Group takes a ‘commercial decision’ to reject a three-year extension of rail franchise

FirstGroup has announced that it intends to forego a three-year contract extension for its Great Western rail franchise from March 2013 and will instead bid for a new contract for the franchise that it believes will be longer and more lucrative.

As a result of the commercial gamble, the Aberdeen-based group has taken a financial hit of £59.9m in its full-year results that were published this week.

Chief executive Tim O’Toole called the move a “tactical decision” despite the accelerated depreciation charges that make up most of the one off charge.

The group reported that overall revenue for the year to March 31, 2011 had increased by 2.7% to reach £6.4bn, However, profit was £309.3m, a fall of 15.1% on the previous year. O’Toole said that the group was reporting solid growth at four of its five divisions.

“We have made the commercial decision not to take up the option to extend the First Great Western franchise for a further three years beyond the initial franchise term to 2013,” he said.

“The government has announced franchise reform and major investment in the region including the redevelopment of Reading station, resignalling and electrification of the Great Western Main Line, the Intercity Express Programme and Crossrail.

“With our unique knowledge of the franchise we believe we are best placed to manage these projects and capture the benefits through a longer-term franchise. We will continue to operate First Great Western until March 2013 and will meet all of our obligations under the franchise agreement.”

O’Toole told analysts that he “didn’t believe it made sense to take it [the franchise extension] up”.

“This is a sensible, commercial decision,” he added. “But we also hope that it turns out to be a smart tactical decision because it allows us to maximise the bidding value of our incumbency given the enormous challenges ahead for our railway.”

The significant fall in profitability at Aberdeen-based First has largely been driven by a series of one-off charges, including the hit for its Great Western franchise gamble.

The group will take a £39.5m charge to help turn round First Student, its North American yellow school bus operation, which has struggled both operationally and financially in the face of squeezed US school budgets. It will also write off £16.6m for a loss making US military contract on the Indian Ocean island of Diego Garcia.

Whilst turnover at FirstGroup’s UK rail division increased by 6.5% to £2.3bn, driven by a 5.3% jump in like-for-like passenger revenue, turnover at the group’s division fell 2.8% to £1.1bn. However, operating profits at the division increased by 19.4% to £148.8m thanks to lower hedged fuel costs, operating efficiencies and cost cutting.

In North America, revenues at the Greyhound intercity coach operation rose slightly to £634.6m on the back of growing passenger numbers, driven in part by increasing fuel costs. As a result operating profit rose by more than two-thirds to £40.2m.

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