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The founder and chief executive of Stagecoach Group has dismissed concerns that foreign state-owned rail operators with deeper pockets than their UK rivals will dominate the next round of rail franchising.
“We’ve all got big enough balance sheets,” said Sir Brian Souter, whose group runs the South Western and East Midlands franchises, and the West Coast London-to-Edinburgh service through its joint venture with the Virgin Group. “If we wanted to to play the game, we could play it.”
Earlier this month, Stagecoach lost out to Abellio, a subsidiary of the Dutch state railway, on the contest to run East Anglia trains for two years before a longer-term licence is tendered. But because of the short length of the franchise, meaning the government could little expect significant investment in infrastructure from the operators, that outcome may have had more to do with aggressive bidding than the Dutch company leveraging its balance sheet.
“There’s a price at which we won’t do the job, and we’re not bitter about it,” said Sir Brian. “Some of these overseas bidders, if they come in too cheap, well, the British taxpayer’s the beneficiary, aren’t they? I mean, if they want to do it for nothing, then good luck to them.”
Sir Brian also doubted changes to the franchising regime, which the government is expected to lay out in a white paper next month and in its “invitation to tender” for the West Coast mainline early next year, will stretch the balance sheet of his company or his UK-listed peers – in particular after the departure of transport secretary Philip Hammond for the Department for Defence. “I think that Philip would consider radical measures, and we don’t know if the new minister [Justine Greening] will be willing to consider radical measures,” he said.
“I’m not saying he necessarily implemented them, but Philip would be willing to think about the unthinkable.”
His big hopes for fast growth lie in the US, where Stagecoach’s Megabus intercity coach business is seeing double-digit revenue growth. While margins there vary depending on maturity of services, they reach well past 20 per cent in fully developed businesses – even using a franchise model, which Stagecoach is employing from time to time, most recently in a deal to provide Megabus services out of Atlanta.
Here, however, Sir Brian is at odds with some sector analysts. Deutsche Bank, for example, would have preferred to see greater capital expenditure in the US rather than quite the scale of the £350m dividend payment Stagecoach made in September.
“Clearly a flabby financial structure is unwanted but we would have preferred that at least a proportion of the capital be put to work rather than simply returned to shareholders,” wrote analyst Geoff van Klaveren.
Mr Souter dismisses those concerns, and says he has his investor base on side.
“We have become a kind of safe-haven,” he explained. “They’re quite a conservative crowd.”