Strategy

National Express' businesses have strong cash generative qualities. These are reflected in the significant degree of cash-based revenue (for example, in European bus, Coach and Rail) and quasi-government-backed contracts (for example, in Spanish coach and North American school bus). In addition, following a sustained period of investment and acquisition, a much more limited investment programme is required over the next 12 to 18 months. A review of working capital has identified a series of initiatives which are targeted to deliver significant improvements during 2009.

With banks around the world severely curtailing debt availability, the Group has also taken action to ensure that it has access to sufficient liquidity. Our treasury management process has significantly improved cash management, utilising a Group-wide weekly control process. In addition, the Group has realigned its currency debt structure to reflect falling interest rates and currency weakness, moving debt out of a US dollar/Euro drawing structure into a Sterling/Euro structure that matches the Group's facility currencies and reduces volatility. As a result of these actions, the Group maintained £144 million of unused committed facilities at the end of 2008.

The increased focus on cash management across the Group should help deliver strong free cash flow generation and reduce net debt. June 2009 will see the Group's banking covenants returning to their normal level with a debt gearing ratio of 3.5 times EBITDA (following a relaxation for the first three half year period end tests after the Continental Auto acquisition in November 2007). The Group is confident that it will achieve these covenants.

Twelve months ago, the Board set a policy to increase dividends by 10% per annum for three years. Since then, global economic and financial conditions have changed substantially. Despite continued strong earnings cover, the current level of dividend places a significant cash drain on the Group at a time when it is more appropriate to conserve cash resources. The Board is therefore proposing to reduce the full year dividend for 2008 by 40% from the 2007 level. As a result, a rebased final dividend of 10.00p per share will be paid in July 2009, following the half year dividend of 12.72p per share paid in September 2008.

Given the cash generative nature and strong earnings potential of the Group, it is expected to resume a progressive dividend policy once the economic outlook is clearer and the Group has refinanced its core banking facilities. Meanwhile, the Group will continue to keep its funding strategy under review.

The Group's debt funding policy is to remain investment grade equivalent, since this maximises access to a wide variety of debt markets. This is supported by good cash generation, operations in defensive business sectors and stable banking relationships. The Group's primary committed debt facilities are in place until September 2010 and June 2011.

In 2007 National Express put in place a three part strategy for growth. We set out to:

• Reorientate the Group around a more customer-driven, branded proposition;
• Invest in the future to develop innovative products and services in markets in which we operate, to enable us to grow organically; and
• Acquire or develop businesses in new markets where we can create value.

For much of 2008, favourable conditions prevailed as we put our ideas into practice. The real test of any strategy is its relevance when trading conditions are less than favourable. By late 2008, when the global slowdown began to have an impact on the transport sector, our strategy remained effective. Whilst we have naturally reassessed priorities in preparing for the year ahead, our strategy can remain essentially unchanged.

We have set out our customer promise to Make Travel Simpler. In doing so, we are making public transport a more appealing alternative, which helps to achieve a wider social objective: the reduction of the emissions that are accelerating climate change. Some commentators might argue that in times of financial insecurity, people care less about issues such as global warming and more about personal expenditure. In our business, we can deliver on both fronts.

National Express' product – public transport – is a cleaner option than the private car. For example, a typical coach is over four times more efficient than the average car with average loadings. Our trains are over three times more efficient. Environmental advantage, combined with the special offers that make coach, bus and rail travel easier on the purse, as well as the conscience, makes our business model even more compelling in these difficult times.

To serve our customers better, we have to know them better. That way we can build the sort of relationship that defines a strong and more profitable brand. That is why, in 2008, we made customer relationship management (CRM) a vital part of our overall marketing strategy.

Our CRM database now holds over five million existing and potential customers. In 2008, we generated over £11 million in genuinely incremental revenue that we would not have had before. In 2009, as economic conditions become more challenging, we are better able than ever to understand our customers' needs and offer them products they really want to buy.

Just as we are getting to know our customers better, they are becoming more familiar with us as a leading provider of public transport. Thanks in part to coordinated advertising campaigns, the positive awareness of the National Express brand grew significantly in 2008.

In 2008, we made progress in forging a single company in the UK. More than ever, we are moving out of traditional silos and working as a multi-modal operator. 2009 will see concerted efforts to share skills and experience and deliver synergies throughout our businesses. Smart cards provide a good example.

In January 2008, we became the first rail operating company to introduce the pre-pay Oyster card, where it has been a success on our c2c commuter business serving London. Using that experience, we are working closely in partnership with Centro in the West Midlands to create a region-wide smart card. Ultimately, as a diversified public transport provider, we want our customers to have access to the newest, most flexible and cost effective technology. e-tickets and m-tickets, where the ticket can be sent simply as a text message to a mobile phone, are becoming more commonplace. National Express has been a pioneer and will continue to be at the forefront of rolling out this kind of innovative technology; it is a technology that will have benefits in the UK, Spain and North America, indeed anywhere we operate in the future.

Presenting a united UK brand makes National Express a more attractive and prestigious partner. Links with major venues such as Wembley Stadium (where we are the Official Travel Provider) and media partnerships give us access to new and different audiences. For example, by offering tickets from £1 to Daily Mirror readers, we generated over 91,000 e-mail signups – 80% from new customers who had never used National Express coaches before. During the promotion period alone we had 14,000 bookings. Now we are building on the customer relationships we gained and looking to embark on new partnerships consistent with our business ethos.

As a company confident in the future of public transport – and our leading role – we continued a programme of organic growth in 2008. While reaping the benefit of past investments, we also began new programmes to improve our levels of service and profitability.

On the East Coast rail franchise, for instance, we made a huge commitment in time, effort and resources to improve operational performance and enhance customer communications on those occasions when things do go wrong. Such events are becoming increasingly rare. East Coast is operating at its highest level of reliability since privatisation.

Equally important were significant improvements in station quality and ticketing convenience and efficiency. An award-winning new website launched in 2008 now generates almost 20% of all sales, and, in 2008, Durham station won the coveted Station of the Year award, following the completion of our refurbishment project.

National Express also pursued organic growth in coach and bus operations in 2008. During the year we continued to grow our events business – including music festivals, one-off concerts and sports fixtures. In 2008 National Express took 40,000 customers to and from events at Wembley Stadium. There are many more examples where our unrivalled skills in major event transport logistics have made us the number one choice for a wide range of clients.

Our Spanish operation, ALSA, was a centre of innovative ideas for growth in 2008. Coming from a rich heritage of outstanding operational delivery, ALSA has redefined the customer experience in Spain on public transport with new ticketing products and a new Supra Class luxury service aimed at business travellers. This market continues to have enormous potential.

We have also seen considerable growth in North America, where we have expanded school bus operations into two new US states, bringing our total to 29 plus two provinces in Canada. Securing nine new contracts, worth a total of $38 million a year, gives some indication of the potential of the North American market, which is expanding due to pressure on local school districts to outsource their transport operations. Significantly, five out of the nine new contracts involved new outsourcing business.

As our North American business gets bigger, it is also becoming more efficient. In 2008, we went live with an integrated Enterprise Resource Planning system (ERP), which is streamlining business processes, and we opened a central operations control centre, the 'Every Time Center', in Illinois. Some of the technology involved, in particular the digital communications links between the control centre and drivers, could have wider potential within the Group. For now, it is making our North American operations even more customer-friendly and competitive.

Not everything in 2008 was as successful as we had hoped. Our Dot2Dot airport transfer service in the UK was an exciting innovation and a potentially significant new business line for the Group. However, with the economic downturn having a serious impact on air travel, the business has remained loss-making and in January 2009 we sold Dot2Dot as a going concern.

Developments in coach have seen successes, such as our Cheltenham-London premier coach link. This high quality service introduced a new range of customers to the comfort and convenience of coach travel – a concept consistent with UK government objectives to widen the appeal of this more sustainable transport mode. Government is considering afresh the opportunities that coach services could offer and National Express, as a leading member of the Confederation of Passenger Transport, will be working hard to explain the benefits of this highly flexible, cost effective and environmentally friendly form of transport.

As we continue to build our business, in February 2009, we submitted our proposal to operate the UK rail South Central franchise.

In 2007, we acquired Spain's second largest bus and coach operator, Continental Auto. In 2008, we achieved our objective of integrating Continental into ALSA, confirming our role as Spain's premier operator in the sector.

Our Spanish leadership team rose to the challenge of combining the best of the two companies' cultures. Now, we are benefiting from increased scale, better purchasing power, reduced costs, greater flexibility and enhanced efficiencies. In a market that is set to be transformed by future liberalisation, all of this gives us greater credibility with government and stronger appeal to those towns and cities considering the outsourcing of their transport activities. In 2008, we further strengthened our position in Spanish local transport with the acquisition of Transportes Colectivos SA (TCSA), which provides high quality services in the Bilbao metropolitan area.

We also expanded our US school bus operations with the purchase of two private school bus operations, including A&E Transport Services in upstate New York. This was a bolt-on acquisition, adjacent to existing business, and so providing immediate synergies. Our enlarged capabilities put us in a better position to pick up new outsourcing opportunities as they arise in the near future.

In the UK, our 2007 acquisition, the Kent-based Kings Ferry commuter service, had an excellent year. The commuter coach business saw strong year end season ticket renewals, reinforcing our belief that in times of economic challenge, consumers will look to better value alternatives, something we are well positioned to offer.