, according to Reuters Estimates.

Go-Ahead has hedged much of its requirement for fuel price increases this year and next and said fuel was a relatively small part of the cost base of its bus operation, at about 10%. It said it would look to recover the extra fuel costs through consumption efficiency and fare increases. The company has bus operations in London and deregulated services in cities including Brighton and Oxford.

Analysts at Citi described the trading statement as upbeat and said Go-Ahead was in a strong position to absorb rising fuel costs.

It added: “As the lowest cost method of transport, bus may even be a beneficiary of high prices at the petrol pumps in the medium term.”

Go Ahead reported underlying pre-tax profits up by £8.2m to £110.1m in the year to June 30, 2007.

The improvement came despite woes at its airport services operation, which suffered amid the security disruption at Heathrow and Gatwick.

The company said yesterday that its aviation business – branded Aviance UK, Plane Handling and Reed Aviation – had made progress, with ground handling revenues boosted by contract gains, price increases and expansion of contracts.

The division employs almost 5,400 people at 17 airports serving 44 million airline passengers a year.

Swift said Go-Ahead had sold its Go West Midlands bus operations business for £2m as it was making “chunky losses”. Last February, the company booked an £8.2m charge against the business.

Fuel is not a huge part of our cost base and in due course we should recover this