National Express plans further cuts to help service £1.2bn debts

National Express Group has announced that it will be making further job cuts and cost reductions, paring back investment and cutting its dividend.

The moves, announced at the presentation of the company’s full year results, are designed to free up at least £100m of additional cash next year, enabling the company to pay off debt, minimise the expected fall in profit and prevent it from breaching its banking covenants.

Although NEG made a pre-tax profit of £194m in 2008, the impact of the UK recession will bring earnings under considerable pressure in 2009. City analysts expected all divisions to be hit, with the exception of the US school bus operation.

Bowker acknowledged that the UK rail division which contributed £81m profit in 2008 is expected to be worst affected. Revenue growth at the flagship National Express East Coast franchise fell to 3-4% in the last quarter of 2008 against a target of 10% and Bowker was unable to provide any reassurance that trading had improved in the first two months of this year.

“The start of 2009 has been quite strange,” he said in a presentation to analysts. “We had a peculiar couple of weeks after Christmas, then incredible weather disruption, and we’ve had some good weeks, so it’s quite difficult to see a pattern. We need to see that emerge a bit more.”

With income at National Express East Anglia now more than 2% below target, triggering revenue support from the Department for Transport, Bowker said that cost cutting measures would be needed to prevent the division falling into the red. These will involve efficiencies in addition to the 750 job losses across the group and cut backs to the NXEC catering service announced before Christmas.

“We have put together a series of cost reduction plans beyond those we announced before Christmas,” Bowker said. “Their implementation depends to some degree how the recession impacts the rail sector. We will make a more detailed announcement shortly.

“When you add those plans to what we are doing in National Express East Anglia, it means that despite rail’s financial performance weakening in 2009, as of today we still expect the division to be profitable.”

One analyst also picked up on signs of weakness at NEG’s large National Express West Midlands bus operation, where revenue growth fell from 7% to 5%, and questioned whether these figures justified Bowker’s characterisation of the business as being resilient to recession. Others also predicted some weakening in 2009 in the large Spanish coaching division as the recession hits tourism and employment.

In addition to the profit squeeze predicted this year, NEG is under pressure from its banking covenants. With net debt having reached nearly £1.2bn due to the £450m acquisition of Continental Auto in 2007 and a £240m hit from adverse currency swings, NEG will be within touching distance of breaching a major covenant when it is revised in June. Bowker said the cut backs in staff, the dividend and investment were essential to prevent that happening. The 40% cut in dividend alone will save £30m.

“Our key priorities for 2009 are cash management,” he said. “Following a period of investment over last few years, we will ensure we maximise our return from those investments. Coupled with a reduction in the final dividend, we can expect those cash management initiatives to deliver in excess of £100m.”