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The holiday season underlined how the UK rail system has been crippled by strikes, signal problems, crew shortages and engineering work. London Paddington was shut on Christmas Eve, while most services from Kings Cross were cancelled. Despite the persistent disruption, however, the UK’s largest rail operator, FirstGroup (FGP), managed to grow its share price by two-thirds in 2023 and announced a £190mn share buyback. Can its winning streak continue as public frustration swells?
The first thing to note is that FirstGroup is not just a train company. It also runs a bus network, which is reporting rising ticket sales and widening margins, in stark contrast to rival Mobico (MCG) – formerly National Express. This has done a lot to bolster market sentiment.
However, the train division – which generates about three-quarters of FirstGroup’s operating profit – is also in excellent financial health, with revenue holding steady in the first half of its 2024 financial year and adjusted operating profit increasing by 52 per cent to £101mn.
Much of FirstGroup’s success is a result of national rail contracts, which were introduced post-Covid. Under these agreements, the Department for Transport takes on almost all revenue and cost risk, including for fuel, energy and wage increases, while operators are paid a fixed fee. There is extra money to be made from running a punctual service, but First Rail’s core income stream is essentially insulated from what is happening on the ground.
The company is also immune to the financial impact of rail strikes – although management admitted that “prolonged industrial action presents enormous challenges for the reputation and recovery of the industry”.
As it happens, FirstGroup is being rewarded for good performance. Between April and September it earned more than it originally anticipated from variable fee payments dating back to FY2023, which boosted profitability. It has also been awarded a nine-year Avanti West Coast contract “following improvement in services”.
FirstGroup’s two ‘open access’ operations – Lumo and Hull Trains – which shoulder full revenue and cost risk, are also doing well. High passenger booking volumes meant both operations performed ahead of expectations in the first half of FY2024, delivering an adjusted operating profit of £15.7mn.
Change could be around the corner, however, in the form of a general election.
The Labour party has pledged to bring the railways back under public ownership as contracts expire, should it come into power next year. In an interview with the Financial Times, FirstGroup chief executive Graham Sutherland said this posed a “risk” to the rail division.
It certainly casts a cloud of uncertainty over FirstGroup’s long-term future. Analysts at Peel Hunt, who are ultimately bullish, cut their estimates for 2026 after taking a “cautious view of rail due to Labour’s nationalisation plans”.
“We now assume all management fee operations cease at the end of the core period, consistent with Labour’s nationalisation aspirations if elected,” the broker concluded.
