National Express generates revenue principally from two sources. First, multi-year contracts with school boards or local authorities make up 49% of revenue, the majority of which are in North America. Revenue is generated either on a per mile/kilometre basis, or per route travelled. Second, a further 38% of revenue is earned through individual ticket sales to the public, with National Express marketing the product and taking revenue risk. This revenue is derived from bus or coach journeys in the UK, Spain and Morocco, and rail journeys in Germany. Concession revenue from local authorities in the UK, Spain and Germany delivers 5% of Group revenue with charter/private hire contributing a further 5%. The remaining 3% is from other revenue streams such as on board entertainment, SMS alerts, booking fees and advertising.
There are many factors contributing to the Group’s strong organic revenue growth. In recent years, our increasingly sophisticated use of Revenue Management Systems (RMS) has been a notable factor. RMS enables us to segment our offer through a better understanding of customer needs and purchasing behaviour to drive revenue through differential pricing depending on time of journey, ticket type, buying channel etc.
Converting it to profit
National Express maintains industry-leading margins through a relentless focus on operational excellence in all we do. The direct, variable costs of providing transport services across the Group depend on a number of factors, but sophisticated network optimisation is a key factor. Through continuously reviewing and improving network designs and routing, we can optimise peak vehicle requirements and increase loading factors, reducing the cost of delivering a high quality service to our customers. Our diversity and scale is an important factor in managing indirect costs, enabling us to optimise cost and quality across the Group’s supply base.
Delivering cash flow
National Express has a track record of generating significant cash flow from its operations. The Group has delivered over £750 million of free cash flow over the last five years and is extremely disciplined in its management of working capital and the conversion of operating profit into free cash. Maintenance capital expenditure is maintained at a level of around 1.1 to 1.2 times depreciation, efficiently retaining an appropriately aged fleet to meet customer requirements. We enforce consistent global policies and processes
Funding returns and reinvestment
By generating cash returns and by managing our net debt to between 2.0 and 2.5x EBITDA, we ensure debt levels and interest costs can be supported by the profits generated by the base business. This allows National Express to do two things. First, we can reinvest cash back into the operations to grow the business. We have invested £365m both organically and inorganically since 2013. This has strengthened our market leading positions in coach in the UK and in Spain; built-out key geographic positions, such as in New York state in school bus; and enabled us to expand into promising adjacent markets such as paratransit in Chicago or urban bus in Morocco. Second, we can deliver consistent, competitive returns to shareholders. Over the last five years the Company has returned £280 million through dividends, growing dividend per share by 35%.