Assessment of National Express Group Operations, Macroeconomic Environment and Challenges - Essay Example

National Express Group Table of Contents Introduction 3 National Express Group 3 Macro Economic Environment 5 Challenges before National Express7 Conclusion 9 References 11 Bibliography 13 Introduction This report is based upon National Express, one of major participants in the FTSE250 Index. It is a British transport group which has its head quarter in Birmingham. It mainly operates trams, busses, coaches and rail in UK and many other countries. This report is aimed at the evaluation of the company. It focuses on the company’s macro economic variables and its effect on the working of the company. It will also discuss the challenges faced by National Express Group in its worldwide operations. National Express Group National Express Group is a leading international passenger transport group. The company was founded in 1972 by the state owned National Bus Company. John Devaney is currently the Chairman of the company. National Express believes in making travel simpler. National Express is dedicated for operating in a formal and responsible manner (National Express, “Our Management”). It is listed on London Stock Exchange. The company has grown tremendously since its privatization in 1988 from a small transport service provider to a multinational firm. It currently has its operations in UK, Canada, Morocco, Spain, US and Portugal. The company has recently expanded its business in other parts of Europe also. The company currently runs more than 1600 busses across UK and is a leader in urban bus service provider. It also provides bus service in North America in which daily 1 million students go to school. During the year 2009, the company earned revenue of £2,711.1 million. The main competitors of National Express are FirstGroup; Go-Ahead Group; Stagecoach; Arriva PLC (National Express, “At a Glance”). (National Express, “Moving forward Focusing on Our Core Strengths”). The figure above shows the group revenue according to the market and normalized operating profit by market. It can be observed that higher revenue is generated in UK but in terms of operating profit, the Spain leads the race. Lesser operating profit in UK is primarily because of higher operating cost. Macro Economic Environment Macroeconomic environment consists of those variables upon which the company has no control. Companies cannot control the macroeconomic factors but can minimize its impact by taking strategic decisions accordingly. These factors exist outside a company and usually have a great affect on the functioning of the company. Some of the macroeconomic environment variables which affect the working of firms are: a) National output b) Unemployment c) Inflation d) Demand and disposable income e) Government policies (Center for Economics and Personal Finance Education, “Overview”) In UK, the market conditions were challenging but still due to strong market hold and flexible coach supply model, the company delivered high profit for the business. As of National Express bus service in UK, there was a rise in cost for the company during the year 2009 due to the increase in the cost of fuel which rose by £4.5 million and led to increase in operating cost. In case of rail services, the company had a franchise with DfT in the East Coast of UK but due to the impact of recession the franchise became unsustainable and the company had to incur a decline in revenue by 11%. Despite of many years of growth, Spain has been affected by recession. Unemployment in Spain has been close to 20% and it is expected to recover from recession by the end of 2010. Economic conditions are of great threat to the business. While some of the business of the Group are not much exposed to the economic threats like the school busses in North America but other businesses are vulnerable to the economic situations and impacts of the country. Any change in the economic variables of the country will directly or indirectly affect the profitability of the company. Another factor which is posing great threat to the company is tough competition from other transport companies like FirstGroup, Go-Ahead Group, Stagecoach and Arriva PLC. Fuel is one of the major components which add to the operating cost of the company. Fuel prices are subject to frequent fluctuations due to economic and political circumstances. Recently the price of fuel rose in 2009 and the company had to incur £4.5 million extra in oil price. Such rise in fuel prices have hampered the revenue generation of the company. Another macroeconomic factor concerning the business of the company is political situation of the country. Transport business is subjected to many laws and regulations of the country which include environmental protection rules, employment, operating issues, etc. Any such rules which are not in favor of the company can adversely affect the smooth operation of the company. Firms may have to comply with the political situation of the country which is ultimately associated with an additional increase in cost (National Express, “Moving forward Focusing on Our Core Strengths”). Challenges before National Express National Express Group has encountered many hurdles and challenges in the past years. National Express had to ward off many takeover attempts and face a bitter public dispute. The company still bears a 1 billion pound debt on its shoulders (Teamsters, “Chairman Should Devote Full Attention to National Express”). Some of the challenges faced by National Express Group are discussed below: a) East Coast Franchise Loss: The East Coast rail franchise of National Express suffered a loss of 20 million Pounds during the first half of 2009. After the termination of the East Coast franchise in November 2009, the Secretary of State for Transport may take action against the company for the damages. b) Inter Capital Regional Rail Ltd.: The group shared 40% of investments in ICRRL and was contracted to provide services to Eurostar, a fast train service provider between London with Paris and Brussels till 31 December 2010. Eventually the Group found the contract to be difficult and rescinded it. The outcome of this act was that the company had to bear a liability of £25.7 million. c) Heavy investment in North America transformation: The company has invested a huge amount in transformation of business in North America for reducing cost and for improvement of services. This investment has incurred huge cost of the company and there is an underlying risk that whether the investment program will be successful or not. d) Cancelation of certain rights by bank due to breach of any financial covenant: As the Group is practicing maintenance of certain financial ratios to comply with its banking agreements, any breach of these agreements on the part of the company will result in cancellation of certain facilities by the bank which will result in impact on Group’s trading. e) Oil price rise: For a transport company, oil is the main component of its business. As there has been a continuous rise in prices of oil in the past years, it creates a serious problem for National Express Group. The Company has already incurred a £4.5 million additional cost due to oil rise in the year 2009 and in future, it is still expected to rise (National Express, “Moving forward Focusing on Our Core Strengths”). f) Increase in competition from other transport service providers: National Express is not the only transport service provider in United Kingdom. It has to face tough competition from other reputed transport companies like FirstGroup, Go-Ahead Group, Stagecoach and Arriva PLC, etc. With the rising oil price and increased competition, it is hard to survive in the market and satisfy customers. g) Derailment of trains and other accidents: In October, a high speed train was derailed in which four people were killed and 24 were injured. The result was that there was an immediate fall in income of its franchises and a fall in the price of shares by 35%. Another incident occurred when a coach driver was stabbed in the shoulder and face. Such types of accidents hamper the goodwill of the company and its market share too. h) Terrorist attack in United States: A terrorist attack on United States on 11th September 2001 has a resonating effect on the National Express with a decrease in the number of global travelers and low traffic levels. It also reduced the number of leisure travelers which had a negative impact for the company (Net Industries and its Licensors, “Times of Trial: 2000-2002”). Conclusion The company should focus on reducing the cost from oil price rise through entering into fuel swaps and purchase contracts. This will help the company in availing opportunities in the market when the price of the oil is low. Accidents should be prevented by introduction of better safety measures so that company can retain its goodwill which it has lost due to past accidents. As far as competition is concerned, if the company provides better and reliable service to its customers, then competition would be no big deal for the company and it can also focus on other important issues. The company has already incurred heavy loss due to East Coast Rail franchise and from the cancellation of contract with Inter Capital regional Rail Ltd. So in future it should consider all the aspects before entering into such contract. National Express Group is focused in achieving excellence in their existing markets and to explore new market opportunities to drive their company to the utmost peak. Its main objective is the growth of its business through customer satisfaction. It believes that until and unless, it does not deliver high quality service to their customers, it is tough to reach the desired level of succeed. This may be the reason that despite that irrespective of the economic condition, they have delivered quality service and are still improving their services. National Express faced many challenges during the year 2009 but regardless of such challenges, the company is still determined and focused on improving its business through cost reduction, strong cash generation and improved quality service. Chairman John Devaney said, “We believe that our actions have drawn a line under a difficult year, establishing a platform to deliver long term benefit to our shareholders by providing excellent customer service, cost effectively and efficiently” (National Express, “Moving forward Focusing on Our Core Strengths”) National Express Group believes that every business has to face uncertainties and risks in its lifetime. The company indentifies the potential risks and threats and takes strategic decisions to face them and minimises their impacts on the business. References Center for Economics and Personal Finance Education. “Overview”. October 27, 2010. The 3 Major Macroeconomic Variables: GDP, Unemployment, and Inflation, 2006. National Express. “At a Glance”. October 27, 2010. About Us, No Date. National Express. “Our Management”. October 27, 2010. About Us, No Date. < http://www.nationalexpressgroup.com/nx1/about/management/> Net Industries and its Licensors. “Times of Trial: 2000-2002”. October 27, 2010. National Express Group Plc Business Information, Profile, and History, 2010. < http://companies.jrank.org/pages/2938/National-Express-Group-Plc.html> Teamsters. “Chairman Should Devote Full Attention To National Express”. October 27, 2010. Teamsters Say Devaney Decision Creates Leadership Problem for National Express Group, 2010. National Express. “Moving forward Focusing on Our Core Strengths”. October 27, 2010. Annual Report and Accounts 2009, 2009. Bibliography Osborne, Alistair. “National Expresss Decision to Quit East Coast Franchise is a Lose-Lose for Nearly Everyone”. October 27, 2010. Transport, 2009. Insider Media Limited. “National Express targets Europe”. October 27, 2010. Midlands, 2010. Reed John. “National Express on Track to Hit Targets”. October 27, 2010. Transport, 2010. Flanagan Martin. “National Express Shares Dip on Disappointing Revenue Figures”. October 27, 2010. Business, 2009. Read More