National Express closes in on 2019 sales but cheap fares hit margins
National Express has warned profit margins will be tighter this year, despite better-than-forecast growth in its British coach business.
The bus and coach operator anticipates earning revenues of around £2.7billion this financial year as it reported demand on some intercity routes in the UK had fully recovered to pre-pandemic volumes.
While the Birmingham-based company’s revenues have robustly rebounded, it told investors on Tuesday that profit margins this year are set to come in below its target average.
Taxpayer help: National Express’s UK coach arm did not benefit from government financial support, unlike its bus division, which received £92.8million in public funding
It blamed this on cheap fares in its UK business amid a major cost-of-living crisis and a school bus driver shortage in the United States, which is causing the business not to run around 10 per cent of its contracted routes.
National Express said the latter factor is driving ‘unprecedented levels of wage inflation,’ with salaries for US school bus drivers envisaged to climb by around 12 per cent in the coming academic year.
The announcement caused National Express Group shares to fall 8 per cent to £2.49 in early trading, making it the top faller on the FTSE 350 Index.
Nonetheless, airport-related sales have improved to two-thirds of their 2019 levels, buoyed by strong demand over the Platinum Jubilee bank holiday weekend, with further growth anticipated over the summer holidays.
Outside the UK, the group noted sales had also bounced back faster than expected at its ALSA subsidiary, thanks to healthy organic growth in Morocco and long-haul bus travel in Spain.
At the same time, its German rail division has seen demand reach nearly four times pre-pandemic volumes after gaining new contracts, including an emergency deal to provide services in North Rhine-Westphalia for two years.
Firms like National Express have seen trade increase significantly in the last year as coronavirus-related lockdown restrictions have loosened, and people have started taking more journeys on public transport again.
The FTSE 250 group predicts margins will progress towards its 9 per cent target average next year and continue increasing in the years afterwards, in line with previous guidance.
In addition, the company said it was ‘confident’ of achieving a minimum free cash flow of £1.25billion between 2022 and 2027, and cash conversion to be near pre-pandemic levels.
The firm put this down to continued growth in underlying earnings and maintaining capital expenditure at or below £210million over the next few years by expanding its ‘asset-light’ contracts and using zero-emission electric vehicles.
‘We are progressing well with decarbonisation of the fleet,’ it added.
‘For example, through our Bus Alliance partnership with Transport for West Midlands, the West Midlands has secured more funding than any other city region from the various government funding rounds.
‘This includes funding for over 300 ZEVs and doubling the length of bus lanes over the next three years.’