National Express Group boss Dean Finch says slowdown in UK rail growth is likely to present significant financial challenges for many operators

 

NEG boss Dean Finch believes that rival companies have been competing over-aggressively for rail franchises

 

Dean Finch has emphasised his belief that transport companies are facing significant and growing financial risks from recently-awarded UK rail franchises by indicating he would not invest his own money in them.

Speaking after the sale of NEG’s last UK rail business, c2c, to Trenitalia for £72.5m, the National Express Group chief executive suggested that any investment firms that view UK franchises as attractive prospects are wrong. “For some, UK rail represents a paradigm of asset light businesses. I earnestly hope no-one of that view is managing my investments,” he commented.

Part of the reason for NEG exiting UK rail is he believes that rival companies are competing over-aggressively for contracts, basing bids on double-digit revenue growth to fund huge premium payments to government.

“I saw no prospect of winning further franchises in the current bidding environment,” Finch told City analysts. “This environment has changed considerably since we bid for c2c [in 2014] and emphatically not for the better.”

Although c2c requires relatively low growth to meet financial targets compared to new franchises such as Virgin Trains East Coast, TransPennine Express and Abellio East Anglia, Finch was concerned that weakening patronage trends evident across the industry had created a risk of substantial losses over the contract term.

Setting out the benefits NEG would gain over rival groups by exiting UK rail, he said: “The slowdown in UK rail passenger growth is likely to present significant challenges to many operators with very high premium obligations. By moving swiftly and firmly, we have both removed this risk and replaced it with the opportunity for further targeted investment [in other countries].

Elaborating on the reasons for the c2c sale, Finch said the company had significantly outperformed other operators in the past year by growing revenue nearly 6%. However, he was concerned that general trends towards lower growth meant c2c faced potential losses over the next decade of up to £200m. He also indicated that c2c may face challenges in making a profit this year.

“What I saw was a business earning a wafer thin margin with a further £10m increase in premiums in 2017, meaning we would have to grow revenue by 6% to offset this increase alone against the background of
other significant cost increases and slowing revenue growth,”
he explained
.

 

This article appears in the latest issue of Passenger Transport.

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