Go-Ahead on course for big hike in profits

Jun 20 2008 by Chris Knox, The Journal

BUS and train operator Go-Ahead has defied the increasing oil price by keeping costs down and now expects a “significant” profit increase by the end of its financial year.

The Newcastle-based firm said it has enough fuel to see its bus operations through the next financial year at a cost of 43p per litre, compared to around 120p per litre at the pumps.

Its policy of buying large quantities of fuel for delivery in the future has paid off, with many companies in the transport sector now struggling to absorb recent sharp rises in the oil price – now at US$140 a barrel.

Like other public transport companies, Go-Ahead doesn’t have to pay duty on its fuel purchases and avoids the 70% tax rate motorists pay at the pump.

The firm is now expecting to report a marked increase to the £55.8m operating profit it achieved in 2007 when it publishes this year’s figures in September.

Shares in the company rose by more than 16% yesterday as analysts revised their forecasts ahead of annual results on September 5. ABN Amro said it expected to increase its full-year profits forecast by at least £5m to £114m for the current financial year.

Shares in South West Trains owner Stagecoach, First Group and National Express also rallied following the update.

Go-Ahead, which employs 27,500 staff in the UK, also said that the performance of its rail division was a major factor and had exceeded expectations over the past two months with the help of the recent acquisition of London Midland.

It is now expecting the division to exceed the £66.1m turnover it achieved last year.

Group chief executive Keith Ludeman said: “We have seen growth in passenger numbers on all three of our UK rail operations and believe this will continue into the next financial year with the help of our hedged fuel stocks.

“I have placed a greater emphasis on hedging fuel since I arrived at Go-Ahead around two years ago and this has paid off.”

The firm did say that it is expecting to incur losses from its aviation division as a result of falling passenger numbers and the impact of fuel prices. It said that this would result in a number of cuts to its 3,000 aviation staff, particularly at Gatwick Airport, where it has seen passenger and freight business dry up over recent months.

However, the firm believes this is a temporary blip and highlighted recent extensions to its ground handling services contract with budget airline bmi as a sign of the division’s resurgence.

Gary Fawcett, assistant director at investment manager Brewin Dolphin Newcastle, said: “While the high oil price is proving a challenge for bus operators, I believe the increase in fuel costs will encourage people on to public transport and, therefore, strengthen the attractions of this sector over the longer term.”

FUEL HEDGING

FUEL hedging is the practice, often employed by public transport companies, of making advance purchases of fuel at a fixed price for future delivery to protect against the shock of anticipated rises in price.

As the price of oil can go down as well as up, hedging can be seen as a risky strategy.

However, a number of companies, including Arriva and Stagecoach, have a percentage of their fuel ordered for future delivery as a way of hedging against the rocketing cost of oil – which shows no sign of abating. Jon Lienard, analyst at broker Brewin Dolphin, said: “Fuel hedging is a measure that a lot of firms are now taking as the rising oil price is showing no indication that it is slowing down.

“A lot of firms are also buying hedging contracts on the futures market to avoid being landed with further hikes. Although it can be risky, it has definitely worked out here for Go-Ahead and the market has given its approval.”