George Osborne made his first post-election speech last week, with the reinstated chancellor revealing plans for a 'Cities Devolution Bill' whereby English cities will get greater powers over housing, transport, planning and policing. Greater Manchester is expected to become a 'blueprint' for the new laws when it assumes these powers following the mayoral elections in two years.
This poses significant change for Britain's transport industry. Mr Osborne has said Manchester could introduce bus franchising, implying re-regulation will be permitted. While it could take up to three years for the changes to hit earnings at Britain's big four transport operators, (because cities would have to elect mayors in order to receive the package of devolved powers), brokerage Liberum has urged investors not to take the legislation lightly.
The regional regulation of bus services aims to mimic the London model where services were never de-regulated in the way they were in the rest of England. Regional councils have complained they are powerless to stop companies over-providing on city centre routes, which cuts margins so they cannot subsidise unprofitable, but socially necessary, buses. Many routes, they claim, run at 50 per cent capacity or less.
For regional operators such as Stagecoach (SGC) Liberum believes there's a risk to margins in a regulated environment. Regional operators can achieve margins of 14 per cent at present, while even the best-in-class operators in London only achieve between 9-11 per cent. The cost risks could remain pretty much the same, but Liberum points out regional operators would lose a substantial amount of autonomy. It wouldn't be their decision to trim services, adjust fares or stimulate volumes.
At the moment, Liberum reckons Stagecoach has the most to lose from regional re-regulation. It has one of the largest market shares, the highest margins and derives the bulk of its earnings, cash flow and value from its regional bus operations. Roughly 20 per cent of Stagecoach's UK regional bus operating profits come from Manchester alone, which equates to 16 per cent of group pre-tax profits based on Liberum's 2016 forecasts.
FirstGroup (FGP) and National Express (NEX) could balance the risks of re-regulation with their substantial non-UK bus earnings. Go-Ahead (GOG) remains in a "mixed position" according to Liberum, as North East bus operations equal to roughly 9 per cent of group profits. However, this could be offset by winning regulated contracts in cities it doesn't currently operate in.
