Mobico Group Plc, formerly known as National Express, recently released its Q4 2023 earnings transcript, detailing a year of mixed results. While analysts focused on the German Rail issues and the impending sale of the North American School Bus division, a less obvious but potentially groundbreaking revelation lies within the UK Bus segment.

The transcript reveals a deliberate strategic shift within UK Bus, one that hints at a potential move towards a fully franchised model. This shift, quietly initiated amidst the noise of other divisional challenges, could redefine the UK Bus landscape, impacting not just Mobico, but the entire industry.

The transcript is peppered with clues. CEO Jose Ignacio Garat highlights the need to "rebalance the risk/reward structure" within UK Bus, aiming for "more equitable and more sustainable commercial arrangements." CFO James Stamp echoes this sentiment, emphasizing the importance of a return "in line with risk and reward," particularly in the context of the final year of the existing funding agreement with Transport for West Midlands (TfWM).

This funding agreement, set to expire in early 2025, has imposed restrictions on Mobico's ability to adjust network size and pricing. However, the transcript hints at a dramatically different landscape post-2025. Stamp mentions the expectation of a new pricing mechanism that would automatically recover inflationary costs and a lifting of restrictions on network reductions.

These changes point towards a reduced reliance on the current Enhanced Partnership model, a hybrid structure combining elements of private operation with public funding. The focus on automatic cost recovery and network flexibility aligns more closely with a fully franchised model, where the public authority takes on greater responsibility for setting fares and service levels.

The transcript also reveals Mobico's proactive preparations for this potential shift. Garat states that the company is "preparing for a possible move to greater franchising across the UK," ensuring they are "best placed to prosper in that market structure too." This proactive stance suggests Mobico sees franchising as a likely outcome, not just a distant possibility.

Evidence Pointing Towards Franchising

This potential move towards franchising, while not explicitly stated, is heavily implied throughout the transcript. Several factors support this hypothesis:

- **Risk/Reward Imbalance:** The transcript repeatedly emphasizes the need for a more balanced risk/reward structure, suggesting dissatisfaction with the current Enhanced Partnership model.

- **Automatic Cost Recovery:** The expectation of a new pricing mechanism automatically recovering inflationary costs is a core characteristic of franchised models.

- **Network Flexibility:** The lifting of restrictions on network reductions post-2025 aligns with the greater flexibility offered by franchising.

- **Proactive Preparation:** Mobico's stated preparations for greater franchising indicate their belief in its likelihood.

Potential Impact on Profitability

While the transcript provides no specific financial projections tied to this potential shift, a move towards franchising could have significant implications for Mobico's UK Bus profitability.

Hypothesis:

If UK Bus transitions to a fully franchised model, Mobico's operating profit margin could see a substantial increase, potentially exceeding pre-pandemic levels.

Rationale:

- **Reduced Risk:** Franchising shifts the burden of revenue risk from the operator to the public authority, creating greater profit stability.

- **Guaranteed Cost Recovery:** Automatic cost recovery mechanisms ensure that inflationary pressures are passed on to fares, protecting profit margins.

- **Network Optimization:** Greater flexibility in network adjustments allows for service optimization, maximizing efficiency and profitability.

Potential Impact:

Assuming a franchised model allows Mobico to achieve a 15% operating profit margin (compared to pre-pandemic levels of ~12%), UK Bus could contribute an additional £30 million to £40 million in annual operating profit.

Mobico Group's Divisional Performance (2023)

Source: Mobico Group Plc Q4 2023 Earnings Transcript

Conclusion

While overshadowed by German Rail woes and the North American School Bus sale, the subtle but significant strategic shift within Mobico's UK Bus segment could be the real headline story. A move towards franchising, if realized, could fundamentally reshape the UK Bus market and unlock significant profit potential for Mobico. This hidden revelation within the transcript could be a canary in the coal mine, signaling a major transformation within the UK's public transport landscape.

"Fun Fact: The term "canary in the coal mine" originates from the practice of using caged canaries to detect the presence of dangerous gases, such as carbon monoxide, in coal mines. The canaries, being more sensitive to these gases than humans, would become ill or die before miners were affected, providing an early warning system."