Robust performance with new revenue management system starting to impact
Managing Director, UK and Germany
Bus and Coach UK
|Year ended 31 December 2017||2017
|Normalised operating profit||70.9||67.3|
|Normalised operating margin||12.6%||12.1%|
Overview of 2017 - Bus
The largest five operators represent around 70% of the UK deregulated bus market, with the remainder of the market made up of a large number of private operators. Active competition comes from national and local bus operators, as well as private car and rail. Economic regeneration and environmentally driven public transport present growth opportunities over the car.
- Increase passenger volumes through investment in vehicles, technology and people through delivering high quality services.
Overview of 2017 - Coach
Our Coach business has the only nationwide network of services, with other competitors tending to focus on specific regions or corridors. Selective competition comes from rail, particularly on discounted fares, and from large bus operators and localised services. Drivers for demand include the level of fare discount to rail, cost of private motoring and environmental friendliness. Customer satisfaction is also an important driver for longer-term loyalty through consistent service and high customer safety standards.
- Revenue growth through competitive pricing, better distribution channels and greater understanding of customers and their needs
Following our exit from UK rail in 2017, we restructured management across our remaining bus and coach businesses, combining the senior functions to operate as a combined team. We therefore present our UK operations together for the first time, as a new combined division. We have also included the separate bus and coach data in this transition year.
In the UK we employed sophisticated pricing, network efficiency and disciplined cost management to reverse the declines we reported at the 2017 half year results. In a challenging year, the division grew normalised operating profits 5.3% in the year, with the combined margin improving to 12.6% (2016: 12.1%).
These headline figures can obscure the detail of the particularly impressive recovery in both our UK bus and coach businesses as management action addressed the challenges they faced:
- Bus: West Midlands like-for-like commercial passengers declined by 0.7% in the first half of the year; in the second half of the year they bounced back to record 0.7% growth;
- In Coach, the year-on-year revenues for each quarter were: 1.9% up (Q1); 2.3% down (Q2); 0.8% down (Q3); and, 2.3% up (Q4) (Q1 and Q2 have been normalised for Easter).
During the year, we concluded an asset sale and leaseback transaction, monetising the value in one of our coach depots and booking a profit of £2.5m.
|2016 normalised operating profit||67|
|2017 normalised operating profit||71|
Within their distinct markets, our bus and coach businesses have focused on their services and pricing to attract new paying passengers and drive growth – the essence of our operational excellence strategy.
|Year ended 31 December||2017
|Normalised operating profit||36.7||34.0|
|Normalised operating margin||13.4%||12.4%|
* Reinstated in relation to the exit from UK rail
Our first two West Midlands Low Fare Zones (LFZ) have successfully driven bus passenger (4%) and revenue growth (1.5%). In 2017 our LFZs covered around 28% of our commercial patronage and continue to be successful in 2018. Our bus business has delivered broadly flat revenue overall, while running 1.5% fewer commercial miles. This translates to an improved revenue per mile in the West Midlands of 1.6% and overall normalised operating margin growth of 100 basis points.
We have also worked with the Mayor of the West Midlands and Transport for West Midlands to establish a credible plan to tackle congestion and promote bus prioritisation. Demonstrating the importance of strong relationships, we are delighted that our joint bid to the Department for Transport for bus lanes on the key Harborne to Birmingham city centre route was successful. We have already started operating our state-of-the-art Platinum buses on this route, with the prioritisation work due to start shortly. Our experience shows that where we have introduced Platinum buses and faster routes before, such as Lode Lane, we have seen double digit patronage growth.
|Year ended 31 December||2017
|Normalised operating profit||34.2||33.3|
|Normalised operating margin||11.9%||11.8%|
Our coach operations used RMS to drive core revenues and increase passenger numbers. Our sophisticated real-time pricing generated an incremental two percent of revenue growth in 2017 and helped increase core passenger numbers by nearly one percent. New routes, especially to airports, generated an additional one percent of revenue growth and when combined with the RMS benefits, helped offset the revenue decline attributable to terrorism (-3%).
The coach business also focused on the efficiency of their operation and removed 3 million route miles from the network. Combined with the benefit of RMS already noted, this increased coach occupancy rates by two percent and drove revenue per mile up by 5.5% during 2017. We believe there is more opportunity to come, with RMS likely to generate a further incremental revenue benefit of one percent in 2018 and additional network optimisation opportunities to pursue.
Both our UK bus and coach operations have received significant external operational excellence recognition in 2017: both hold five-star British Safety Council ratings, as well as the Sword of Honour, the safety council’s highest accolade; both recorded improved customer satisfaction scores – 87% in bus, up 1% year-on-year; 86% in coach, up 3% year-on-year; and, both hold five-star European Foundation for Quality Management awards.
Deployment of technology
The importance of RMS to our coach operations has already been covered; the importance of new technology in enabling us to innovate further in our bus pricing is becoming increasingly apparent. As we look to build on the success of the LFZs, we roll out new ticketing products in bus. From near zero usage at the start of the year, 10% of all journeys on our bus services are now by m-ticket. We have introduced the latest contactless ticketing machines to our bus fleet. Customers in Coventry are already using and benefiting from them, with daily capping a key feature. These machines will be fully operational across the West Midlands in April, making it the single largest contactless network outside of London. This crucial technology not only responds to a customer demand, but also enables us to offer new, targeted pricing through a range of payment methods rather than the exact change fare that frustrates passengers.
Our coach website – www.nationalexpressgroup.com – and customer app now provide 66% of all sales revenue (up 3% year-on-year). We therefore invested in 2017 to make them easier and quicker to use.
The benefit is seen in both the improved online conversion rates, up 1.5 percentage points to 18.5% and an App Store rating of 4.5 (up from 2.5 at the start of the year).
We have also invested in technology to improve our safety performance. All our vehicles in the UK are fitted with Lytx DriveCam smart safety cameras. All of our UK fleet is fitted with GPS technology allowing detailed speed management and monitoring. Alongside enhanced management and training programmes, we anticipate these technologies will deliver both improved driving performance and cost savings through reduced accidents.
Creating new opportunities
With the investment in improved sales channels and on-board ticketing, alongside a continued focus on efficiency and customer service, we anticipate organic revenue growth in the UK during 2018.
During 2017 we set a new record for the most revenue raised and passengers carried in a day on our coach services: Boxing Day saw revenue exceed £1.3 million and around 75,000 passengers carried. Our Glastonbury Festival services also secured their highest ever revenues. We also won a contract to transport Amazon employees to and from work and have signed new partnerships with, amongst others, The Jockey Club and BoomTown Fair Festival.
Our acquisition of Clarkes has performed well, achieved the targeted synergies and demonstrated a resilience to the impact of the terrorist attacks in London. We anticipate this will continue to grow our presence in Kent and Medway commuter services as well as the in-bound tourist and discretionary travel markets. We have also taken the opportunity to exit operations during 2017 – Hotel Hoppa and the Eurolines network – that were underperforming. We made a small profit on the sale of Hotel Hoppa and have entered a new joint venture with ALSA and Ouibus to provide coach services across selected European locations.
In 2018, we expect that our sophisticated approach to pricing will drive further revenue growth. We expect RMS to provide an incremental revenue benefit of one percent in coach. And by moving away from a traditional annual (largely cash) fare increase in UK bus, to more agile and targeted pricing – including fare cuts – we also expect to generate revenue growth. This is being complemented in both bus and coach by investment in technology to make our ticketing portals and services easier to access and also encourage loyalty and frequency of use among existing customers. We are optimistic about our prospects in the UK for 2018.