Contents. Another year on our travels. Annual Report & Accounts 2009

Transcription

1 Contents Another year on our travels About Arriva Who we are... and what we do 2 Our business models 3 Our business 6 Our three divisions 10 Our markets 14 Review of 2009 Chairman s statement 34 Chief executive s review 36 Financial review 44 Principal risks & uncertainties 50 Corporate responsibility Our approach 56 Safety 59 Community 63 Employees 69 Environment 73 Directors statements Board of directors 82 Directors report 84 Directors remuneration report 88 Corporate governance 97 Annual Report & Accounts 2009 Accounts Independent auditors report on the group financial statements 110 Financial statements 111 Accounting policies 116 Notes to the accounts 121 Five-year financial summary 151 Parent company financial statements 152 Parent company accounting policies 153 Notes to the parent company accounts 155 Independent auditors report on the parent company financial statements 161 Financial calendar, registered office and advisers 162

2 We hold a photo competition for our employees. Some of their excellent results are used in the annual report. Look out for the captions 2009 key messages Arriva has come through a challenging year with resilient earnings Excellent operational performance in all divisions High levels of customer satisfaction Strong run of contract wins and renewals Mainland Europe order book up 29% in euro Picture from Salvatore Tigano (bus driver), SAF, Italy UK Trains passenger revenue growth continuing to strengthen Robust UK Bus performance Further progress in delivering our strategy Fuel fixed at lower prices Further growth opportunities Picture from Henry Wend (train driver), Vogtlandbahn, Germany Picture from Simon Kent (train driver), CrossCountry, UK. An Arriva bus in Castleford, Yorkshire Group cost control Outlook Tight management control mitigates 60 million fuel hit and impact of recession on passenger revenue. Commercial mileage reduced by 3.4% in UK regional bus operations More than 15 million annualised cost savings achieved in UK Trains Targeted savings and mileage reductions in mainland Europe Pension and tax savings realised in 2009, and locked in for future years David Martin, chief executive...i am confident that the group has excellent prospects for substantial progress. Picture from Mark Scott (train driver), CrossCountry, UK

3 Adjusted EPS * (p) (Earnings per share) 4% Dividend (p) 5% About Arriva * Before goodwill impairment, intangible asset amortisation and exceptional items Mainland Europe - order book m 1,200 29% 1, order book 2008 order book 2025 Estimates of future revenue from contracted business, over a year in duration, rolled forward to reflect contract variations and updated to current prices at year end 1

4 About Arriva Who we are... and what we do Who we are... and what we do UK Our vision is to be the leading transport services organisation in Europe. We employ 42,300* people who operate our buses, trains, coaches and waterbuses carrying passengers across 12 European countries - the Czech Republic, Denmark, Germany, Hungary, Italy, the Netherlands, Poland, Portugal, Slovakia, Spain, Sweden and the UK. Our strategy In 1999 we recognised the long-term growth opportunities that would be presented by the historic opening of transport markets across Europe, and refocused our strategy to concentrate on public transport. We started a disposal programme of our contract hire, motor retailing and vehicle rental businesses. In their place, we carefully and patiently built up a network of operations in mainland Europe, through targeted acquisitions and contract wins, and today we operate around 8,500 buses and 370 train sets in mainland Europe. With around 6,300 buses and two UK rail franchises we are also one of the largest public transport operators in the UK. TRAINS COACHES BUSES WATER BUSES PUBLIC TRANSPORT OPERATOR MAINLAND EUROPE * Including our share of associate companies 2 Arriva plc Annual Report & Accounts 2009

5 Our business models About Arriva Our business models See page 4 for a graphical explanation Contracted services The primary customer is some form of public sector body A regional government or transport authority may offer various forms of contract giving an operator the right to operate services, usually exclusively, on a particular route or in a specific area Examples: Most of our mainland European bus and rail markets The UK London bus market The UK rail market There are two main types of contracted arrangements. The tendering authority generally provides a contribution in the form of additional contracted income, where the cost of providing such a service would not be commercially viable if it depended solely on the fare income that it could achieve On especially popular services it may be possible for the tendering authority to receive a premium payment from the operator running these routes rather than providing financial support Examples: UK rail franchises Italian bus contracts Some bus and rail contracts in the Netherlands and Germany Gross cost contracts Tendering authority agrees to pay an operator a specified sum to provide the specified service for a specified period Revenue from fares is passed to the tendering authority, which bears the revenue risk The service provider generally carries the cost risk, though there may be provisions for cost increases, such as elements of wage or fuel costs Generally the tendering authority will take responsibility for working out routes, and may also specify the vehicles to be used As the operator has no direct commercial relationship with passengers it is common for the tendering authority to provide a system of bonuses and penalties to give operators a financial incentive to provide the desired quality of service Examples: The UK London bus market Some rail operations in Sweden and Germany Bus contracts in Denmark, Sweden and Madrid in Spain Net cost contracts Operator takes on both the revenue risk and the cost risk Operator keeps the revenues from fares Deregulated services Commercial relationship is directly between Arriva and passengers Fare payments are the dominant source of income Therefore services have to be profitable in order to be sustainable, to generate the financial returns which underpin investments in replacement vehicles, our depot facilities, and the expansion and development of services The operator accepts the revenue risk: if the travelling public decides to switch to another form of transport, the lost revenue directly affects our finances Examples: Most bus operations in the UK outside London operate on a purely commercial basis Spain (excluding Madrid) and Portugal also operate on a largely commercial basis Often deregulated services are subject to significant oversight, scrutiny and regulation in various ways, and there is usually a layer of sector-specific regulation. 3

6 About Arriva Our business models (continued) Our business models We operate according to several different business models, which vary by country, by region, and by the mode of transport. But who are our customers and where does our income come from? UK REGIONAL BUS EXAMPLES DEREGULATED SERVICES SPAIN PORTUGAL OTHER MODES OF TRANSPORT, INCLUDING THE CAR COMPETE AGAINST OTHER TRANSPORT OTHER OPERATORS OF SIMILAR TRANSPORT THE PASSENGER = OUR CUSTOMER FARE PAYMENTS = DOMINANT SOURCE OF INCOME WE BEAR THE REVENUE RISK WHICH MEANS OUR SERVICES HAVE TO BE PROFITABLE 4 Arriva plc Annual Report & Accounts 2009

7 (START HERE) About Arriva MOST OF MAINLAND EUROPE BUS & RAIL MARKETS CONTRACTED SERVICES EXAMPLES UK RAIL PRIMARY CUSTOMER = PUBLIC SECTOR BODY LONDON BUS GROSS COST NET COST TENDERING AUTHORITY... OPERATOR... TENDERING AUTHORITY... OPERATOR... PAYS OPERATOR TO PROVIDE SERVICE ACCEPTS PASSES REVENUE FROM FARES TO TENDERING AUTHORITY ACCEPTS CAN GET COST RISK MAY PROVIDE A CONTRIBUTION IN THE FORM OF ADDITIONAL CONTRACTED INCOME ACCEPTS KEEPS REVENUE RISK WAGES & FUEL INDEXATION PROVISIONS REVENUE RISK COST RISK REVENUE FROM FARES 5

8 About Arriva Our business Our business Arriva is a large international business, but is also a local business wherever it works. We combine a broad strategic vision with close attention to detail in our operations. Key facts 3 divisions 12 countries 14,800 buses 587 train sets Employees 42,300 employees passenger journeys 1bn+ every year Our broad footprint in mainland Europe gives us practical experience of operating successfully in many different commercial and regulatory regimes. Bringing together experts from many regions and city-scale operations into one group supports innovation and encourages the spread of best practice and economies of scale. We actively seek knowledge and support learning and development amongst our employees. Our wealth of local contacts and our network of operating and maintenance bases help us to develop existing businesses and create new opportunities for the future. By understanding each local market in depth we constantly stay abreast of the bigger picture of how our markets are evolving across Europe. These sources of competitive advantage are not easy for others to replicate. We think long-term, and build our market positions piece by piece. We may start small, but our long-term aim is always to be one of the top three private sector operators wherever we work. Our commercial focus is on winning and retaining contracts thereby generating organic growth. We capitalise on the expertise and experience gained from many years of operating across Europe. Operational excellence We strive for operational excellence. It makes our services attractive for our passengers. It rewards our tendering authorities for their confidence in us. It makes our employees proud of what they do for their communities. It improves our reputation amongst our stakeholders. Punctuality and reliability are fundamental in themselves, and also underpin good financial performance over time. Operating countries 6 Arriva plc Annual Report & Accounts 2009

9 COMFORTABLE TO OUR PASSENGERS WE AIM TO PROVIDE AN ATTRACTIVE ALTERNATIVE TO OTHER MODES OF TRANSPORT RELIABLE SAFE To our transport authority customers, we bring: Benefits of private sector delivery Value for money for the services their communities rely on Improved services Lower public spending To our employees, we aim to provide: Worthwhile long-term work Recognised value to their own communities Safe, supportive working environment About Arriva We have a broad range of stakeholders and aim to operate in ways which benefit many different sets of stakeholder interests To our investors, we aim to give: Long-term growth in earnings and dividends based on a varied portfolio of business models, a mixture of contract sizes, types and durations, a range of transport modes, and a broad range of operating territories RESPONSIBLE MANAGEMENT OF THE ENVIRONMENTAL IMPACT OF OUR OPERATIONS TO THE WIDER COMMUNITY, IN EVERY CITY, REGION OR COUNTRY WHERE WE OPERATE, WE AIM TO PROVIDE SOCIAL & ECONOMIC BENEFITS OF AFFORDABLE, ACCESSIBLE TRAVEL 7

10 About Arriva Our business (continued) Arriva has benefited during these turbulent times from being a broadly-based group. Our operations include a mixture of cash generative businesses in mature markets, and growth businesses in opening markets. We depend on no single mode of transport, contract, source of revenue or source of funding. As a result of these different business models, revenue across the group is derived from a combination of passenger revenue and non-passenger revenue, including contracted government payments. The chart below shows the 2009 revenue split for different parts of the group, highlighting the variety of revenue sources. Non-passenger revenue: 60% 1,880.7 million Passenger revenue: 40% 1,267.1 million Mainland Europe bus 26% UK Bus 15% REVENUE SOURCE UK Trains 13% UK Bus 16% UK Trains 9% Mainland Europe trains 9% Mainland Europe bus 6% Mainland Europe trains 6% What makes us different? KPI TRUSTED OPERATOR: RECORD OF DELIVERY IN PUBLIC SECTOR 2ND LARGEST UK BUS OPERATOR PROMINENT MARKET POSITIONS: EARLY MOVER ADVANTAGE ORDER BOOK: 12.2 BILLION VISIBLE REVENUE, RUNNING TO 2024 PAN-EUROPEAN PIONEER The key to Arriva s success is our spread and our balance. Diversification broad-based portfolio Diversity by geography 12 European countries Diversity by revenue source 60% of revenues from authorities or governments LEADING PRIVATE MAINLAND EUROPEAN OPERATOR: LARGEST PUBLIC TRANSPORT PURE-PLAY 200 BILLION MARKET: TREND TOWARDS LIBERALISATION The order book represents the expected future revenue from public transport contracts already won by the group. By providing forward visibility of a large proportion of future revenue, the order book helps to demonstrate the underlying strength of the business 8 Arriva plc Annual Report & Accounts 2009

11 Inside the group: bus/ rail split Our key areas of operation are bus and rail. The table below looks inside the group at our bus/ rail split, showing the contribution each area of operation makes to the group. About Arriva Group revenue* Group operating profit* Rail 36% Rail 28% Bus 64% Bus 72% Group order book Group employees* Bus 34% Rail 15% Rail 66% Bus 85% Excluding central * Including share of associates 9

12 About Arriva Our three divisions Our three divisions ARRIVA PLC UK BUS UK TRAINS MAINLAND EUROPE Within our business, we have three divisions - UK Bus, UK Trains and Mainland Europe. The table below, which includes our share of the results of associate companies, compares and contrasts what they contribute to the group and how they operate. Group revenue Group operating profit UK Trains 22% Mainland Europe 49% Mainland Europe 45% UK Bus 49% UK Bus 29% UK Trains 6% Group order book Mainland Europe 51% UK Bus 8% Group employees UK Bus 45% Mainland Europe 46% UK Trains 41% UK Trains 9% Excluding central 10 Arriva plc Annual Report & Accounts 2009

13 About Arriva UK Bus UK Trains Mainland Europe* Operates buses across England, Scotland and Wales, including the contracted London market. The operator of two UK rail franchises. A leading pan-european public transport operator running services in 11 countries. Buses Buses Buses 6,300 8,500 (including waterbuses) Train sets Train sets Train sets Employees Employees Employees 19,100 3,900 19,150 Operating area Operating area Operating area Key areas London Southern Counties, Shires & Essex Midlands North East, North West & Yorkshire Wales Scotland Key areas Wales and the English border counties Aberdeen to Penzance Birmingham to Cardiff Key areas Czech Republic Denmark Germany Hungary Italy Poland Revenue m m m up 7% to 83.9 million 2007 Operating profit 2009 down 64% to 12.1 million 2006 Operating profit 2009 down 8% to 91.2 million 2005 Operating profit up 15% to 1,604.2 million , , , m 1, m 1, down 16% to million reflecting the effect of CP4 900 m 1, Revenue 2009 up 4% to million 2005 Revenue 2006 CP4: see page 42 for explanation Portugal Slovakia Spain Sweden The Netherlands * Including share of associates 11

14 About Arriva Our three divisions (continued) UK Bus UK Trains Mainland Europe Order book Order book Order book 2009 up 27% to 1.0 billion bn down 13% to 5.0 billion 900 bn up 29% to 7.0 billion 900 bn London High level of contract renewals Previous years order book value re-stated to reflect the impact of CP4 changes CP4: see page 42 for explanation In sterling terms, the order book was up 19% to 6.2 billion, reflecting contract wins and retentions in 2009 Strategy Focus on high quality delivery in core business - Delivering efficiencies - Network management - Services Deepening of local authority and passenger transport executive partnerships Growth strategy Targeted growth in the mature core business Non-core development opportunities including demand response and airport services Strategy Maintain and further improve operating performance Grow patronage Improve yield management Maximise efficiency Further reduce costs without impacting long-term viability Growth strategy Targeted bidding for further rail franchises Strategy Offer and deliver cost effective, high quality transport solutions for client bodies and end users Concentrate on reducing costs and growing revenue, whilst pricing at our hurdle rate of financial return Lobby for accelerated market testing and work in partnership with client bodies to redesign and re-invigorate networks Growth strategy We aim to build market leading positions wherever we operate Organic growth through contract wins Acquisition opportunities may still arise Achievements Excellent operating performance - 99%+ mileage delivered in the regions - Best performer in London league tables Customer satisfaction - Improvements every year since started in Record level achieved in 2009 of 93% Local authority partnerships in Kent and Yorkshire Achievements Excellent operating performance - Record breaking service delivery in Arriva Trains Wales (ATW) - PPM over 90% in CrossCountry for first time in franchise history National passenger satisfaction results survey increasing in both franchises Achievements Excellent operating performance and customer experience - Best in class on punctuality in Denmark, Sweden and the Netherlands Driving liberalisation - High quality, cost effective operations - Innovative solutions drawing on pan-european expertise Growth achieved: Arriva is in the top 3 private operators in 10 countries 12 Arriva plc Annual Report & Accounts 2009

15 UK Bus UK Trains Mainland Europe About Arriva Contracted business Contracted London business - c.30% of divisional revenue - Length typically 5 years - Gross cost Some smaller tendered contracts in regional business - Operating socially necessary routes for local authorities - c.10% of divisional revenue Buses mostly owned Contracted business 2 contracts Length - CrossCountry to Arriva Trains Wales to 2018 Net cost Significantly larger contracts than elsewhere in group Trains leased Staff employed by franchise Indexation - Retail Price Index - Average Earnings Index - Network Rail costs indexed Contracted business 150+ contracts Range of business from totally commercial to gross cost contracts Many different contract models, with variations including buses and rolling stock held on and off balance sheet Varying lengths up to 14 years Varying sizes up to 500 buses or 50 trains Indexation: many contracts provide for labour and fuel cost increases to be recovered Other operations Deregulated regional market - c.60% of divisional revenue The Original Tour sightseeing business Private coach hire and airport services Bus & Coach distribution Other operations LNWR - maintenance Other operations Concessions (rights to operate services) Maintenance of buses and trains Waterbuses Private coach hire and airport services Metro Principal competitors Transport groups FirstGroup Stagecoach Go-Ahead National Express Other Local operators Principal competitors Transport groups FirstGroup National Express Stagecoach Virgin (with Stagecoach) Go-Ahead (with Keolis) Ned Railways (with Serco) Deutsche Bahn MTR Other Small direct access operators Principal competitors Pan-European operators (more than 5 countries) SNCF/ Keolis Veolia Transdev Other State and city-owned operators Small local private operators 13

16 About Arriva Our markets Our markets Our public transport services across 12 countries span a wide range of operating environments, in locations with varying market characteristics. Here we give you an insight into those markets and the role Arriva plays. United Kingdom In the UK, where our plc headquarters are based, we are one of the largest bus operators and an operator of two rail franchises. Our operations in the UK are currently larger than in any other market in which we operate. Revenue 2009 down 5% to 1.7 billion reflecting the impact of CP4 bn 2 CP4: see page 42 for explanation Bus Rail 1 58% 42% Passenger and non-passenger revenue Passenger Non-passenger 53 O /O 47 O /O Order book 2009 down 8% to 6.0 billion as rail contracts run off bn m 1,200 1, Bus/ rail split Bus Rail Arriva plc Annual Report & Accounts 2009

17 About Arriva Buses 6,300 Train sets 217 Employees 23,150 Entered bus market 1980 Entered rail market 2000 Bus operating area Rail London UK bus market Market description Liberalisation stage: mature The UK bus market has 2 different operating environments - Deregulated market outside London - Regulated market in the capital, which is competitively tendered Market features Regions (outside London) Privatised in the 1980s Operates on a commercial basis - Relationship is directly with the passenger - Revenue principally comes directly from fares and compensation for non fare paying passengers - We bear revenue risk and cost risk We also run contracts for local authorities where there is deemed to be a social need for services (which would not otherwise be commercially viable), and airport transport services London Operate services under contract to Transport for London (TfL), the city s transport authority TfL specifies the required routes, timetables and vehicles Revenue comes from TfL, who pay us for running services on their behalf Sightseeing tour operators Contracts Gross cost London contracts - Typically 5 years in length - TfL bears revenue risk - TfL operate a bonus/ penalty regime linked to service quality Other contracts - Airport contracts - Local tendered service contracts UK rail market Market description Liberalisation stage: mature Competitively tendered Almost fully franchised Market features Rail in the UK is split into 3 types - Long distance - Regional - London/ south east commuter The tendering authority sets service provision and schedules Rolling stock and employees transfer to the franchisee Franchises tend to be much larger than their equivalents in mainland Europe Contracts Net cost Variable length The tendering authority may provide a contribution in the form of additional contracted financial support - In some franchises support payments decline over the life of the contract (as passenger revenue increases) - In others where there isn t as much opportunity for the operator to grow revenue, it remains steady - Some routes in the UK are premium paying (the operator pays the tendering authority) Revenue support/ risk sharing mechanisms are in place in most contracts 15

18 About Arriva Our markets (continued) United Kingdom (continued) UK bus market (continued) Arriva s role in market Arriva is one of the largest bus operators in the UK Regions (outside London) - Approximately two-thirds of our UK Bus business - Market share: approximately 15% - Third largest bus operator - Run approximately 4,700 buses London - Around 30% of our UK Bus business - Market share: approximately 20% - Joint largest bus operator in London - Run approximately 1,600 buses Market changes in 2009 An Office of Fair Trading (OFT) market study of competition in the regional bus market was referred to the Competition Commission. Arriva cooperated with the OFT in its study, and will continue to work with the Competition Commission throughout its investigations The Local Transport Act which came into force in December 2008 encourages partnership working between operators and local transport authorities In London, we retained 99% of contracted mileage up for renewal and won additional work, growing the UK Bus order book by 27% UK rail market (continued) Arriva s role in market Arriva runs approximately 11% of the UK rail network by passenger train miles 2 franchises CrossCountry 9-year franchise, began in 2007 Geographically the most extensive franchise in the UK, stretching from Aberdeen to Penzance and from Stansted to Cardiff More than 1,500 route miles, calling at more than 100 stations Long distance rail franchise, also provides inter-urban journeys along the route Support payments steadily decline over the life of the franchise Revenue support available from November 2011 Arriva Trains Wales (ATW) Began operating the 15-year franchise in 2003 Wales and the English border counties More than 1,000 route miles Regional rail franchise, operates inter-urban, rural and commuter passenger rail services Support payments decline slightly each year over the life of the franchise CP4: see Market changes in 2009 page 42 for explanation CP4 The East Coast Main Line franchise was surrendered by a competitor. The government is running the franchise under a management contract until it is retendered Future The Competition Commission may report preliminary findings in 2010 The spring general election result may shape transport policies We will focus on maintaining and improving our excellent operational performance in our bus operations and both rail franchises Rail bidding opportunities accelerate in We will monitor the situation and bid for new franchises as appropriate 16 Arriva plc Annual Report & Accounts 2009

19 About Arriva Germany Germany is the largest European public transport market but is predominantly in state or local government ownership. After starting operations in the country in 2004, we have built up a significant network of rail and bus operations across the country. Revenue 2009 up 14% to million Bus Rail m % 83% Passenger and non-passenger revenue Passenger Non-passenger 36% 64% Order book 2009 up 15% to 1.8 billion bn m Bus/ rail split Bus Rail 2022 Cross border service from Denmark Cross border service from the Netherlands Buses 900 Train sets 216 Employees 2,900 Cross border service to the Netherlands Berlin Entered rail market 2004 Cross border services to the Czech Republic Entered bus market 2005 Bus operating area Rail Rail yet to start 17

20 About Arriva Our markets (continued) Germany (continued) Germany bus market Market description Liberalisation stage: emerging, now stalled Less than 10% of the market has been competitively tendered, approximately half of which was awarded to the private sector Market features Highly subsidised Cities, districts or public transport associations are responsible for bus tenders Conditions differ widely between the regions Contracts Net cost or gross cost contracts Length ranging from 5 to 8 years Arriva s role in market Arriva s market share is around 1% Competition Dominated by public transport companies owned by cities, districts and state subsidiary DB Stadtverkehr, part of Deutsche Bahn (DB), and small local companies International operators Veolia Transdev FirstGroup NS Market changes in 2009 PSR: see page 37 for explanation Bus tendering declined significantly in 2009 prior to the start of the PSR transitional period on 3 December as direct award to state and city-owned companies was a dominant feature M&A activity in Germany has slowed significantly since 2006, with very little activity in 2009 Germany rail market Market description Liberalisation stage: mid-liberalisation Around 35% of the regional market has now been competitively tendered, with approximately 20% of the market currently operated by the private sector Close to 100% of the long distance market is operated by state-owned operator DB, who is also dominant in the regional market Market features Regional authorities are responsible for tendering regional rail routes The 25 client bodies take their own approach to tendering Infrastructure: mostly owned by the subsidised national operator Contracts Range in market: everything from gross cost limited incentive/ penalty regimes to net cost super bonus/ fine regimes New rolling stock is usually required Arriva s role in market 2009 has been the most successful year yet for Arriva in German rail tenders, winning 3 contracts Second largest private rail operator in Germany Market share: approximately 5% Competition International operators DB Veolia Transdev Keolis DSB (Danish State Railways) NS Rail (acquired Abellio) Other Publicly-owned regional groups Small number of regional or local operators Market changes in 2009 Tender volume in rail at an all time high Trend towards bigger contracts being offered (the biggest contract ever awarded to the private sector was won by Arriva) Future Economic pressures are increasingly driving the need for market testing in Germany. With high state capital subsidies due to end, private companies are becoming an increasingly attractive option for the regional authorities 2010: significantly more rail contracts being tendered, already ahead of full year 2009 New rail contracts are due to start in December 2010, 2011 and 2012 Medium to long term: expect to see more bus tendering as public service contracts come to an end during the PSR transition period, and are not eligible for automatic direct award PSR: see page 37 for explanation 18 Arriva plc Annual Report & Accounts 2009

21 About Arriva Netherlands Revenue 2009 up 12% to million Bus Rail m % 22% Passenger and non-passenger revenue Passenger Non-passenger 32% 68% Order book 2009 up 21% to 1.7 billion Bus/ rail split bn m Bus Rail Buses 570 Trains 54 Other 10 waterbuses Cross border service to Germany Employees 1,600 Amsterdam Entered bus market 1998 Entered rail market 1999 Cross border service from Germany Bus operating area Rail 19

22 About Arriva Our markets (continued) Netherlands (continued) Netherlands bus market Market description Liberalisation stage: mature Around half of the bus market is competitively tendered, outside major cities Amsterdam, Rotterdam, the Hague and Utrecht are yet to put concessions out to tender Market features The 19 regional authorities in the Netherlands have had responsibility for public transport since January 2001 when the Passenger Transport Act 2000 came into force The regional authorities are obliged to organise public transport into concessions, which are periodically put out to tender by open procedure Contracts Typically net cost contracts Average length: 8 years Arriva s role in market Arriva is one of the 3 largest bus operators Operates approximately 12% of the regional bus market Competition The regional market is dominated by Connexxion, which was part-privatised in 2007, with the Dutch state retaining a 33.33% stake International operators Veolia Syntus (joint venture Keolis/ NS) Netherlands rail market Market description Liberalisation stage: emerging Very little of the rail network has been competitively tendered Approximately 6% of the market is operated by the private sector Market features Responsibility for regional rail is transferred to regional authorities Conditions differ widely between the regions, and by contract Contracts Typically net cost contracts Average length: 15 years Arriva s role in market Arriva is the largest private operator Best performing rail operator in the Netherlands Competition Dominated by state-owned NS Rail (Nederlandse Spoorwegen), with 100% of long distance market under direct award contracts International operators Veolia Syntus (joint venture Keolis/ NS) Other QBuzz: a new company founded by former Connexxion management (supported and 49% owned by NS) Market changes in 2009 Tenders focusing on quality and the environment in addition to price Future 2012: Amsterdam, Rotterdam and the Hague currently operate bus services by direct award. Bus tendering may take place in these areas after 2012 when existing contracts expire The state rail operator s contracts are currently due to expire in National debate is ongoing with regard to the staged opening of the market PSR transition period PSR: see page 37 for explanation 20 Arriva plc Annual Report & Accounts 2009

23 About Arriva Italy Revenue * 2009 up 13% to million m Bus only 100% Passenger and non-passenger revenue Passenger Non-passenger 26% 74% Order book 2009 down 43% to 201 million Longevity m m Buses 1,950 Employees 2,500 Rome Entered bus market 2002 Bus operating area * Including share of associates 21

24 About Arriva Our markets (continued) Italy (continued) Italy bus market Market description Liberalisation stage: emerging Market opening is slow, and competitive tendering is not yet commonplace Market features Highly subsidised, with low fares Capital subsidies available for investment in fleet Public transport funding is provided nationally by the state Provincial or municipal local authorities are responsible for bus provision and setting fares (inside a general framework provided by the region) In some regions, public private partnerships have been set up Italy rail market Market description Liberalisation stage: yet to liberalise Early attempts at competitive tendering failed Market features Yet to emerge Market changes in 2009 Trenitalia (owned by FS) signed 6 year service contracts for regional services in many areas (with 6 year extension options) Some regions are considering market opening, including Piemonte where we operate buses Contracts Where contracts are in place, they are typically net cost Arriva s role in market Largest wholly privately owned operator Market share: approximately 5% Operate urban and inter-urban services in the north Airport connection services to Turin and Milan airports Competition Large number of local operators, mostly owned by regions and municipalities Other private operators SITA (51% owned by FS, state-owned rail operator) Transdev Future Successive changes in government have delayed the liberalisation process in Italy. Regional elections in 2010 may bring change We expect to see rail tendering in selected regions, and will respond to any invitations to tender we see as a good business fit for Arriva Picture from Sergio Spadari (bus driver), SAB, Italy 22 Arriva plc Annual Report & Accounts 2009

25 About Arriva Scandinavia Revenue 2009 up 13% to million Bus Rail m % 17% Passenger and non-passenger revenue Passenger Non-passenger 6% 94% Order book 2009 up 2% to 1.7 billion Bus/ rail split bn m Bus Rail 2018 Picture from Paul Peschke (operational planner), Arriva Deutschland. Arriva trains in Varde, Denmark 23

26 About Arriva Our markets (continued) Scandinavia (continued) Denmark Buses 1,500 Trains 47 Copenhagen Employees 4,500 Entered bus market 1997 Entered rail market 2003 Cross border service to Germany Bus operating area Rail Denmark bus market Market description Liberalisation stage: mature Tendering is well established Of the 90% tendered, approximately 95% is operated by the private sector Market features 6 Passenger Transport Authorities have responsibility for public transport services Contracts Typically gross cost Average length: 6 years Quality and service incentives/ penalties apply Arriva s role in market Arriva is the largest private sector public transport operator Acquired Veolia s operation in Denmark in 2007 Bus market share in Copenhagen is approximately 60% Operate approximately 50% of overall market Competition Keolis, Tidebuss, Nobina (formerly Concordia) Denmark rail market Market description Liberalisation stage: mid-liberalisation Opened to public tendering in 2000 Market features Danish parliament is responsible for the regulatory framework for transport provision and also sets fares Contracts Net cost Bonus/ penalty regimes for punctuality and customer satisfaction Arriva s role in market Arriva was the first private company to be awarded a rail franchise, which was re-won in 2009 We operate approximately 15% of the regional network Our operations are focused in the Jutland area Competition Danish State Railways (DSB) operates approximately 75% of train kilometres in Denmark, under direct award from the Ministry for Transport DSB/ FirstGroup joint venture Future Having established scale in the bus market we are now focusing on improving the quality of our contract portfolio. We expect our bus market share to decline as we look for improved prices for the loss-making former Veolia contracts as they come up for tender 24 Arriva plc Annual Report & Accounts 2009

27 About Arriva Sweden Stockholm Buses 580 Trains 38 Employees 1,800 Entered bus market 1999 Entered rail market 2007 Bus operating area New bus operating area yet to start Rail Sweden bus market Market description Liberalisation stage: mature Deregulation commenced in the 1980s Competitive tendering is well established Market features 22 Passenger Transport Authorities have responsibility for public transport services, including determining ticket prices, timetables and contract duration in the regions Contracts Typically gross cost Average length: 8 years Quality and service incentive/ penalty regimes are in place Arriva s role in market Arriva has established a market share of around 5%, mainly in the south of the country In 2009 we became the first new entrant in Stockholm in 10 years Competition Nobina (formerly Concordia) Busslink (80% Keolis) Veolia Sweden rail market Market description Liberalisation stage: mid-liberalisation There is widespread tendering of regional contracts Market features Rolling stock often provided by contracting authority Contracts Regional rail contracts are typically Gross cost Between 3 and 5 years Quality and service incentives/ penalties apply Inter-regional services tend to be Net cost Between 10 and 15 years Arriva s role in market With contracts in the Skäne region and between Göteborg and Örebro, we now operate approximately 6% of the short distance rail network, by kilometres operated Competition Dominated by state-owned Swedish Railways (SJ) DSB Veolia Future In June 2010, we will start operating an 8-year bus contract, with a 2-year extension option, which we won in June 2009 A new law is preparing a partial deregulation of the rail sector bringing opportunities for potential open access in the rail market 25

28 About Arriva Our markets (continued) Iberia Revenue * 2009 up 19% to million m 300 Bus Rail % 5% * Including share of associates Passenger and non-passenger revenue Passenger Non-passenger 49% 51% Order book 2009 up 285% to 718 million Longevity (Madrid) m m Picture from Stuart Lowerson (bus driver), Arriva North East, UK. An Autocares Mallorca bus, Spain 26 Arriva plc Annual Report & Accounts 2009

29 About Arriva Spain Buses 460 Employees 950 Madrid Entered bus market 1999 Bus operating area Spain bus market Market description Liberalisation stage: emerging Market is mostly concession-based The urban bus market is operated by private and city-owned companies, whilst the inter-urban and long distance concessions are typically operated by private companies Market features 19 autonomous regions, with law making capabilities Long concessions have typically been granted, with exclusive rights The regions set maximum fares and monitor the delivery of concession requirements Spain rail market Market description Liberalisation stage: yet to liberalise No competitive tendering has taken place to date Market features State-funding provides for loss-making regional and urban services 19 autonomous regions Competition The state railway companies RENFE and FEVE operate all trains in Spain Contracts Concession based market, with revenue risk and exclusive rights - Concessions ranging from 8 to 25 years Where contracts are in place, in Madrid for example, they are typically gross cost with increasing incentives (and penalties) Arriva s role in market One of the larger private operators although our market share is still less than 1% Operations in Madrid, Galicia and Mallorca We now run approximately 14% of the privately operated Madrid market Concessions extended in Galicia and Mallorca Reshaped and extended contract in Madrid until 2024 Competition The bus market is diverse and fragmented: 4,000+ small operators, often family owned, account for c.70% of the market Larger bus groups are emerging - National Express - Avanza Future Until long concession agreements come to an end there will be little change in concession operators National long distance coach lines could be subject to competition in 2010 and beyond 27

30 About Arriva Our markets (continued) Portugal * Buses 1,550 Trains 6 Employees 3,100 Entered bus market 2000 Entered rail market 2006 Lisbon Bus operating area Associate Barraqueiro operating area Rail Portugal bus market Portugal rail market Market description Liberalisation stage: mid-liberalisation No competitive tendering, operates as a commercial market under licence Market features Major cities are still municipally owned Municipalities are responsible for allocating routes by awarding licences to independent operators, or by delivering services directly Fare increases set by government Contracts Concession based market with exclusive rights Concessions range from 10 to 30 years Arriva s role in market Third largest bus operator in Portugal Market share: approximately 8% 31.5% stake in Barraqueiro, Portugal s largest public transport operator Competition The bus market is fragmented outside the main cities with many small local operators Large operators - Barraqueiro (31.5% owned by Arriva) - Grupo Joalto Transdev Market description Liberalisation stage: yet to liberalise There has only been one instance of a concession awarded to a private operating company to date Market features Urban and regional services are operated under concessions allocated by the state State funding provides for loss-making regional and urban services Arriva s role in market Barraqueiro (31.5% owned by Arriva) is the first and only private company to hold a rail concession in Portugal, operating the Fertagus services around Lisbon Through Barraqueiro we also have an interest in the Metro Sul do Tejo tram operation to the south of Lisbon Competition Dominated by state-owned Comboios de Portugal (CP) Barraqueiro is the only private operator Market changes in 2009 There are no signs of a further early move towards competitive tendering Market changes in 2009 No fare increases in 2009 Future Metropolitan authorities have now been established in Lisbon and Porto, with a view to introducing competitive tendering for bus contracts We will continue to monitor the rail situation, and when changes do occur we are well placed to benefit through the good reputation of Fertagus rail operations through Barraqueiro In April 2010 we are due to start operating Metro do Porto, the city of Porto s tram network * Including share of associates 28 Arriva plc Annual Report & Accounts 2009

31 About Arriva Eastern Europe Revenue 2009 up 58% to 59.8 million Bus Rail m % 11% Passenger and non-passenger revenue Passenger Non-passenger 27% 73% Order book 2009 up 133% to 36 million Bus/ rail split m m Bus Rail Picture from Vojta Vlcek (internal audit), Czech Republic. Passengers boarding one of our buses at Nové Zámky bus terminal in Slovakia 29

32 About Arriva Our markets (continued) Eastern Europe (continued) Czech Republic Poland Buses 260 Employees 450 Entered bus market 2006 Trains 9 Employees 80 Entered rail market 2007 Cross border service from Germany yet to start Cross border services from Germany Prague Warsaw Bus operating area Rail Czech Republic bus market Poland bus market Market description Liberalisation stage: emerging Competitive tendering limited, direct award common Market features Market very fragmented after privatisation Regional governments control licensing and maximum fares Individual cities are responsible for urban public transport Arriva s role in market We have a position around Prague, operating 260 buses Contracts Cost-plus subsidy contracts, awarded annually Competition Around 250 bus companies, many formed in the 1990s as part of privatisation Czech Republic rail market Market description Liberalisation stage: emerging Market features The state is responsible for rail provision and funding Competition Dominated by state-owned CD with a 99% market share Market changes in 2009 The state has extended the majority of CD s contracts for a further 10 years, limiting medium-term opportunities Future In December 2010 we will start a cross border rail service from Germany into the Czech Republic Market description Liberalisation stage: emerging Market features Regional authorities have the option of awarding contracts by competitive tendering or direct award 167 former state owned companies (known as PKS), operate rural, inter-urban and long distance transport 140 municipal bus operators in towns and cities Contracts Gross cost in city operations, ranging from 2 to 6 years Regional services operate on a commercial basis Market changes in 2009 Some cities are moving towards the creation of tendering authorities Poland rail market Market description Liberalisation stage: emerging Market features Regional rail provision has been devolved to the regions Contracts Short, net cost contracts, 1 to 3 years Arriva s role in market Joint venture (with DB Schenker) Only private company operating passenger rail services Competition State and region-owned operators Market changes in 2009 Growth slower than anticipated. 3 contracts tendered, retained by state operator Future We will monitor privatisation of PKS bus companies We intend to build upon existing experience in rail 30 Arriva plc Annual Report & Accounts 2009

33 Slovakia Hungary About Arriva Buses 600 Employees 1,050 Entered bus market 2008 Buses 120 Employees 200 Entered bus market 2008 Bratislava Budapest Bus operating area Bus operating area Slovakia bus market Hungary bus market Market description Liberalisation stage: emerging Less than 5% of the market has been competitively tendered Market features Regions responsible for public transport provision and funding Contracts Between 1 and 9 years in length, with exclusive rights Arriva s role in market Arriva is the largest privately owned bus operator 60% interest in 2 SADs (former Slovak Bus Service operators) Competition Dominated by the SADs: 17 regional bus companies either owned completely by the state or partially privatised (60%), with public stakes (40%) 5 municipal/ city-owned companies Slovakia rail market Market description Liberalisation stage: yet to emerge Market features The central government is responsible for rail provision and funding Future Market description Privatisation in the bus market will remain a theme in coming years, with public stakes in SADs expected to be sold Market description Liberalisation stage: emerging Contracts with exclusive rights may only be awarded to an operator selected by a tendering procedure Market features National government is responsible for regional public transport, mainly provided by state-owned Volan companies Municipalities are responsible for local public transport Contracts Generally entered into once a year, longer in some areas Mixture of gross cost or cost-plus Arriva s role in market Largest privately owned bus operator Joint venture with Hungarian company, Videoton Market share: less than 1% Operate tenders and sub-contracts for the Volan companies Competition The Volan companies: 24 state-owned regional operators 6 municipal operators Market changes in 2009 In recent months, outsourcing by the Volan companies has become more common Hungary rail market Market description Liberalisation stage: yet to emerge No competitive tendering as yet Market features Responsibility of national government Funded by state Future As bus contracts expire in the run up to 2012, we expect to see competitive tendering gradually introduced in line with PSR PSR: see page 37 for explanation 31

34 About Arriva Our markets (continued) Larger mainland Europe contracts won in 2009 Country Area Mode Start date Approximate anticipated lifetime revenue m Denmark Jutland Rail Dec Sweden Halland Bus June Germany North East Rail Dec Netherlands Gelderland Bus/ rail Dec 2010/ Dec Our share of 50/50 joint venture Picture from Sebastian Schneider (train conductor), Metronom, Germany So far in 2010, we have also won the following Country Area Mode Start date Approximate anticipated lifetime revenue m Germany Hamburg Rail Dec Denmark Fyn Bus Summer Portugal Porto Metro April our economic interest in this is 37% we have an effective economic stake of 35% 32 Arriva plc Annual Report & Accounts 2009

35 Review of 2009 Chairman s statement 34 Chief executive s review 36 Financial review 44 Principal risks & uncertainties 50 Review of

36 Chairman s statement Review of 2009 Meeting the challenges of uncertainty A resilient business We anticipated that 2009 would be a challenging year for Arriva, with the group facing the effect of recession on passenger revenues alongside a 60 million increase in the cost of our fuel. In a highly uncertain economic environment, the focus of management needed to move quickly at times, while maintaining a decisive emphasis on cost control, cash generation and business operations. It is to their credit that management and employees at all levels responded effectively and tirelessly allowing us to report resilient results. In this environment, the group s strategy was also tested and it too proved resilient, with our geographical diversification, broad spread of contracts and limited exposure to passenger revenue underpinning group performance. These qualities, developed through many years pursuit of a consistent strategic vision, served us well. While it is pleasing that our business continued to grow, with revenue rising by three per cent to 3,147.8 million (2008: 3,042.2 million), the business environment inevitably affected operating profit which at million, was lower by seven per cent (2008: million). Profit before taxation was down 19 per cent to million (2008: million). During the year, an important management initiative to bring pension costs within long-term sustainable levels came to fruition, and will produce ongoing benefits in terms of future pension obligations. The resolution of a number of outstanding tax issues contributed to the year s results and will also produce future benefits. Earnings per share before goodwill impairment, intangible asset amortisation and exceptional items, our preferred measure, was 58.8 pence (2008: 61.5 pence). The success of our UK Bus division in absorbing much of its 30 million fuel cost increase was reflected in a much smaller 8.1 million reduction in operating profit. The business has positioned itself well to benefit from the lower fuel costs that will flow through in the second half of The CrossCountry rail franchise suffered materially lower passenger revenue growth than we had hoped, reducing the profitability of our UK Trains division from last year s record level. Yet both our rail franchises increased their passenger revenues over the year as a whole, and through determined cost reductions were able to limit the impact on profitability. The CrossCountry contract includes provision for passenger revenue support, effective from November Operationally, both UK rail franchises are amongst the highest performers in the UK, having improved consistently over recent years. Both experienced encouraging improvements in passenger revenue growth in late 2009, which have so far followed through into In mainland Europe too, there has been a strong focus on controlling costs, including the restructuring of parts of the business in response to changing market conditions. Encouragingly, significant growth in our mainland Europe order book has been a prominent feature of the year, reflecting success in winning new contracts and renewing many expiring ones. In April 2009 it was heartening to see Arriva s long-term European growth strategy recognised by a Queen s Award for Enterprise for International Trade, marking the group s achievement in trebling the size of its bus and rail business in mainland Europe over six years. Our long-term strategic vision, of being acknowledged as Europe s leading transport operator, remains unchanged. Although the business environment remains volatile we continue to bid for, and win, new business. As we do so, it is important that we drive returns from our investments which reflect changed economic realities. With efficient and effective transport remaining a priority for governments, we are encouraged by the scale of interest emerging across the continent in the potential benefits we can offer through the contracting out of service provision. Public 34 Arriva plc Annual Report & Accounts 2009