Safeguarding future returns Principal risks and uncertainties
Every business faces risks and uncertainties across a range of strategic, commercial, operational and financial areas. The Group’s management recognises and prioritises those risks and puts in place measures to mitigate them, in order to improve safeguards over future returns for shareholders.
Outlined below are potential risks that could impact the Group’s performance. These are monitored through the Group’s risk management processes. Additional risks and uncertainties not identified below may also have an adverse affect.
External risk
- Economic conditionsWhilst some of the Group’s businesses have naturally defensive characteristics to the economic environment (eg school bus), other parts of the business may be adversely affected by economic conditions.
- Political and regulatory changes The Group’s businesses are subject to numerous laws in the jurisdictions in which they operate, regulating the operation of concessions, safety procedures, equipment specifications, employment requirements, environmental procedures and other operating issues.
- Fuel costs All of our businesses are exposed to fuel costs – primarily diesel for buses and coaches, and gasoil or electricity for rail. Fuel prices are subject to significant volatility due to economic, political and climate circumstances.
- Contract risk Much of the Group’s business is secured through winning contracts and concessions, particularly in its North American school bus business, in Spain and UK Rail.
Potential impact
- Revenues in many of the businesses, including UK Bus, UK Rail and Spain, are historically correlated to GDP and employment.
- Changes in political and regulatory environments can have significant impact on regulated public transport businesses. In particular, there is a risk of significant additional cost being associated with complying with changes in the regulatory environment.
- Fuel costs constitute a significant proportion of the Group’s costs and, consequently, to the extent that price increases cannot be passed on to customers, increases in fuel costs will significantly affect profitability.
- An inherent risk in contract bidding is that bid assumptions might prove to be incorrect. If the Group’s significant bid assumptions prove to be incorrect, this could have an adverse effect on results of the operations and the Group’s financial condition.
Mitigation actions
- The Group seeks to mitigate this risk through proactive cost control, revenue management systems, careful economic modelling of new contracts and through sharing revenue risk with the awarding body (eg UK Rail and Spain urban).
- The risk is reduced by maintaining close relationships with key stakeholders and ensuring that the economic advantages of our business models are fully understood and considered.
- The Group seeks to mitigate risks of increases in fuel costs by entering into fuel swaps and purchase contracts.
- The Group seeks to mitigate the risk through careful economic modelling of new contracts, and by sharing revenue risk with the awarding body; for example with the DfT in UK Rail.
