Risk

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.

Economic conditions

Whilst 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.

Potential impact
Revenues in many of the businesses, including UK Bus, UK Rail and Spain, are historically correlated to GDP and employment.

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).

 

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.

Potential impact
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.

Mitigation actions
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.


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.

Potential impact
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.

Mitigation actions
The Group seeks to mitigate risks of increases in fuel costs by entering into fuel swaps and purchase contracts.


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
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 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.

Cost reduction programmes

The Group continues to target the delivery of a number of cost saving programmes, including approximately US$40 million in North America.

Potential impact
The Group needs to deliver cost savings to offset inflation and improve margins, which would otherwise threaten the competitive position of the business.

Mitigation actions
A number of new management teams have been appointed with long experience in the industry and the right credentials to achieve the desired result. Improved management systems and processes are in place and additional resource from Group has been dedicated to North America. In 2010 £39 million of cost savings were delivered across the Group.

 

Rail

The Group's two current rail franchises, Greater Anglia and Essex Thameside ("c2c"), expire in February 2012 and May 2013 respectively.

Potential impact
Rail revenues and profits represent a material financial contribution to Group results. In particular, the substantial outflow of cash at the time of expiry through the return of season ticket balances has an effect on shareholder returns and investment plans throughout the Group.

Mitigation actions
Operationally the two franchises are always looking to improve the quality of service provided. For example, c2c has continually set record-breaking levels of punctuality in Britain and National Express East Anglia continues to improve. The Group has regular and ongoing discussions with the DfT and considers that it is now substantially rehabilitated with regards to being able to bid for future franchises.


Insurance and Claims

The Group's policy is to self-insure a number of potential claims within its business.

Potential impact
There is a risk that a successful claim or series of successful claims may result in substantial higher charges to profit and cash outflow than expected.

Mitigation actions
Throughout the business, a strong safety culture prevails, led by the Board Safety and Environmental Committee. Where claims arise, they are managed by experienced claims handlers and professional advice is obtained in order to evaluate and minimise costs to the Group. It has also reduced self- insurance values and increased external market coverage.


Financial

The Group is dependent on maintaining certain financial ratios in order to comply with its banking covenants.

Potential impact
In the event of a breach of covenant, the Group's lending banks would be entitled to call an event default under the facilities and would be permitted to exercise certain rights including the right to cancel facilities, which would have a material impact on the Group's ability to continue trading.

Mitigation actions
The Group carried out a number of actions in 2009 and 2010 to improve the financial position of the Group, including successful rights and bond issues. The Group has robust controls and processes in place to monitor cash flows and forecasts to ensure adequate facility and covenant headroom is maintained. The Group has strong headroom in these at the end of 2010.