Stagecoach boss Brian Souter says the government must cut carefully to avoid hurting the economy.
Stagecoach’s chief executive Brian Souter has seen it all in the 30 years since he founded the bus and rail operator – but even he admits the industry is undergoing a difficult period.
The transport sector, which is only just emerging from a painful recession, is about to face more pain. Chancellor George Osborne’s emergency budget last month suggested that the Department for Transport will face the full force of the deep cuts the coalition government wants to make to the £156bn UK budget deficit over the next five years.
The National Health Service and international development budgets will be ring fenced, while education and defence will be looked on sympathetically, which means other areas, including the transport department, will face the greatest reductions. Observers expect to see its £15.9bn annual budget cut by around £5bn in real terms over the next few years.
“The industry is asking itself what will happen,” says a thoughtful Souter in a quiet sing-song Perthshire accent. “There are a wide-range of potential cuts we are facing.” Souter sits deep in a wing-backed chair and picks at a bunch of grapes in his spacious first-floor suit at the Lanesborough in Hyde Park Corner.
The boss of the FTSE 250 firm, valued at £1.3bn, is known for dressing down and when City A.M. met him he was sporting jeans, a light-blue denim shirt, white trainers and a tweed jacket.
Souter comes from a working-class background and after beginning life as a bus conductor went to the University of Strathclyde as a mature student to read accountancy. He saw his chance during the transport market deregulation of Margaret Thatcher’s government. He used his bus driver father’s £25,000 redundancy money to buy two buses and with his sister Ann Gloag started Stagecoach in 1980.
Today, thanks to a series of acquisitions and franchise wins, the firm runs hundreds of bus routes across the UK, three rail franchises including South West Trains (the second largest in the country), coach service Megabus, as well as a US coach unit. The business was floated in 1993, but he and his sister retain 26 per cent of the business, which along with other investments give the family an estimated wealth of £610m.
Charles Stanley analyst Douglas McNeil says: “Brain Souter is undoubtedly one of the fathers of bus privatisation in this country. He has also had a significant influence over train deregulation as well.”
Even though the full detail of the cuts will not be laid out until the government’s departmental budgets are established on 20 October, Transport secretary Philip Hammond has moved quickly. He has backed Crossrail, the £16bn east-west London rail link, and regional high speed rail links into London. But he has frozen an order for 1,400 Hitachi trains and for another 700 (mainly commuter) carriages until the autumn.
Souter is sanguine about this. He says: “You have to start somewhere. We absolutely understand that the transport department has to make cuts.”
The bus and train boss has met Hammond – he was due to be chief secretary to the Treasury until the Conservatives were unable to win an outright election victory and had to form a coalition government with the Liberal Democrats – and is so far impressed.
Souter says: “He is very bright, and has picked up the brief quickly. He seems willing to listen. But we are not sure about how coalition government works. We will have to see about that.”
But the bus and rail chief is quick to point out that cuts in transport spending imply more than just economic consequences. Souter says: “There are difficult choices to be made that have important social and environmental consequences. You have to protect the elderly and the poor.”
The Stagecoach boss has two red lines – both of which would impact his firm – which he believes should not be crossed. They are free travel passes for pensioners, which costs the government £1bn; and fuel subsidies for buses, which cost £2.4bn.
He says: “If bus subsidies were withdrawn we would have to put up fares because that is a cost. But if we do that it will mean people will leave the buses and will find it harder to get around the towns they live in.”
By comparison, and not surprisingly, Souter thinks the transport secretary should look hard at the Highways Agency’s £3.7bn budget, which is spent on roads.
The transport department is also considering letting regulated train fares (journeys during the rush hour) rise above the current long-standing formula of the retail price index plus one per cent.
But Souter cautions this may have economic consequences for the country. He says in this recession we have so far lost fewer jobs than predicted because workers have been prepared to accept measures like pay freezes and taking unpaid time off – but a hike in rail fares may upset that balance, particularly in London.
Souter says: “When you price up rail services you could choke fares into London, and that is like killing the goose that lays the golden egg. You have to be careful. The City is beginning to expand again, and the job market in London is fundamental to the UK’s long-term growth.”
Souter, along with many train operators, wants to see franchise periods extended from seven to around 20 years, which they say gives them the time to invest properly in the routes. He also wants to see less prescriptive monitoring of the franchise by the Department for Transport.
Souter says: “There are too many targets, which they want to micromanage. They want to tell you what time to open the coffee shop.” He says this should be stripped down to a few basic customer satisfaction targets such as punctuality, pricing, staff service, onboard facilities, and good booking technology.
He adds: “If the customer is happy, what the heck does it matter how you get there?” Souter also wants to see train operators take over the maintenance of the track from Network Rail, which runs the country’s lines on behalf of the taxpayer. He says Network Rail would still own the line, but train firms would manage the track more cheaply and safely because they cover smaller operational areas.
Last month Stagecoach, which employs 30,000 staff, posted an 18 per cent fall in pre-tax profit (albeit ahead of forecasts) to £161.3m, on sales up three per cent at £2.2bn.
Souter adds: “Growth over the last six months on the trains is strong as the economy picks up. We are positive about the outlook over the next six to 12 months. And buses are a great place to be in a recession, because people trade down and this is a cheap form of travel.”
Last October, troubled rival National Express walked away from takeover talks with Stagecoach, preferring to launch a successful £358m rights offer instead. And since then Europe’s biggest transport group Deutsche Bahn has taken over UK rival Arriva.
However, Souter says it is “not clear” whether the industry is ready for another round of consolidation, or if the last few months have been atypical.
He says there has been a feeling that the industry could lose a major player “without any big competition issues involved.” But equally, he says, all the other big firms (FirstGroup, National Express and Go-Ahead) “want to keep their independence”.
Nevertheless, Souter has cut Stagecoach’s debt to a “lean” £343m, which will allow it to take part in any major consolidation should it arise. He adds that National Express’ rights issue means he is unlikely to go back with a sweetened offer.
Souter has never been overly concerned with the orthodox view. Even though he made his fortune thanks to the Thatcher revolution, he has given money to the Scottish National Party. He is one of Scotland’s most successful businessmen, but he stands outside its clubby Presbyterian roots. He belongs to a devout Christian group called the Church of the Nazarene. And in 2000 he launched the unsuccessful Keep the Clause campaign, aimed at resisting the repeal of Clause 28, which forbade the promotion of homosexuality in schools.
This non-conformist streak, perhaps explains why he has never been knighted, unlike Sir Moir Lockhead, boss of rival FirstGroup and another “father” of transport deregulation. But Souter says has no plans to enter politics or leave Stagecoach.
He says: “I have no ambition to do anything else. I want to do this job for the foreseeable future. The company is 30 years old this year, but we still have ideas and want to try new things.”
Which means that for the next few years at least, investors can be assured that Souter will continue to do things his way.
Article: Copyright © All rights reserved, City A.M.