Better Buses News
Hints of trouble ahead for FirstBus
we tweeted this article last week but am just getting round to putting it up on the website …
An article in the Herald last week suggested First’s Bus Business is running into trouble in some parts of the UK. This article is an excellent analysis of First’s obsession with costs over customer service and the Herald notes that ‘it was only a matter of time before the chickens came home to roost for First’s buses in the UK’.
Glasgow ought to be a place to grow passenger numbers, where car ownership levels are low but, according to the article, passenger numbers actually dipped from 110million to 80 million.
From our analysis of the Better Buses questionnaires, and your comments to us via twitter and the website, we can tell that First have a very disgruntled passenger base in Glasgow. If First can’t up their game for the bus users of Glasgow in the very near future, it looks like they will be heading into oblivion….
The article in full
Sunday 22 July 2012
A ticket to troubleFirst’s bus business is running into difficulties in some parts of the UK
THERE is a saying in management circles that a wise leader gets off at the second-last stop.
inShare.6 Custom byline text: First’s bus business is running into difficulties in some parts of the UK
Whether or not Sir Moir Lockhead has ever heard this, it certainly looks as though he put it into practice when he began a very well- heeled retirement from FirstGroup in November 2010.
He might spare a thought for those remaining, who can look forward to a roasting at the annual meeting at the Aberdeen Exhibition & Conference Centre on Wednesday when they explain to shareholders why a company that was once seen as a transatlantic success story is now facing serious problems. The share price recently reached its lowest level in 12 years amid high debts, credit-rating downgrades and profit warnings that have led some to call for the resignation of Martin Gilbert, the longstanding chairman.
Contextual targeting label: Business
FirstGroup’s rise began as recently as 1989, when local bus operator Grampian Regional Transport (GRT) was bought out by the management of Aberdeen council. Led by Lockhead, still many years from his knighthood, GRT began buying up other local bus companies that had left council control during those go-go days of transport privatisation.
Shortly after Gilbert became chairman in 1995, GRT became a big player after floating on the stock market and merging with Badgerline, a substantial bus company based in Somerset. In the late 1990s, now renamed First, the company moved into rail in England and then won the ScotRail franchise in 2004. While Brian Souter’s Stagecoach ran into endless difficulties in the US, First seemed to pull off a much smoother transition by buying US-based Laidlaw, an operator of inter-city coaches and yellow school buses across North America, for nearly £2 billion in early 2007 to become the owner of the Greyhound bus business, among other things.
However, the champagne corks have since stopped popping. New chief executive Tim O’Toole last year had to tell shareholders that First’s American profits would be damaged by problems in its school bus business. And this year the wheels came off its bus interests on this side of the Atlantic, prompting fears that the company’s net debt, £1.8bn and 2.5 times earnings, could get out of hand.
If you ask people in the industry, it was only a matter of time before the chickens came home to roost for First’s buses in the UK. It runs the biggest bus business in the country, with more than 8000 vehicles serving London, Manchester, Glasgow, Leeds and numerous smaller areas.
It brings in more profit than any other division but is showing serious signs of trouble. In the year ended March 31, its operating profits fell 10% to £134 million. In the current financial year, the company is predicting profits will fall by several more tens of millions of pounds and drag down the all-important operating margin to about 8%. Healthy bus companies make margins in the mid-teens. Little wonder O’Toole recently waived a bonus that could have been worth about £900,000 (although the company shortly announced an incentive scheme that could net him more than £1m in three years).
O’Toole, whose background is in rail rather than buses, has blamed these bus problems on rising fuel costs, the weak economy and cuts to government subsidies for services that would not otherwise be profitable. These are hitting the whole industry, but not like they are hitting First. Down Perth way, for example, Stagecoach managed to grow its bus operating profits by 6% in its most recent financial year (ended April 30).
It is not usually good form for chief executives to criticise their predecessors, especially when their chairman was part of the old regime. Yet O’Toole recently told The Herald that the company had “lost some entrepreneurial flair”, and has talked about needing to respond better to local issues.
Observers are happy to fill in the blanks. Lockhead’s management philosophy is said to have been markedly different from the likes of Stagecoach and Arriva. While they invested more heavily in their buses and kept down prices to win passengers, First prioritised costs above all else. Vehicles were expected to last longer and were not cleaned as rigorously. Drivers appear to have been under less pressure to look smart. Timetables are said to have been less reliable because buses would sometimes be held off routes.
One source takes as an example Strathclyde, which is one of First’s biggest bus areas and should be a goldmine because of relatively low car ownership and high population concentration. Annual passenger numbers are said to have fallen in a few years from about 110 million to 80 million. Other strongholds such as Leeds and Manchester are said to be in better shape, but these problems have taken their toll on overall passenger numbers. At present, First says it serves 2.6 million UK bus passengers a day. Back in 2009 it was claiming three million.
Neil Renilson, former chief executive of Lothian Buses, warns that this is a dangerous spiral. “If you repeatedly let your passengers down, they will find alternative means of travelling. Then they’re lost to you forever and won’t come back at a later date. It’s not like the supermarket business, where every week everyone has to buy food,” he says.
Amid this passenger decline, Lockhead’s geographic strategy appears to have been to grow the business wherever possible.
Stephen Morris, general manager of passenger group Bus Users UK, comments: “They were very keen on maximising their territory across the country. They made some unwise choices in areas they bought into. North Devon would be a good example. So would Cornwall and East Anglia.”
Others add that Lockhead was against ever selling anything, since he feared it would show weakness. Struggling areas would be cross-subsidised by stronger parts. For example, the company kept a presence in East Lothian and Midlothian despite struggling to make money there for years.
To ensure profits kept rising in spite of these cross-subsidies and falling passenger numbers, First took the obvious way out. As one City analyst puts it: “FirstGroup has a track record of being more aggressive on fares to make up for lack of volume growth.”
A survey of some fares around the country certainly puts First among the most expensive. In Edinburgh, a three-mile single journey with Lothian Buses at £1.40 is 45p cheaper than the equivalent with First Glasgow. A three-mile Stagecoach journey from Perth to Bridge of Earn costs £1.70, while First’s Aberdeen equivalent costs £2.40.
When two operators are in the same city, First again tends to come out worst. In Manchester, a Stagecoach three-mile journey to Droylsden costs £2.10, while a First journey of similar length to Prestwich costs £3.10. In Sheffield, it costs £2 to get to Meadowhead with Stagecoach but £2.50 with First.
This appears to no longer be working for the company. Stephen Morris says the company’s revenues now sometimes actually fall when fares go up, meaning any gains are offset by the numbers of passengers leaving.
According to the City analyst: “Recent rises by Stagecoach and Go-Ahead of 5% to 8% come on the back of quite modest rises in previous years. If, like First, you have already pushed up fares, it becomes harder to push them up further.”
In other words, First’s bus profits have been reducing because it is losing customers and can no longer rack up fares to paper over the cracks. A First spokesman says: “The economic backdrop has been weaker than expected and we were disappointed by the yield from our fares increases in January.
He added: “We have not hesitated to acknowledge that our approach in our UK Bus division had to change because of the trend of growth comparisons between us and our competitors.”
Early in O’Toole’s reign he brought in Giles Fearnley, a well-respected bus and rail veteran, to run the division. This preceded various other management changes, not least the unexpected departure of Scottish bus boss Mark Savelli last autumn. Since then the company has carried out a full-scale review of the business that has led to a £160m investment programme in 1000 new buses, £4m in vehicle refurbishments and £27m plans to introduce swipe card/mobile phone payment technology on buses.
Various poorly-performing parts are now being sold off or closed. For example, First has recently closed its Dalkeith bus depot and exited parts of East Anglia and north-west England. It is also selling off £100m of assets, reported to include Redditch, Chester, Wigan, Northampton, North Devon, Birkenhead, Kidderminster and Somerset.
O’Toole has said Scotland remains core to the business, but one well-placed source reckons there will be disposals here, and in Wales too.
Candidates in Scotland, they speculate, would include East and West Lothian and Stirlingshire.
However, this programme is turning out to be problematic, following the recent news of Stagecoach scrapping a £2.8m plan to buy First’s North Devon business after the Competition Commission (CC) planned to investigate. The CC carried out a full review of the industry last year and concluded that having five operators controlling more than 70% of bus transport warranted close attention to each deal. Many in the industry are saying that if the CC is going to look at even a little business like North Devon with just 30 buses, it will make First’s programme a major headache. Potentially it won’t be able to make deals, or will have to sell at knock-down prices to smaller players.
One analyst says that for this reason, the company would be better to look at selling one big business such as Strathclyde rather than a lot of smaller ones. He points out that when Stagecoach and Arriva had problems in the past, they got through by taking tough disposal decisions. “I don’t know if the board has quite got this yet,” he says.
Options like these mean losing emotional attachments – getting rid of Martin Gilbert might make this easier, goes the logic. The fact that he is already chief executive of FTSE 100 group Aberdeen Asset Management and sits on various boards including BSkyB makes him vulnerable to charges that he is over-stretched. Asked for a comment on the matter, First was somewhat equivocal, saying it would not engage in a public debate on the matter but that “it is important that we take into account the views of a broad and representative spread of shareholders”.
Whether or not Gilbert’s sacrifice proves necessary, investors are already waiting for the winter interim trading update for progress. It will be the first to include Chris Surch, who starts in the key role of finance director in September.
Success in other areas of the business will help, such as winning new rail franchises in the UK or making more progress with the US school bus problems. But investors are unlikely to settle until the management are able to show they can get the bus business working.
Sir Moir Lockhead’s former bus-industry rivals see him as a great empire-builder who was much weaker at day-to-day management. Whether or not that is fair, he might well be feeling relieved that he is not there to bear the brunt of it now.