INCREASED Government support for its rail arm has helped transport group Stagecoach post an 8.1% rise in underlying annual profits.

The Perth company's shares rose 3.5% on the news, which contrasts with the performance of its Aberdeen-headquartered rival FirstGroup, which saw pre-tax profit plunge 86.7% in its last financial year and yesterday completed a £615 million fundraising to bolster its overstretched finances.

Stagecoach which is one of the UK's biggest bus and coach operators with around 8000 vehicles and 2.5 mil-lion passengers a day, increased underlying profits to £218.9m for the year to the end of April.

This was up from £202.5m a year earlier and better than the City had expected. Revenues were ahead 8.3% at £2.8 billion.

Martin Griffiths, who became chief executive in May, after co-founder Sir Brian Souter stepped up to chairman, said: "The story across the group is generally strong."

Investors reacted by sending Stagecoach's shares up 10.5p to 310p. This added £60m to its market value which now stands at £1.8bn.

Notable profit gains were made in the company's rail business, which includes South West Trains.

While revenues at the division rose 5.9%, earnings jumped 84.1% to £49.9m as East Midlands Trains, which was loss-making the previous year, received revenue support from the Government because the economic downturn led to lower than expected income.

Asked if Stagecoach's profits were therefore the product of extra Government subsidy, Mr Griffiths said: "I just do not accept that. These are contracts."

He added: "When we get to a certain point and the economy has changed fundamentally we get some element of contractual support. It is not subsidy."

Stagecoach said its rail arm made a net contribution of £380m to Government coffers in premium payments during the year even after revenue support was taken into account.

Meanwhile at its joint-venture Virgin Rail, which operates the West Coast Mainline, operating profit fell 40.5%.

Virgin Rail will continue to run the franchise until at least 2017 after a botched re-tendering exercise.

Earlier this month Stagecoach revealed it was launching legal action against Network Rail over breach of contract due to "poor performance" on the route, which it said had deterred customers.

Stagecoach is also considering a bid for the currently state-operated East Coast franchise, most likely as part of the Virgin joint venture.

A major point of contrast with FirstGroup was Stagecoach's UK bus business where revenues rose 6.3% and operating profit was up 1.4% to £165m despite a £22m hit from increased fuel prices and reduced fuel duty rebate.

Asked about the contrasting fortunes of Stagecoach and FirstGroup, which has struggled to maintain demand for bus services in the north of England and Scotland, Mr Griffiths said: "Our business model, particularly if you are talking about the bus business, means we have invested consistently through the different economic cycles. We have been very careful about our pricing.

"The whole business strategy has been about how we drive volume up."

On July 8 Stagecoach will launch its first double-decker sleeper coach Megabus service from Dundee to London.

It has piloted a single-decker version from Glasgow to the capital and plans to roll out the service to locations including Aberdeen, Inverness and Cumbernauld.

Mr Griffiths said Stagecoach was also considering running a similar service in the Untied States through its rapidly expanding Megabus service there.

"There is a huge market opportunity, not just this year but the years beyond that," Mr Griffiths said of its North American business. Gerald Khoo, analyst at Espirito Santo, said: "So far, management has received the benefit of the doubt on Megabus.

"This is the group's main growth opportunity, and a significant rebound in profits in North America is required to justify the market's confidence."

Stagecoach declared a final dividend of 6p a share, a rise of 0.6p, to be paid on October 2.