Stagecoach has reported a modest acceleration in profits as its Virgin Rail joint venture offset a squeeze on rail margins and slower growth in bus markets.

The West Coast line racked up a £28m operating profit following refranchising compared with just £2.6m the previous year when the route was operated under an interim management contract. Virgin salvaged the route in the controversial overturning of the franchise award to FirstGroup in 2012, which sparked a review of the entire system.

On the East Coast line where Virgin is poised to invest £140m after outbidding rivals to take it over in March, it now faces potential 'open access' services from FirstGroup as well as Grand Central. But chief executive Martin Griffiths said a sound business case had yet to be made with the Office of Rail Regulation by competitors. "There is much more work to be done to demonstrate ...that further competition would be beneficial to consumers," he said.

Mr Griffiths said it was a "solid set of results". Revenues were up 9.4 per cent at £3.2billion, operating profit rose 1.7 per cent to £227m and core earnings per share were 2.7per cent higher at 26.7p, in line with expectations. The dividend should rise by 10.5per cent to a total 10.5p.

Bus operating profits fell short of targets, with UK regional profits down 4.3per cent at £141.1m. At the Megabus coach business in the US, which was more exposed to the sharp fall in motoring costs, profits fell by 7per cent to £35m. The wholly-owned rail business saw a revenue rise of 18.1 per cent (or 8.7per cent like for like) but operating profit was slashed by over 21 per cent to £26.9m as franchises became less profitable towards their expiry.

Ross Paterson, finance director, said the new East Coast franchise had "made a good start both financially and operationally".

The group upped its capital investment from £118m to £141m last year and expects to spend £200m in the current year on new bus and train programmes.

Mr Griffiths said the bus business overall had shown underlying profit improvement in challenging markets, such as Scotland where he expected "some rationalisation" particularly in Fife. "The Scottish Government has been steadily reducing the reimbursement rate of concessionary fares," he said.

The chief executive said Stagecoach supported more devolution but added: "We are very sceptical that contracting out, franchising or some other regulatory change, is the best way to get some sort of additional passenger traffic. The price of that hasn't been properly considered."

Updated research by the group into 40 key commuter corridors in England, Scotland and Wales has found that the bus is still cheaper than the combined cost of fuel and car parking. It is now poised to launch a package of new digital tools for transport users as part of an £11m three-year project to transform the engagement with customers.

Stagecoach is still in growth mode, with its expansion of Megabus across Europe spawning a new Italian network launched last month. It admits Megabus losses could climb to £10m in the start-up phase, but Mr Griffiths said: "Hopefully we will see that come through strongly in future."

Paul Hickman, analyst at Edison Investment Research, commented: "Passenger volumes in mainland Europe increased by more than 60per cent in the past year, and the company sees further opportunities in what has been a rather sleepy market in the past."

He added: "We are also impressed with management's plans for the new East Coast franchise. Stagecoach is to introduce technologically advanced Hitachi trains on the line, with £140m of investment in improvements, which should transform the experience for inter-city train travellers."