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Directors’ Report: Business Review Operating review continued

Rail

Our rail division delivered another excellent performance 2008 highlights this year. • Operating profit* +16.8% Revenue increased by 28.7%, or £307.1m, to £1,378.4m (2007: • Successful addition of Midland and £1,071.3m) and operating profit* rose by 16.8%, or £11.1m to Gatwick Express franchises £77.2m (2007: £66.1m).The operating profit* margin reduced • Continued strong passenger growth by 0.6 ppts from 6.2% to 5.6% reflecting the addition of the lower margin franchise. Our London Midland franchise commenced operations 2007 2008 on 11 November 2007, and has subsequently performed Revenue (£m) 1378.4 1,071.3 well, contributing £239.7m of revenue, including £103.0m Operating profit* (£m) 77.2 66.1 of passenger revenue and £113.1m of subsidy, and £6.3m of operating profit* for the period. Margin 5.6% 6.2% The transfer of Gatwick Express into our Southern franchise Passenger income growth on 22 June 2008 also went smoothly.There was no significant Southern 13.2% 14.1% impact on the division’s revenue or operating profit* for the year to 28 June 2008. Southeastern** 13.0% 12.4% This year’s results include £0.3m of bid costs relating to the Volume growth new Southern franchise. Last year included £1.9m of revenue Southern 6.7% 9.1% and £1.0m of operating profit* relating to end of franchise Southeastern** 6.4% 7.0% adjustments and bid costs for London Midland.

* Before amortisation and exceptional items. Excluding the above items, total revenue for the Southern ** Southeastern acquired 31 March 2006. 2007 growth based on Q4 2007 v Q4 2006. and Southeastern franchises increased by 6.5%, or £69.2m, to £1,138.7m (2007: £1,069.5m) and operating profit* increased by 9.4%, or £6.1m, to £71.2m (2007: £65.1m). 2008 Rail revenue by operating company (£m) Like for like passenger revenue in our Southern and Southeastern franchises increased by 13.1%, or £97.6m, to £842.0m (2007: £744.4m).This was ahead of our expectations, 2008 2007 and we believe that this reflects the structural improvements Southern 557.1 518.6 in rail, resulting from sustained investment coupled with operational improvements in punctuality, frequency and service Southeastern 581.6 550.9 quality, together with the impact of increased road congestion London Midland≠ 239.7 – and higher fuel costs for motorists. Other – 1.8 Subsidies from the DfT to these two franchises reduced by Total Rail 1,378.4 1,071.3 13.7%, or £39.4m, to £247.7m in accordance with the terms of the franchises. Operating costs in the two franchises increased by 6.3%, or £63.2m, to £1,067.5m. ≠ (part year) The integrated nature of the rail industry means that there are a number of complex operational allocation issues to resolve each year.As with last year,this year’s operating profit* includes a number of favourable settlements in respect of certain of these items, some of which were resolved close to the year end.The benefit of settlements for the year was approximately £7m.

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“Our rail operations start the new year with record levels of operational performance and high levels of customer satisfaction.”

Total depreciation for the division was £11.3m (2007: £9.2m), London Midland and capital expenditure was £9.3m (2007: £4.9m).We Mobilisation of this new franchise was complex although were also shortlisted to provide services for the Pendolino the transition to new ownership was seamless. Despite Lengthening Project on the West Coast Main Line, although this some problems with the Network Rail led West Coast Route work was ultimately awarded to the current franchise operator. Modernisation Project, operating performance has been good.The franchise achieved a PPM of 88.6% and a customer Southern satisfaction rating of 81% in line with our improvement plans. Our operating performance reached record levels in Southern We have completed a number of key developments such as with the public performance measure (PPM) demonstrating that the integration of the Bletchley and Birmingham control centres, 90.1% of our trains arrived on time. Our customer satisfaction engineering depot consolidation and securing the Investor in rating remained at 81%, in line with last year. People status two years in advance of our target. Further Passenger revenue increased by 13.2% and growth in passenger initiatives are underway, such as revenue protection through numbers has remained particularly strong, with a full year increase enhanced gating, and a significant timetable change in of 6.7% following a first half increase of 6.1%. December 2008 involving the introduction of new trains. Improvements to the network included a new timetable in Revenue growth has been above the franchise bid assumptions, December 2007, additional capacity on the south coast, and triggering revenue share to the DfT of 50% for amounts above improvements to customer services such as ticketing and 102%, and 80% of the revenue in excess of 104%. cycling facilities. Outlook In February 2008, Southern agreed to procure a further 11 four- Our rail operations start the new year with record levels car Electrostar units for the DfT as part of the preparations for of operational performance and high levels of customer the programme. Under this agreement, Southern satisfaction.We will benefit from a full year’s contribution paid a 40% deposit of £21.2m from restricted cash at the end from London Midland and from the re-profiling of Southern’s of March 2008, with the balance due in March 2009.This profit share. Gatwick Express is expected to add around confidential agreement also included a favourable reprofiling £70m of revenue and be broadly neutral in operating profit* of the DfT’s profit share in Southern from 1 January 2008 contribution under the terms of the transfer. to September 2009. We have benefited from particularly strong increases in passenger numbers over the last two years, as well as a number of favourable Southeastern settlements.There is no certainty that we will continue to benefit Our operating performance also reached record levels in to this extent in future years. Our aim is to continue improving Southeastern, with a PPM of 91.1%. Some of this improvement operational performance, customer satisfaction and cost control is a result of reducing congestion between London Bridge while meeting, and exceeding, our franchise obligations. and Lewisham through the introduction of a comprehensively revised timetable in December 2007. Our customer satisfaction A high priority for the Group is to retain our Southern rail rating increased to 79%, compared to 74% last year. operations.We have been shortlisted by the DfT to bid for the new franchise and we are mobilising our strong and Passenger revenue increased by 13.0% compared to last year. experienced bid team to accelerate preparations for our bid to Growth in passenger numbers was 6.4%, following a first half retain this important franchise.The new franchise will run for increase of 5.9%. five years ten months from September 2009, with an optional Preparations continue for the launch of significant timetable two year extension. Costs associated with the bid will be changes across the whole of Kent from December 2009, which expensed during the bid process, with the franchise expected to be awarded to the successful bidder by May 2009. includes the introduction of the new high speed services.These will result in significant journey time reductions, as well as providing new journey opportunities.

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