Government support has hauled public transport companies through the pandemic. As passenger numbers plummeted, the Department for Transport (DfT) struck emergency agreements with train operators, and dished out grants to keep bus services running. By June 2020, it had spent £3.5bn on the rail network alone.
Listed companies still need all the help they can get. Passenger volumes rose steadily last year, but Omicron sparked a second exodus, and numbers are still down. According to government figures, use of National Rail services was still half of pre-pandemic levels at the end of January, while bus use was 40 per cent lower than early 2020.
Government intervention risks turning sour for some companies, however. Over the past two years, the DfT has shown a growing interest in how public transport is run, arguing that customers are being failed by shoddy services and expensive tickets. This sentiment is on full display in Michael Gove’s new levelling up report, which promises to bring all public transport “much closer to London standards” with improved services, simpler fares and integrated ticketing.
The reforms will shape the future of listed companies that deal in buses, trains and tickets. But are there opportunities as well as risks?
All aboard
One of the government’s many alliterative goals is to “bus back better”. Last summer, the DfT announced a bus recovery grant of over £225mn, which will run until April 2022. This replaced the Covid-19 bus service support grant, which was introduced during the first lockdown and helped sustain local transport links.
The Tories have a longer-term strategy as well, however. Companies decide which routes to cover and what to charge, which means unprofitable journeys can be cut even if they are crucial to residents.
But the tide is starting to turn. In his white paper, Gove promises to support any local transport authority that wants to access franchising powers to deliver improvements for passengers, and there is growing interest among campaigners.
This is not just a Conservative shift. Under Labour mayor Andy Burnham, Greater Manchester is bringing its buses back under public control after 35 years of private operators running the show. And the bus companies aren’t happy.
Stagecoach, which enjoys a one-fifth share of the Manchester travel market, has launched a legal challenge against the reforms, arguing that the consultation failed to meet the standards on proper process, evidence and analysis required by law. A decision has yet to be handed down.
The big fear for bus companies – and those who invest in them – is that franchising will lead to significantly lower profits. Profit margins in regional markets are typically much higher than in London, where Transport for London specifies routes, timetables and fares. In 2019, for example, Stagecoach generated an operating profit margin of 11.2 per cent from its regional operations, compared with just 4.2 per cent from its work in the capital.
Franchising could also allow new entrants to the market. In a worst-case scenario for existing players, government-controlled routes could leave them out in the cold, with a depot full of buses and no passengers.
These concerns are starting to materialise. In its most recent results, Stagecoach warned that Greater Manchester’s plan “creates uncertainties” around its share of the Manchester bus market from 2024 onwards, as well as its profit margins. (Before Covid-19, Manchester contributed £128mn to annual revenue and a "higher-than-average" operating profit margin.)
Is it all bad news, though? Gerald Khoo, an analyst at Liberum, argues that the Tory push for better bus services could benefit companies. “The industry has backing from a prime minister who believes in it," he said. "For the first time in generations, the PM thinks buses are a force for good because of the environment, social inclusion and air quality."
As part of its “bus revolution”, the government has pledged £3bn for better, greener services. Khoo says this should kick off a “virtuous cycle” where an increase in services prompts a rise in passengers, which in turn sustains those services.
He concedes that there are challenges, however – including a changing risk environment. When companies are allowed to operate freely, they can be relatively flexible. However, when bidding for a contract, there is a danger they are locked in to loss-making services.
Joining forces
Stagecoach and National Express (NEX) face more uncertainty than most. In December, the two companies announced plans to merge, in a deal that is expected to create the UK’s largest road transport provider. However, the Competition and Markets Authority is currently investigating the merger, and both companies have been temporarily banned from disposing of material UK assets.
If the deal is allowed to go ahead, the combined group may be better placed to deal with changes to the industry. For starters, it will be more geographically diverse, and there’s potential for strong growth in National Express’s international markets.
Stagecoach’s depot network could also prove significant. At the moment, National Express runs coaches up and down the UK, but typically rents depot space from other bus companies. If the merger takes place, it will be able to use Stagecoach’s existing infrastructure and pocket the savings.
Investors shouldn’t ignore the issue of debt, however: both Stagecoach and National Express have been forced to negotiate covenant waivers with bank facilities. In the case of National Express, this means that dividends are restricted until further notice, and the debt and payable-heavy balance sheet (as of 30 June) ramps up risk, although it helps that borrowings are largely long term.
Combined or separate, therefore, big industry changes may prove painful for the bus operators, and their deleveraging efforts – particularly when combined with staff shortages and rising fuel costs.
Model railways
It’s not just buses that are under scrutiny. The rail network is also in line for a shake up – which could leave ticketing platform Trainline (TRN) feeling shaken.
Trainline veered off track during the first UK lockdown. This is hardly surprising: it’s hard to sell rail and coach tickets when all your customers are banned from leaving the house. However, despite the gradual easing of travel restrictions and a strong rebound in ticket sales, shares in Trainline hit an all-time low at the end of last month.
The answer lies in the government's ‘Great British Railways’ (GBR) plan. Announced last year, it sees a new public body taking ownership of the infrastructure, receiving fare revenue and also setting fares and running the network. Meanwhile, ‘passenger service contracts’ will replace franchises, with operators competing to meet government specifications.
There’s been lots of chatter about the new model, and whether it will actually make things better for Britain’s beleaguered commuters, who also face some of the priciest rail tickets in Europe. For Trainline, however, tickets are what matter. Under the reform programme, ticketing is to be centralised and the “confusing array” of train company sites will be replaced with a single website and app.
However, analysts seem relatively relaxed. Alex Chatterton, of Panmure Gordon, said GBR is “unlikely to threaten Trainline’s share of the UK consumer market”, citing the group's user-friendliness. (Faith in government IT is not strong, it seems.)
But Trainline has another important source of revenue – partner solutions – which mainly provides rail technology for travel management companies. In its half-year results, the company said GBR will likely have a “significant impact” on this side of the business, as it has contracts with operators such as Greater Anglia to handle their sales platforms.
It’s not all doom and gloom, though – particularly if the government decides to use a tech partner to run ticket sales.
The tender process is due to start in April, and an outcome is expected in the second half of 2022. If Trainline wins the contract it would last for four years, with the opportunity to extend for a further four. It’s also worth bearing in mind that any threat is not imminent. Government projects tend to take a long time to materialise – if they materialise at all.
However, Chatterton said the “exceptional level of uncertainty” has driven down Trainline’s share price, and the spectre of reform is making investors jittery.
After a difficult two years, therefore, transport companies and travel platforms aren’t out of the woods yet. If a shrinking pool of commuters wasn’t enough to deal with, the threat of more government intervention is likely to make investors wary, and rightly so.
Uncertainties abound, particularly for Trainline in the wake of rail reform. The long-term prospects of Stagecoach and National Express may take longer to surface, so we recommend hold for now. However, a government retreat seems unlikely if levelling up stays top of the agenda.
