Stagecoach Braced for Brexit Impact on Bellwether Rail Lineby
London-Edinburgh route regarded as most sensitive to economy
Downturns have twice forced operators to pull out of contracts
Stagecoach Group Plc said it’s ready to respond to any slowdown in traffic on the East Coast rail route linking London with Scotland following Britain’s vote to leave the European Union.
The U.K. company would provide incentives for corporate travelers to carry on buying business-class tickets on the 400-mile line in the event of a softening in the economy, while seeking to extend its appeal to other passengers, Chief Executive Officer Martin Griffiths said in an interview.
“We saw as early as December that there was a slowing of growth,” Griffiths said by telephone Wednesday. “That has continued and the Brexit vote will have an effect. I don’t know what will happen, but rail has been through this before, most recently in 2007-8, and it came through it.”
While the East Coast route has had a “terrific year,” according to Griffiths, boosting revenue 5.1 percent, it connects fewer major cities than the bigger West Coast network, and is more dependent on leisure and other discretionary travel. Such journeys are seen as the most vulnerable in the event of a slump.
During the last recession then East Coast operator National Express Plc walked away from the franchise as traffic fell below the levels anticipated when the contract was awarded in 2007, while previous operator Sea Containers Ltd. of Bermuda was stripped of the route in 2006 after filing for bankruptcy.
Under terms of the current deal, which began in 2015, the state will carry 90 percent of the risk should the U.K. economy slow more than 2 percent. While that limits the exposure of Perth, Scotland-based Stagecoach and junior East Coast partner Virgin Trains, the route is still “a focus for market concern,” Jefferies International analyst Joe Spooner wrote in an investor note.
Shares of Stagecoach fell 23 percent in the two trading days after the Brexit vote, before trading 4.4 percent higher Wednesday after the company said adjusted earnings per share rose 3.7 percent in the year through April and announced the disposal of retail operations at unprofitable Megabus Europe. It added that the EPS outlook for 2016-17 hasn’t been significantly revised.
Griffiths said that regardless of the fallout from last week’s vote, the railway should remain “a priority” for the government, which is set to spend 38 billion pounds ($51 billion) on upgrades by 2019, and 56 billion pounds on the longer-term High Speed 2 project between London and northern England.
Stagecoach’s bus operations may also be vulnerable were the economy to tip into a recession, with less affluent urban passengers in particular curbing travel. The company has already reduced fares to spur rider volumes at a time when the low price of oil is encouraging potential customers to go by car.
“We just have to wait and see,” Griffiths said. “Clearly the world is in an uncertain place, but the buses and trains will still run.”