Fuel cost hits bus profit – but passengers rise

Dec 17 2008 by Peter McCusker, The Journal

TRANSPORT group Go-Ahead expects a hit to profits from its bus business after failing to recover £2.5m of additional fuel costs, although the company expects overall group profits to be in line with expectations.

The Newcastle firm, which with a fleet of 3,400 buses is one of the UK’s biggest operators, said it was looking to cut costs. Some vacancies were not being filled.

The company said fuel costs were likely to increase by £10m in the year to the end of June 2009 after this year’s oil price spike at $145 a barrel.

It has recovered £5m of the estimated £7.5m increase in the first half through fare rises and efficiency improvements, but the company said this still left £2.5m of unrecovered fuel costs.

In a trading update for the six months to the end of this month, the company said its performance should be in line with expectations for the full year to June, despite the ailing UK economy.

Finance director Nick Swift said the company had been cost-cutting to weather the downturn and was also protected by regulated fare increases.

“We saw this coming, although we may not have seen it being as grim as it is ... like-for-like costs are down a couple of per cent on a year ago.”

Go-Ahead hedged its fuel for the year at 43p a litre, compared with 34p a litre in 2007/08. It has hedged 50% of the following year at 52p, but expects to hedge the rest of its requirements at a lower price.

The company expects first-half operating profits for the bus division to be slightly below the same period last year, when profits of £33.7m were achieved.

The fuel pressures have been offset by continued strong demand, with the number of passengers using its deregulated services up by 2.9%. It expects trading in the bus division to remain robust in the second half of the year.

On the railways the company said growth in the second half was likely to be slower than the double-digit growth it had recently enjoyed.

The economic downturn has increased uncertainty surrounding the company’s rail division, which includes the London commuter routes Southern and Southeastern. Mr Swift went on to say that regulated fare increases as high as 8% in the South East and a profit-sharing agreement with the Department for Transport would support revenues.

Rail operating profits for the first half are expected to be similar to last year’s figure of £31.4m. The group’s aviation division is one of the UK’s largest providers of cargo handling services, operating from 16 airports.

Go-Ahead says weaknesses in the aviation sector meant the division was “continuing to experience difficult market conditions”.

It expects first-half losses to be greater than last year’s six-month equivalent of £1.8m and it had decided to take a one off writedown charge of £40m.