“We are sorry to announce that….” It’s the dreaded precursor to another delayed train, and one that rail commuters have become all too familiar with in recent years. So much so that the re-nationalisation of UK rail franchises has become a key manifesto pledge of the Labour party, reiterated at its party conference. The policy has garnered widespread support from a public who have seen prices rise, but perceive service to have deteriorated, creating a feeling that they are being exploited while shareholders reap the benefits.
With calls for a General Election growing, Labour at “evens” with bookmakers to win the most electoral seats and John McDonnell’s promise that this will be one of their first priorities in office, you would expect the share prices of these “profiteering” and “leeching” (McDonnell’s words not mine) companies to be feeling the strain.1 But this has not been the case. In fact, if share prices could shrug, that is exactly what they would have done. Perhaps investors don’t believe the threat to be credible? That the equity market views the possibility of a Labour government differently to the betting market? More likely, it is because, for the listed rail operators at least, the threat may not actually be that serious.
Promises and profits
Over-optimistic bidding, a creaking infrastructure and changing passenger behaviour has led to years of poor performance for UK rail franchises. The promise of a small, but dependable, margin over the lifetime of a contract has given way to a desperate effort to eke out any profit at all. Most recently, the East Coast franchise (90% Stagecoach, 10% Virgin) has had to be handed back to the government following over GBP 200 million of losses in only two years, approximately 20% of the value of the Stagecoach group. The market is beginning to view these franchises as high risk for minimal reward, and is placing little value on the rail operations of these companies.
A silver bullet for National Express
National Express, once the country’s biggest train operator, had its own problems with the East Coast franchise back in 2009, also having to be bailed out by the government. Since then, it has been slowly exiting that part of the market, only operating the relatively small c2c franchise from 2012, before finally selling that to Trenitalia in February 2017. Earlier this year, its CEO suggested his Board of Directors should “take me outside and shoot me” if he so much as considered going back into UK rail. Instead, the company has focused on their bus service and international expansion, a strategy that seems to be working. Over the past five years, it has achieved a total return of 85% (vs. the peer group ex-National Express of -13%)2.
The debates around the pros and cons of nationalisation are for another article and a different author. But as I type this up on the platform (making the most of the time afforded to me by another delayed train) I can’t help but think it is a prize nobody should be fighting too hard over.
Timothy Lewis is an analyst in the J.P. Morgan Asset Management International Equity Group – Behavioural Finance Team, focusing on small and mid-cap.
1 Quotes from John McDonnell on 3rd Sept 2018 at Dover Priory station https://www.kentonline.co.uk/dover/news/shadow-chancellors-fares-demand-189104/
2 Source: Bloomberg. Five years to 26 September 2018
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