Our Business Model What We Do

6 Our business model and strategy Annual Report 2017 National Express Group PLC

Our business model What we do

National Express operates safe, reliable, Revenue breakdown by business line convenient and good value public transportation services. We do this in both Student transportation (North America school bus) regulated and unregulated markets, and Revenue provide services to our customers who £770m are private individuals, companies, school 2016: £710m boards or public authorities.

We own and lease buses, coaches and trains which we use to deliver local, regional, national and international transportation Urban Bus (UK bus, North America transit, ALSA urban bus) services. In our UK coach operations, we also outsource certain Revenue services to select partner operators. Irrespective of the operator, all vehicles are driven and maintained to our global standards, £670m either on a network of services scheduled by National Express, or 2016: £600m delivered point to point on private hire. In Spain, Morocco, North America and Germany, services are run typically under an exclusive concession or franchise of fixed duration granted by a competent body (eg government, school board) and after a competitive bid process. In the UK, coach services are unregulated while for UK Regional/long haul coach bus services, contracting differs by geography. (ALSA Regional and long haul, UK coach) Revenue £620m 1.1 billion 2016: £580m Number of kilometres travelled Charter and other (North America, ALSA and UK) Revenue 882 million £180m Number of passenger 2016: £145m journeys

21,185 Rail (German Rail) Number of school bus Revenue routes operated in North America £80m 2016: £60m

29,000 Note: Data above rounded to nearest £5m Number of vehicles operated National Express Group PLC Annual Report 2017 Our business model and strategy 7

Strategic Report Where we operate

National Express operates transportation Revenue (£m) services in eight countries (UK, USA, Canada, Spain, Morocco, Switzerland, USA 934.1 Germany and Bahrain) with some Spain 610.5 international coach services to other UK 561.5 Canada 83.1

European countries. Corporate Governance Germany 79.0 Morocco We hold the largest market share for long haul coach transport 45.7 in both Spain and the UK, and are the second largest school bus Switzerland 7.3 provider in North America. We also operate urban bus and transit Total 2,321.2 operations in the USA, Canada, Morocco, Spain and the UK. In 2017, we disposed of our final UK rail franchise, c2c, to Trenitalia. Our sole rail operations are now in Germany.

Our primary markets Financial Statements 1 USA 3 4 2 5 Canada 2

6 3 UK 1

7 8 4 Germany

5 Switzerland

6 Spain Additional Information 7 Morocco

8 Bahrain

Markets colour-coded to business line as set out on page 6

We employ 47,000 people worldwide. 8 Our business model and strategy Annual Report 2017 National Express Group PLC

Our business model How we create value

Sources of revenue (£m) Converting it to profit National Express maintains industry-leading margins through a relentless focus on operational excellence in all we do. The direct, variable costs of providing transport services across the Group Contract revenue 1,134 depend on a number of factors, but sophisticated network optimisation is a key factor. Through continuously reviewing and Ticket sales 891 improving network designs and routing, we can optimise peak Charter and private hire 121 vehicle requirements and increase loading factors, reducing the Concessions and subsidies 112 cost of delivering a high quality service to our customers. Our Other 63 diversity and scale is an important factor in managing indirect Total 2,321.2 costs, enabling us to optimise cost and quality across the Group’s supply base. Delivering cash flow National Express has a track record of generating significant cash flow from its operations. The Group has delivered over Growing revenue £750 million of free cash flow over the last five years and is extremely disciplined in its management of working capital and National Express generates revenue principally from two sources. the conversion of operating profit into free cash. Maintenance First, multi-year contracts with school boards or local authorities capital expenditure is maintained at a level of around 1.1 to make up 49% of revenue, the majority of which are in North 1.2 times depreciation, efficiently retaining an appropriately America. Revenue is generated either on a per mile/kilometre basis, aged fleet to meet customer requirements. or per route travelled. Second, a further 38% of revenue is earned through individual ticket sales to the public, with National Express marketing the product and taking revenue risk. This revenue is Funding returns and reinvestment derived from bus or coach journeys in the UK, Spain and Morocco, By generating cash returns and by managing our net debt and rail journeys in Germany. Concession revenue from local to between 2.0 and 2.5x EBITDA, we ensure debt levels and authorities in the UK, Spain and Germany delivers 5% of Group interest costs can be supported by the profits generated by the revenue with charter/private hire contributing a further 5%. The base business. This allows National Express to do two things. remaining 3% is from other revenue streams such as on board First, we can reinvest cash back into the operations to grow entertainment, SMS alerts, booking fees and advertising. the business. We have invested £365m both organically and inorganically since 2013. This has strengthened our market leading There are many factors contributing to the Group’s strong organic positions in coach in the UK and in Spain; built-out key geographic revenue growth. In recent years, our increasingly sophisticated positions, such as in New York state in school bus; and enabled use of Revenue Management Systems (RMS) has been a notable us to expand into promising adjacent markets such as paratransit factor. RMS enables us to segment our offer through a better in Chicago or urban bus in Morocco. Second, we can deliver understanding of customer needs and purchasing behaviour to consistent, competitive returns to shareholders. Over the last five drive revenue through differential pricing depending on time of years the Company has returned £280 million through dividends, journey, ticket type, buying channel etc. growing dividend per share by 35%.

The Group has delivered over £750 million £365m We have invested £365m both organically and in free cash flow since 2013. inorganically over the last five years

£327m Including this year’s proposed final dividend, over the last five years the Company has returned £327m through dividends National Express Group PLC Annual Report 2017 Our business model and strategy 9

Strategic Report How we maintain competitive advantage

National Express is the best value operator in price sensitive transportation markets, combining the benefits of scale and diversity with deep understanding of the local markets in which we operate. This

international-local balance drives a number Corporate Governance of competitive advantages:

We engage our customers through clear marketing and branding We invest in our consumer brands to ensure the value in our products is understood by our customers. The National Express and ALSA brands are household names and stand for safety, consistency, reliability and affordability. We promote these values in our brands to help drive purchasing decisions. We prioritise safe operations The Group operates consistent, world-class safety policies in all markets, supported by leading edge technology. Our focus on Driving Out Harm supports our primary goal – to get customers We enforce consistent global to their destination safely. policies and processes

Our global Master Driver and Master Technician programmes Financial Statements We operate at scale drive a consistently high standard of capability across our markets. We seek leadership positions in the markets in which we operate. Consistency and standardisation in turn allow costs to be optimised In the UK and Spain, our long haul coach operations are market to enable us to offer best value to our customers. leaders. In urban bus and transit, we are focusing on growing urban markets around the world – for example in 2017 we grew in We deploy new technologies London, New York, Chicago, Madrid and Geneva. rapidly across the Group The Group consistently applies technology to improve our customer offering (eg deploying free wifi on our premium bus services in the West Midlands, development of VUER in our UK coach business, development of mobile apps, web interfaces and customer portals); to grow the business (eg RMS in our coach businesses in the UK and Spain, and on-demand scheduling through our Ecolane tool in North America); and to drive operational excellence (eg the global roll-out of Lytx DriveCam in support of our global safety policies).

We operate a balanced Additional Information and resilient portfolio Because of the contract nature of a material portion of our business, less than 50% of our revenues vary based on passenger demand, and we are therefore less exposed to changes in travel patterns caused by economic cycles. In addition, the nature of some of our main contracts (eg in school bus transportation) means that we are less of a target for technological disruption (from unregulated technology-based companies who target market share growth at a loss) than others who participate in only B2C markets. Our diversification means that no one contract accounts for more than 4% of revenue. All of this helps us to generate cash consistently, allowing us to invest prudently over the medium to long term, and to minimise our financial risk. 10 Our strategy at a glance Annual Report 2017 National Express Group PLC

Strategy and priorities

Driving our business forward through our three strategic priorities

Delivering operational Deployment Growing our business through acquisitions excellence of technology and market diversification

Definition We aim to be the safest, most reliable, convenient and best We utilise technology to raise customer and safety We continue to look to grow our unique portfolio of value transport provider in the modes we operate standards, drive efficiencies in our business and international bus, coach and rail businesses through facilitate growth selective bolt-on acquisitions and diversification into complementary markets

Performance –– All eligible businesses, ALSA and our UK bus and coach operations, –– New mobile websites and ticketing apps are driving higher online –– We have acquired nine bolt-on acquisitions in the year: now have EFQM* five-star ratings transactions, conversion rates and lowering costs – eg ALSA has –– three in North America: the significant acquisition of a Chicago –– Both our UK bus and coach operations re-awarded the prestigious seen a 10% increase in sales through digital channels paratransit operator, securing entry into the second largest paratransit British Safety Council Sword of Honour –– Contactless pay launched across the UK business, providing faster, market in North America; and the acquisition of two school bus and –– Improved customer satisfaction in our UK businesses and in ALSA more convenient methods of payment charter businesses in Cincinatti and Rochester, New York –– 19% underlying improvement in FWI index** –– Our real-time revenue management systems in ALSA and our UK coach –– six in ALSA: two urban transport companies in Madrid and Granada; –– Strong retention rate of 96% in our North America school bus business operations are growing revenue through both improved yield and three businesses in the Geneva area including two additional –– Another record year for passenger numbers at ALSA passenger growth businesses in the Swiss ski transfer market; and a charter transport –– Launched World Class Maintenance and safety initiatives across each –– Lytx DriveCam technology is now fully implemented in our UK bus services company in Madrid of our businesses and coach operations and North America transit, delivering a reduction in the number of collisions and associated costs

Future outlook –– Target further passenger growth in the ALSA and our UK bus and coach –– Further optimisation and automation of our RMS systems in Spain and our –– Further selective bolt-on acquisitions principally in North America and operations through our digital initiatives UK coach operations to drive growth in revenue, profit and incremental Spain where we can extend our offering into new regional markets and –– Launch new products and services including new routes, new express demand, as well as higher fleet utilisation cities or build further scale in existing markets and cities, also enabling us and charter services and new ticketing options –– Further roll-out of Lytx DriveCam across our ALSA and North America to drive incremental revenue and profit through the provision of additional –– We will continue to leverage our customer reputation to win new business school bus businesses, strengthening driver standards and commercial services such as charter services, while also making greater in North America reducing collisions use of our fleet –– Delivering Excellence programme will continue to embed best practices –– Enhanced CRM systems driving greater customer insight, to deliver –– We see a strong pipeline of future opportunities, both in bidding and in across the Group including world class safety performance greater personalisation and improved service M&A, as the liberalisation agenda continues across the world –– Continue implementation of our World Class Driver programmes across –– Further enhancements to websites, apps and ticketless payment systems, –– We will seek investments in assets that present a platform for future each of our businesses, raising driving and safety standards further helping to drive revenue and reduce costs growth, and will consider JV arrangements with the right partners –– Technology to support our World Class Driver programmes such as driver fatigue detection

Measuring our We believe passenger growth and improvements in safety standards through A rising proportion of sales transacted through our digital channels We maintain a disciplined approach to investing and target project returns progress a reduction in safety-related incidents are key indicators of whether we are demonstrates that our customers value more convenient and faster ways to well above our cost of capital, typically targeting returns of 15% or above. driving high safety and service standards and which will ultimately help pay. At the same time, the transfer of transactions away from traditional ticket Across the business as a whole, disciplined allocation of capital is measured deliver further growth in revenue, cash and profit. offices and third party sales agents to digital channels is driving operational through a focus on ROCE, a key element of executive remuneration. efficiencies and reducing costs.

See KPIs, p12-13 See KPIs, p12-13 See KPIs, p12-13

FWI** Passenger journeys Percentage of sales through digital channels ROCE

Mitigating Risks See Risk, p38-40 See Risk, p38-40 See Risk, p38-40

02 03 05 06 03 05 07 08 12 01 03 04 09 10 11

08 10 12 13

* European Foundation for Quality Management – recognises operational excellence and awards ratings to businesses based on a number of criteria, including quality of leadership and strategic direction together with development and improvement of people, partnerships and processes in order to deliver value-adding products and services to their customers

** Fatalities and Weighted Injuries Index National Express Group PLC Annual Report 2017 Our strategy at a glance 11 Strategic Report

Driving our business forward through our three strategic priorities

Delivering operational Deployment Growing our business through acquisitions excellence of technology and market diversification

complementary markets Corporate Governance

–– Delivering Excellence programme will continue to embed best practices –– Enhanced CRM systems driving greater customer insight, to deliver –– We see a strong pipeline of future opportunities, both in bidding and in Financial Statements across the Group including world class safety performance greater personalisation and improved service M&A, as the liberalisation agenda continues across the world –– Continue implementation of our World Class Driver programmes across –– Further enhancements to websites, apps and ticketless payment systems, –– We will seek investments in assets that present a platform for future each of our businesses, raising driving and safety standards further helping to drive revenue and reduce costs growth, and will consider JV arrangements with the right partners –– Technology to support our World Class Driver programmes such as driver fatigue detection

See KPIs, p12-13 See KPIs, p12-13 See KPIs, p12-13

FWI** Passenger journeys Percentage of sales through digital channels ROCE

Mitigating Risks Additional Information See Risk, p38-40 See Risk, p38-40 See Risk, p38-40

02 03 05 06 03 05 07 08 12 01 03 04 09 10 11

08 10 12 13

12 Key performance indicators Annual Report 2017 National Express Group PLC

Measuring our progress

Financial Non-financial

Normalised operating profit Free cash flow Return on capital employed Safety – Fatalities and Weighted Injuries (FWI) Passenger journeys Percentage of sales through digital platforms 2017: £241.5m 2017: £146.4m 2017: 11.9% 2017: 8.574 2017: 882m 2017: ALSA 40.4% UK: 44.5% £m £m £m £m £m 2015 2016 2017 250 200 12.0 20 1000 50

200 160 16 800 40 241.5 11.9 11.9 882.1 217.5 871.3 17.085 150 120 12 600 821.7 30 190.6 146.4 11.7

138.6 11.5

100 80 8 12.242 400 20 111.0 10.585 8.574 50 40 4 200 10

0 0 11.0 0 2015 2016 2016 2017 0 0 2015 2016 2017 2015 2016 2017 2015 2016 2017 (including 2015 2016 2017 ALSA UK Chattanooga)

Relevance to strategy Relevance to strategy Relevance to strategy Relevance to strategy Relevance to strategy Relevance to strategy Key measure of the overall performance Strong cash generation provides the funding Demonstrates how efficiently the Group is Safety is of paramount importance to a Growth in passenger journeys is a leading Deployment of technology is one of our of the business. to invest in initiatives to drive our strategy. deploying its capital resources and generating public transport operator and is a core indicator for growing our business and a core strategic priorities and a key driver for operating profit. measure of our strategic priority: measure of our strategic priority: Delivering growing our business and reducing costs. Delivering operational excellence. operational excellence.

KPI definition KPI definition KPI definition KPI definition KPI definition KPI definition Group normalised operating profit Free cash flow is the cash flow available after Return on capital employed (ROCE) is The Fatalities and Weighted Injuries Index Passenger numbers as measured by the Sales transacted through digital channels, from continuing operations. deducting net interest and tax from operating normalised operating profit, divided by weights injuries by severity to give an overall aggregate of passenger journeys across including websites, mobile apps and ticket cash flow. See reconciliation on page 21. average net assets excluding net debt and standard based score. our five operating divisions. machines, as a percentage of total sales. derivative financial instruments, translated at average exchange rates. See reconciliation Our numbers for North America are estimated on page 21. as our School Bus services are non-ticketed.

Performance Performance Performance Performance Performance Performance –– Further progress in Group normalised –– Normalised operating cash flow of –– ROCE stable at 11.9% –– In 2017 we saw a 50% reduction in the –– A record number of passengers carried in –– Continued strong growth in ALSA with operating profit, driven by strong £212 million, up £10 million on 2016 –– Invested £165 million of net maintenance FWI score compared to the previous year, 2017, with 882 million passengers travelling sales transacted through digital channels performances in our overseas businesses –– Generated £146 million of free cash, capital, predominantly in replacing our fleet which included the Chattanooga incident, on our services, up 1.2% in the year up 9% to 40.4% and up 55% over the last –– Growth being delivered both organically £8 million higher than last year in our existing operations with significant improvement in North –– Growth in passengers across each of three years and through bolt-on acquisitions –– Generated over £750 million of free –– Invested £13 million in growth capital America and ALSA our businesses –– With launch of new mobile ticketing app, –– Normalised operating profit up 6.0% in cash flow in the last five years expenditure to support growth in digital –– This represents a 19% reduction on an –– Strong performance in ALSA, with a record already 10% of our UK bus commercial constant currency, and up 11.0% on a and e-commerce initiatives, fleet upgrades underlying basis compared to 2016 314 million passengers carried, up 2% in revenues coming from digital sales reported basis on newly acquired businesses and –– 74% improvement in safety performance both Spain and Morocco –– Contactless and on-board ticketing mobilisation costs in German Rail since the introduction of Driving Out Harm launched in our UK coach operations –– Strong returns generated by our recent in 2010 (when adjusting for increased helping to drive further growth in sales acquisitions in North America, Spain and mileage) through digital channels to 66% in 2017 Switzerland, with acquisitions delivering ROIC of at least 15%

Why we measure Why we measure Why we measure Why we measure Why we measure Why we measure We are focused on driving growth in operating To ensure that we are running the business A focus on ROCE ensures that we maintain Safety is at the heart of our Vision and Passenger journeys are reflective of We aim to provide our customers with more profit in order to drive higher and sustainable efficiently, converting profit to cash to enable a disciplined approach to capital investment, Values and is our priority for both our underlying demand for travel. National convenient and faster ways to pay. returns for our shareholders. investment into the business and returns to and continue to invest in those areas in which customers and employees. Express is targeting increased passenger shareholders. we can deliver the best returns. This ensures ridership as a longer-term driver of National Express is targeting increased sales that we maximise returns to shareholders for High safety standards also help to drive sustainable value. through digital channels, not only to provide the capital they invest. sustainable growth through customer loyalty more convenient methods of payment and to and new business wins. increase customer loyalty, but also to reduce costs and fraud.

Remuneration linkage Remuneration linkage Remuneration linkage Remuneration linkage Remuneration linkage Remuneration linkage Normalised Group operating profit is one Free cash flow is one of three bonus inputs ROCE is one of the performance conditions Improvement in FWI is one of three bonus Non-financial targets within the Executive Non-financial targets within the Executive of three bonus inputs within the Executive within the Executive Directors’ annual for the National Express Long-Term inputs within the Executive Directors’ annual Directors’ annual bonus structure typically Directors’ annual bonus structure typically Directors’ annual bonus structure. bonus structure. Incentive Plan. bonus structure. include a component of personal objectives include a component of personal objectives relating to operational performance metrics. relating to operational performance metrics.

Read more in remuneration, p68 National Express Group PLC Annual Report 2017 Key performance indicators 13 Strategic Report

Financial Non-financial

200 10 1 00 10 120 12 00 Corporate Governance 11

100 0 00 0 0 200

0 0 110 0 0 inluin L Cattanooa

KPI definition KPI definition KPI definition KPI definition KPI definition KPI definition Group normalised operating profit Free cash flow is the cash flow available after Return on capital employed (ROCE) is The Fatalities and Weighted Injuries Index Passenger numbers as measured by the Sales transacted through digital channels, from continuing operations. deducting net interest and tax from operating normalised operating profit, divided by weights injuries by severity to give an overall aggregate of passenger journeys across including websites, mobile apps and ticket cash flow. See reconciliation on page 21. average net assets excluding net debt and standard based score. our five operating divisions. machines, as a percentage of total sales. derivative financial instruments, translated at average exchange rates. See reconciliation Our numbers for North America are estimated Financial Statements on page 21. as our School Bus services are non-ticketed.

Why we measure Why we measure Why we measure Why we measure Why we measure Why we measure We are focused on driving growth in operating To ensure that we are running the business A focus on ROCE ensures that we maintain Safety is at the heart of our Vision and Passenger journeys are reflective of We aim to provide our customers with more profit in order to drive higher and sustainable efficiently, converting profit to cash to enable a disciplined approach to capital investment, Values and is our priority for both our underlying demand for travel. National convenient and faster ways to pay. Additional Information returns for our shareholders. investment into the business and returns to and continue to invest in those areas in which customers and employees. Express is targeting increased passenger shareholders. we can deliver the best returns. This ensures ridership as a longer-term driver of National Express is targeting increased sales that we maximise returns to shareholders for High safety standards also help to drive sustainable value. through digital channels, not only to provide the capital they invest. sustainable growth through customer loyalty more convenient methods of payment and to and new business wins. increase customer loyalty, but also to reduce costs and fraud.