The pressure duly mounted when the market turned and First began running into problems with its new US student bus division. Since then, however, this situation has been improving thanks to stringent cost-cutting and improving customer service. It is now possibly off the critical list, unlike the net debt pile. It is still three times top-line earnings at circa £2bn, even after the share issue, and is central to the pressure from the ratings agencies.
Having said that, it might have been manageable were it not for the third and perhaps most important reason for First’s problems: it has made a total hash of its UK bus business. This can’t be blamed on government blunders or market failures, but rather years of bad decisions that took a long time to come to the fore.
Unlike rivals such as Stagecoach and Arriva, who prioritised customers, First’s bus strategy was always built on ruthless attention to costs. Consequently buses were too often old, scruffy and prone to breakdowns and timetable changes. When customers voted with their feet, First would raise bus fares to minimise the damage to revenues. This gave passengers another reason to go elsewhere, which prompted First to put fares up some more. What a great way to encourage the public out of cars and on to public transport.
Now it has reached a point where the elastic in this strategy has snapped. Operating profits in the most recent year are down from £134m to £91m. First has been blaming rising fuel costs, government cutbacks to subsidised fares and the weak economy, but rivals have been making a decent fist of exactly the same situation.
Main competitor Stagecoach managed a 13% rise in its UK bus operating profits in the first six months of its financial year and is indicating that the second half of the year has been going well too, for example.
Now comes the fight back. First Bus has had to exit London to achieve its plan to sell £100m of its assets. It seemed set on disposing of other bits and pieces around the country until the Competition Commission made clear that it was not keen on any of the usual suspects getting bigger.
The other main plan is to invest a pile of money, with the UK bus and US student divisions to receive the lion’s share of a £1.6bn investment over the next four years. This will include refurbishments and new buses in the UK, improved maintenance and also probably fare cuts after the company made positive noises about a pilot in places like Manchester in the past few weeks.
Will it work? It had better, if First is to stand any chance of recovering its reputation, especially amid mutterings that a new Labour Government might cause further pain to rail franchise companies by renationalising the system. (And bear in mind that the likes of First would be in even worse shape if their rail franchises were not entitled to annual fare rises above inflation.)
The councillors were responsible for paving the way for First to dominate bus services in cities like Aberdeen and Glasgow will be long gone, but their legacy is not pretty. The company has squeezed its customers at the very time when they can least afford it.
It would be ironic if market forces now finally delivered decent affordable bus services to these cities. If consumer power can achieve that, you begin to wonder what else might be possible.
