OREANDA-NEWS. Fitch Ratings says the outlook for the UK local bus industry and the UK passenger rail industry is stable. However, we see risks for the local bus industry from potential introduction of franchise models in some of the local authority areas. The risks for UK Rail operators could increase from lower risk sharing in some of the later franchise contracts.

Fitch rated entities in this sector include FirstGroup plc (BBB-/Stable), National Express Group plc (BBB-/Stable) and Stagecoach Group plc (BBB/Stable). These companies are significant players in the UK Rail and local bus markets. Their recent operating performance has been in line with Fitch's expectations and credit metrics are expected to broadly conform to current rating guidelines.

The UK local bus market outside London faces medium-term risks from the potential regulation of bus services in some local authority areas. A conversion to a franchised service model, similar to London's, could lead to a reduction in margins. We estimate that on average, operating margins for franchised bus services would be around 3% lower than those of deregulated services (without adjusting for leasing expenses).

Local transport authorities have had the option to introduce franchised bus services since the Transport Act of 2000. Until now, only the North East Combined Authority has tried to introduce a franchised services model, which the Quality Contracts Scheme Board judged as not meeting the conditions required. Fitch therefore does not see an imminent risk to incumbent bus operators, as it will take at least two to three years from conception to implement a quality contracts scheme in any local authority.

Rail franchise holders in the UK benefit from relatively stable operations with long-term contracts and limited capital requirements. However, these benefits tend to be offset by low profit margins. The main risks to franchise holders are franchise renewal (three franchises due to be awarded during 2016-2017), competition from other transport modes, risk from any changes to regulation and non-GDP related revenue shortfall risk. We view the outlook for the UK rail franchises of Fitch rated companies as stable.