FTSE 350: Public transport franchises on the horizon

This is all good news for commuters, but rail operators are still focused on winning some of the key franchise contracts due for renewal this year. The South Eastern franchise is up for grabs, for example. The government has listed some of the criteria that applicants are required to meet, including longer trains to create space for at least an additional 40,000 passengers and a new smart ticketing system. Companies on the shortlist include standalone bids from Stagecoach (SGC) and Italian business Trenitalia. Go-Ahead (GOG) has teamed up with French transport group Keolis under the name Govia, and a joint venture between Dutch operator Abellio Transport Group, the East Japan Railway Company and Mitsui & Co is also in the running. 

One potential franchise causing some contention is the West Coast Partnership. This contract would entail running the West Coast Main Line from April 2019, along with initial HS2 high-speed services between London and Birmingham from 2026. Additional high-speed services between Manchester and Leeds – slated to start up in 2033 – are not currently part of the contract. As such, British companies have been forced to team up with foreign high-speed rail operators, as no domestic business currently has the capability to run these services. FirstGroup (FGP) and Trenitalia have joined forces under the First Trenitalia West Coast bid, and the two have also made a joint offer on the East Midland service, due to be announced later this year. Stagecoach has teamed up with Virgin and French high-speed operator SNCF. Two Chinese companies, MTR Corporation of Hong Kong and high-speed rail business Guangshen Railway Company, make up the MTR West Coast Partnership bid.

Investors in Stagecoach might be wondering whether its performance running the troubled East Coast rail franchise might hamper its chances of winning any of these new bids. The DfT announced an early end to the contract in 2020 instead of the originally planned March 2023. Stagecoach’s shares shot up on the day of the announcement, as it meant there was less chance the company would default on the contract before it expired. 

Outside of rail, transit operators have been turning international to make up for tough conditions in the UK bus sector. Around 80 per cent of earnings at National Express (NEX) now come from outside the UK, and shareholders will want to see whether the international business can make up for the lacklustre performance in the UK. At the half-year stage, UK bus operating profit fell slightly, but the North American and Spanish and Moroccan divisions delivered record half-year nominalised profit. A squeeze on national finances has hurt Stagecoach’s regional bus service in the UK, with flat like-for-like sales at the half-year and a 60 basis point decline in the operating margin. Similar to National Express, international revenue – specifically from North America – helped offset a weak bus performance. What’s more, the disposal of the lossmaking megabus business in Europe should also benefit Stagecoach this year.

The rise of budget airlines has meant that long-haul journeys on FirstGroup’s US Greyhound bus cross-country transit service have become less popular. But short-haul or ‘Greyhound Express’ routes have outperformed its long-haul counterpart. Tighter immigration controls also resulted in less cross-border traffic in the US south-west, so investors should monitor whether further legislative change could further discourage travellers on these routes.