Description of the UK rail and bus market

The UK government privatised the railways in 1993; since this time the UK franchising bodies award contracts for the operations of UK rail franchises to private operators (Train Operating Companies, TOCs) for a specified period of time. As at December 2018, there are 23 TOCs running franchises, 4 of which are managed by the Abellio group. 13 of these franchises are let by the Department for Transport (DfT), however some franchises – including ScotRail and Merseyrail – are let by national/ regional franchising authorities.
Rail infrastructure in the UK is maintained by Network Rail which was brought back into public sector ownership in 2013. The TOCs work together with Network Rail on a day to day basis to deliver safe and efficient operations. Abellio operates ScotRail under an Alliance Agreement with Network Rail Scotland, which means that the management teams work in close partnership. The purpose of the alliance is to work on specified initiatives and align priorities for both ScotRail and Network Rail in such a way that this benefits the quality and costs of public transport in Scotland and will improve services for the passengers.

Current market context

Calls for radical change of the UK rail industry, including increasing support for renationalisation, are driven by growing frustration at poor performance and (perceived) high fares and fare increases. The annual fare increases are perceived as high, however these mainly reflect the political decision taken years ago to shift the balance of network costs onto passengers rather than general taxpayers. A significant proportion of punctuality issues are down to the already publicly owned UK infrastructure operator. Public dissatisfaction reached a tipping point in 2018, with the introduction of time table changes at Northern, Govia Thameslink Railway and ScotRail, fueling calls for radical change. On top of that it became clear that the growth in passenger numbers and related revenue that has come since privatisation also declined for many franchises in 2018 as a result of changing working patterns, with more people working from home, for example. This increased the pressure on the financial system.In response, the UK Government commissioned a ‘root and branch’ review of the UK rail
industry, chaired by an independent business leader. In calling the review, the governing Conservative Party reaffirmed its support for the principle of private sector involvement in running the railway, positioning the exercise as a practical response to challenges like fragmentation between track and train, the continued underperformance of Network Rail and the impact of industrial relations issues.
This review is expected to run until late 2019, when recommendations will be made that will lead to legislation to reform the system over the long term. While the Government has suggested that changes heralded by the review will be implemented prior to the expected 2022 general election, there is no indication that existing franchises will be prematurely terminated.
Against this backdrop Abellio UK remains focused on the core task of delivery across its operations. Despite the fact that Abellio UK was faced with difficult circumstances in 2018, resulting in a poorer punctuality than would otherwise be expected and weaker financial returns at Greater Anglia and ScotRail. Abellio UK has shown relatively steady performance results over time and will keep unremitting focus to deliver the anticipated enhancements. This means that Abellio UK is well positioned to participate in the future shape of the UK rail industry. To this end Abellio UK is engaging with the Government’s review, providing evidence and insight that helps the review team to fully appreciate what is needed to operate a successful railway and the systemic issues that need to be addressed.

Brexit

On 23 June 2016 the British people voted to leave the European Union (EU) (Brexit). In March 2017 the UK submitted the official notification of its intention to withdraw from the EU under Article 50. This started a 2-year negotiation period on the terms of leaving the EU. If no agreement is reached before 29 March 2019 (‘no-deal Brexit’ or ‘hard Brexit’), all EU primary and secondary law will cease to apply to the UK. The UK will become a ‘third party’ country, putting the country’s trading relationship with the EU on World Trading Organisation terms.
Abellio UK is active only in the UK and does not provide any international cross-border passenger rail services. All necessary licences to operate (such as licenses from the ORR, homologation of trains) are in place and will remain in place. Brexit does not have any direct impact on Abellio UK’s operations from a legal point of view, and a ‘No-Deal’ situation will not impact the necessary licences etc.
The British Pound (GBP) has fallen in value against the Euro since the Brexit vote from 1.31 (24-6-2016) down to 1.11 at year-end 2018, a decline of 15%. Abellio UK does not have any material exposure to foreign currencies, and so the only impact of this is the translation risk to NS. This translation risk has an impact on the translation of invested capital, balance sheet items and results into euros.
There are potential implications from Brexit for the smooth import of new trains and spare parts and in a decline in economic growth having an impact on passenger revenue and profitability. In the event of a ‘no-deal’ Brexit economic growth could diminish further. Contractual and other measures are in place to mitigate risk. Abellio UK is confident of achieving its ambitions through all Brexit outcomes, although a ‘no deal’ Brexit will hamper the growth in revenue and will have an impact on results of Abellio UK.

Regional bus market

The regional UK bus market is deregulated. The majority of regional bus services are operated by ’the Big Five’ (Arriva, FirstGroup, Go-Ahead Group, National Express, and Stagecoach Group). Abellio operates bus services in London. In London, bus routes are let by the local transport provider – Transport for London (TfL) – for a period of 5 years based on tenders.

Abellio UK rail and bus franchises

Abellio operates 4 UK rail franchises and around 8% of London bus services with a combined revenue of € 2.67 billion (including Merseyrail). The company operates ScotRail, Greater Anglia as a 60:40 venture with Mitsui, West Midlands as a 70:15:15 venture with Mitsui and JR East, Merseyrail as a joint venture with Serco, as well as a profitable bus business. At the time of publishing this report, Abellio is in the running for the South Eastern and East Midlands tender awards following bid submissions in 2018. The bus business provides complementary travel expertise, including a successful rail replacement service in case of disruption for Abellio TOCs and one competitor.

Key figures per UK rail franchise and bus company

• * Income and number of Merseyrail employees at 100% (Merseyrail is a joint venture [JV] of 50% and is therefore not consolidated in the annual report)