16 December 2008
Go-Ahead announces its pre-close trading update for the six months ending 27 December 2008, ahead of its interim results which will be released on 19 February 2009.
Overall, we anticipate delivering a profit before tax and exceptional items for the first half of the year in line with our expectations.
On a like-for-like comparison with the same period last year, we have maintained high single digit revenue growth in both our regulated services in London and our deregulated operations.
Regulated revenue growth continues to be driven by additional contract mileage, plus increases in contract prices that broadly track inflation. The level of earnings from quality incentive payments has been similar to the first half of last year. We are pleased to have recently retained the Red Arrow network of services operated from our Waterloo depot. These will use 47 twelve metre single deck buses from mid 2009, replacing the existing 31 articulated "bendy" buses.
The number of passengers using our deregulated services has continued to increase at a similar rate to last year (2007/8: 2.9%). This growth is being led by an increase in concessionary passengers, but also includes more fare paying passengers who are offsetting those switching from fare-paying to concessionary status.
Wage negotiations are largely complete, securing labour costs (which account for approximately two thirds of our cost base) at reasonable levels. Fuel, around 10% of our cost base, is fully hedged for the current year at 43p per litre (2007/8: 34p per litre). Compared with last year, this hedged price will result in a first half increase in our cost of fuel of £7.5m and a full year increase of around £10m. We have recovered around £5m of the first half increase through fare rises and fuel consumption efficiency improvements, and expect to make further progress in the second half of the year.
In addition to the £2.5m of unrecovered fuel costs, the first half of this year will include an increase in incident claim costs of around £2m and pension costs of around £1.5m. The net impact of these items is expected to result in a first half operating profit for bus slightly below the same period last year (H1 2007/8: £33.7m) which included a loss of £3m in Go West Midlands (sold in February 2008).
To date this year, the overall performance of our rail operations (which we operate through our 65% owned subsidiary Govia) has been in line with our expectations.
Passenger revenue growth in our Southern franchise (on a like-for-like basis excluding Gatwick Express) has remained strong at around ten percent for the year to date, with second quarter growth to date trending slightly below the first quarter growth as expected. As previously reported, the Gatwick Express service (which became part of the Southern franchise on 22 June 2008), continues to show softening in demand as a result of the fall in air travel at Gatwick Airport and we are not expecting any near term improvement. The profit share regime in Southern (including Gatwick Express) means that 60% of the incremental profit or loss for the franchise is taken by the Department for Transport (DfT).
In our Southeastern franchise, passenger revenue growth to date is just below ten percent. Growth in the second quarter to date has eased slightly more than in Southern, reflecting the higher proportion of commuters carried by this franchise. Nevertheless, we are nearly two percent above the target revenue specified in our franchise bid (more than two percent above means that we would share 50% of our incremental revenue with the DfT).
The results from our new London Midland franchise remain strong and going forwards should benefit from new rolling stock and the recent completion of engineering work on the West Coast Main Line. We are currently operating at just over 106% of the target revenue specified in our bid and are sharing 80% of the incremental revenue with the DfT.
Overall rail operating profit for the first half is expected to be similar to last year's strong first half performance (H1 2007/8: £31.4m), with the bid costs for the new Southern franchise and the negative impact from the Gatwick Express broadly offset by the additional contribution from London Midland.
The current Southern franchise expires in September 2009. Its replacement will last for five years and ten months, and is due to be awarded in late May / early June 2009 following receipt of final bids on 18 February 2009. We have a strong and experienced bid team and are making good progress with our submission.
This division continues to experience difficult market conditions. In ground handling, the like-for-like reduction in aircraft turnarounds has been around 5% compared to the first half of last year. Our like-for-like cargo volumes have reduced by around 8%. We have managed to offset most of this reduction in revenue by cost savings from our restructuring programme and expect the first half operating loss to be slightly greater than the loss of £1.8m in the first half of last year.
Whilst we are pleased with the restructuring progress, we believe that the recent market decline and weak outlook for aviation will make significant improvement in financial performance more difficult in the near term. We therefore plan to recognise a non cash, exceptional impairment charge of around £40m at the half year to reduce the carrying value to approximately £25m.
Meteor continues to perform in line with our expectations and at a similar level of profitability to last year (H1 2007/8: £1.2m).
The first half results will include a number of exceptional items. These consist of the non cash impairment charge for aviation services referred to above; a non cash reduction in deferred tax assets of approximately £8m following the Government's abolition of industrial building allowances in July 2008; a non cash charge of around £4m (£7m for the full year) for the element of our bus fuel hedge entered into last year which does not meet the effective hedge requirements under IAS39; and around £4m of cash restructuring costs for aviation services.
Operating cashflow has been strong during the period and first half capital expenditure (representing around 40% of the expected full year spend) is in line with depreciation. We have not bought back any of our own shares in the period, so the weighted average number of shares is still 42.9m. Net debt is expected to be around £175m (30 June 08: £197.8m, 29 Dec 07: £192.0m) and the tax rate is expected to be around 27%.
We have made a good start to the year and anticipate profit before tax and exceptional items for the first half of the year to be in line with our expectations.
The second half of our financial year will be subject to an uncertain economic climate. Economic forecasts for that period have become increasingly pessimistic over the past two months and we are taking management action accordingly.
We expect our bus operations to remain robust in the second half of the year. Around two thirds of our revenue is either from Transport for London or from deregulated concessionary fares which are less sensitive to the economic cycle.
In rail, we believe that the recent underlying revenue trends will continue. This, combined with fare increases in January, should result in a good level of passenger revenue growth in the second half of the year, albeit at a lower rate of increase than achieved in the first half. We do not expect this to have a material impact on our second half results, given the progress we have made with our cost saving initiatives, which we started in March 2008, and the profit share and revenue share mechanisms in the franchises.
Our cashflow remains strong and our balance sheet is robust, with financing secured through to 2012. We will continue with our focus on service quality, cost savings and financial discipline and remain confident in the underlying strengths of our business.
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Keith Ludeman, Group Chief Executive and Nick Swift, Group Finance Director will be hosting a conference call for analysts at 8.00am today. Please contact Weber Shandwick Financial for dial-in details. Please dial into the conference call a few minutes before the start time.
For further information, please contact:
|Weber Shandwick Financial
Terry Garrett / Stephanie Badjonat / Clare Perks
|020 7067 0700
Notes to Editors
Go-Ahead is one of the UK's leading providers of passenger transport services operating in the bus, rail and aviation services sectors. Employing over 27,500 people across the country, around 920 million passenger journeys are undertaken on our services each year. In addition to the travelling public, customers include the Department for Transport (DfT), Transport for London (TfL), local authorities, British Airports Authority (BAA) and major airlines.
Go-Ahead is one of the UK's largest bus operators. With a fleet of over 3,400 buses, we carry, on average, around 1.6 million passengers every day. Our operations are focused on high density commuter markets. We have a strong presence in London, with around 20% market share, where we provide regulated services for Transport for London (TfL). We operate deregulated services in the north east; Oxford; the south east and southern England.
The rail operation, Govia, is 65% owned by Go-Ahead and 35% by Keolis. It is the busiest rail operation in the UK, responsible for nearly 30% of all UK passenger rail journeys through its three rail companies: Southern (which includes the Gatwick Express), Southeastern and London Midland. The Southeastern franchise will include the operation of new high speed trains on the domestic Channel Tunnel Rail Link into St Pancras International from 2009, significantly reducing current journey times.
The Group's aviation services division is one of the UK's largest providers of cargo services (primarily Plane Handling), ground handling (primarily Aviance UK) and car parking (Meteor). The division operates from 16 airports and services major airline operators such as British Airways (BA), Virgin and bmi. Market leading services within Meteor include 'Meet & Greet' and 'Pink Elephant' services.