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Introduction

The Operating and Financial Review (“OFR”) of National Express Group PLC describes the main trends and factors underlying the development, performance and strategy of National Express Group PLC during the year ended 31 December 2007, as well as the main trends and factors likely to affect our future development, performance and position.

Throughout the remainder of the Annual Report and Accounts, National Express Group PLC is referred to as “the Company” and the Group, of which it is the ultimate parent company, is referred to as “the Group”.

Group Strategy

The Group’s objective is to generate shareholder value over the longer term, which we expect to achieve through three core strategies:

  • Reorient the Group around a more customer-driven, branded proposition
  • Develop new products and services, and grow organically
  • Acquire businesses in markets where we can add value

These three strategies have been explained in more detail in the Chief Executive’s Review, together with a review of what has been accomplished in 2007.

Stakeholder Relationships

The Group has a broad range of stakeholders who are key to the achievement of our business objectives.

Our external stakeholders range from those who award us contracts such as the Department for Transport, local authorities, transport bodies and school boards to our passengers who use our services each day. In addition there are numerous other stakeholders such as non government organisations, trade unions, suppliers and user groups with whom we have a constant dialogue. Our stakeholders are also internal with around 43,000 employees enabling us to deliver our products and services day in day out.

We engage with our stakeholders at a Group, divisional and local business level. During 2006 all of our UK businesses participated in this process mapping out accurately those stakeholders with whom we need to work to deliver our objectives. During 2007 we continued to develop stakeholder plans to support the business.

We communicate with our external stakeholders through a number of channels; open forums such as Meet the Manager sessions, customer magazines and websites. Our internal stakeholders engage with the business through a range of channels including conference calls, management conferences and magazines. As we believe in two way communication, we undertake surveys amongst our stakeholders, primarily customers and employees to gauge their satisfaction with our products and the degree of their engagement with the business.

Resources

The Group has a range of resources that it uses to deliver its objectives and service its stakeholders.

Our Employees – The Group’s most importance resource is its people. We believe there is a strong correlation between employee satisfaction and customer satisfaction, which means that our employees are vital to achieving the Group’s objectives.

Our Brand – Market surveys consistently demonstrate that the National Express brand is the most recognised brand amongst the UK transport groups. It is a Superbrand and has received this accolade over a number of years. The strength of our brand has positioned us well to create a masterbrand which we started to roll out across our operations at the end of 2007. We believe focusing on one brand will provide greater clarity for our customers and cost efficiencies as well as focus within the business.

Our Customers – Every year, passengers make almost a billion journeys with us. From this interaction we have databases of customer contacts to whom we believe we could further market our products. We believe the Group has a significant opportunity to market itself, open new sales channels and achieve incremental sales.

Our Reputation – The Group has a strong reputation as a reliable operator across all its divisions. This reputation enables us to bid for contracts safe in the knowledge that we can deliver to meet customer expectations.

Our Expertise – Our reputation is backed up by first class operator knowledge which ensures we deliver a safe, reliable and excellent service. We are constantly reviewing ways to improve our performance.

Our Contracts – Our existing portfolio of contracts, including London Bus contracts, Trains franchises, North American school bus contracts, and in Spain long distance concessions and regional and urban contracts, provides assurance in those divisions over the delivery of shareholder value in the short and medium term.

Description of the Business

National Express Group is a leading transport group with operations in the UK, Spain and North America. On the back of the UK Integration process, we now operate three divisions, one for each of these geographies.

The following sections are intended to provide a description of each of our businesses as context for the Operational Review which follows. Narrative describing how the Group manages its operations is contained in the Corporate Governance Report.

Trains

Our Trains business operates a range of inter-city, commuter, rural and airport passenger train services under franchise agreements with DfT Rail. Franchises are awarded following a tender process managed by DfT Rail, in which applicants are required to prequalify for the main franchise bid process. Following a successful bid, the franchises generally last for a period of seven years, with the possibility of short term extensions.

Our National Express East Anglia franchise expires in March 2011, but will be extended to March 2014 if certain performance targets are achieved. Our National Express East Coast franchise started in December 2007 and ends in 2015. Our c2c franchise will finish in March 2011 and our Gatwick Express franchise will finish in June 2008. The next franchise tender process will be for the current Southern franchise, which will commence in 2008 with bids submitted in 2009. It is our intention to take part in this bid process.

Revenue is generated from the sale of tickets to passengers, with yield management techniques used to maximise revenue in off peak periods. Increases in certain ticket prices are regulated, with the increase linked to RPI. Other income is generated from areas such as catering services and car park income. In addition a significant amount of Government funding is received in certain franchises in the form of franchise support.

Buses

Our Bus operations provide high frequency urban bus services in the West Midlands, London and Dundee.

In the West Midlands and Dundee revenue is generated by the sale of tickets to our passengers. Fare increases are unregulated and we work in partnership with local authorities to grow the business.

In London we operate contracts for Transport for London (“TfL”), which specify frequencies and performance levels. We do not retain any of the revenue from ticket sales in London with all revenue passing to TfL. The contracts normally last for five years, with two year extensions. We are constantly bidding for new contracts and no one contract is material to the business.

The division also operates Midland Metro, the light rail service in the West Midlands, which generates revenue by the sale of tickets to passengers.

Coaches

Our Coach business operates a national integrated network of scheduled coach services under the National Express brand. This network operates to more than 1,000 destinations within the UK including all of the major UK airports. Revenue is primarily generated through ticket sales to passengers with yield management systems used to maximise revenue in off peak periods. Fare increases are unregulated. The majority of vehicles used by the business are contracted from third parties who employ the drivers.

There are a number of smaller businesses in this division. Our start-up operation National Express Dot2Dot generates revenue through ticket sales to customers travelling from central London to Heathrow and Gatwick Airports respectively. Eurolines generates revenue through ticket sales to customers travelling between the UK and Europe. National Express Rail Replacement and Airlinks operate coaching services under contracts with Train Operating Companies (TOCs) and coach services at Gatwick Airport respectively.

North America

Our North American Division is the second largest operator of private school bus services in the United States and Canada, operating over 15,000 buses. It operates from locations in 27 US states and 2 Canadian provinces.

We completed the disposal of Stewart Airport in October 2007, which enables our North American Division to be totally focused on student transportation. In this business we earn revenue by operating contracts on behalf of school boards to transport children from home to school with additional revenue earned from ad hoc field trip and vehicle charter activity.

The North American student market is highly fragmented. Local school boards operate around 350,000 vehicles in house, with the balance being operated by private companies.

Spain

In Spain we trade under the brand names of Alsa and Continental Auto. The combined business is Spain’s leading private operator of long distance and regional coach services and urban bus services.

The coach business operates 28 long distance coach concessions in Spain and international coach routes across Europe. The long distance concessions are granted on an exclusive basis by the national government for each route, with an average duration of 15 years. In addition, the business operates 91 regional coach concessions in Spain awarded by regional governments. In the coach businesses, revenue is principally generated by the sale of tickets to passengers, some of which are subject to regulated price increases.

In addition to its coach businesses, the division operates urban networks in 17 Spanish cities and outside of Spain in Porto and Marrakech and seven commuter concessions. Urban contracts are awarded by city councils and revenue is principally generated by the operation of these contracted services.

Operational review

Group Results

The Group’s objective is to generate shareholder value over the longer term. In the short term, we monitor the growth in Group profitability to ensure this is being achieved. The Key Performance Indicators (“KPIs”) for profitability are normalised operating profit, normalised profit before tax and normalised diluted earnings per share, which are calculated as per the notes to the accounts.

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