Ugly times at FirstGroup, which announced earlier this week that it needed to raise £615m by issuing new shares to avoid losing its all-important investment-grade credit rating.

If this rating gets cut to junk status, which was clearly being threatened by the ratings agencies, it would mean that First couldn’t bid for UK rail franchises and apparently also school bus contracts in the US, not to mention adding about £50m to the company’s annual interest bill.

As unpalatable as going to the markets cap in hand was to the company, not to mention cutting loose chairman Martin Gilbert after 27 years of service, there might have been no way back from a junk rating. 

All the same, this ghastly state of affairs has dragged the share price down to levels that have not been seen since the mid-1990s. For this, the main scapegoat has been the collapse of the re-tender for the West Coast rail franchise last year. You may recall that First won the tender last August, Virgin Rail cried foul and initiated court proceedings, then the Department for Transport admitted  in October that it had bungled the process and would start again. Meantime, Virgin got two years’ extension.

This is the ideal thing to blame for First’s state, since the Aberdeen company emerged as a victim. Its contribution is easy to exaggerate, though. It would only have added a couple of tens of millions of pre-tax profits to First’s accounts each year – not a huge amount for a company that garners well over £250m in a good year. Equally, First has been granted extensions on two of its own rail franchises while the government sorts out the mess. At best, West Coast Rail was a straw that broke the back of a camel that had been staggering through the business desert for some time.

A deeper cause was First’s deal to buy US transport group Laidlaw in 2007 for £1.9 billion. This deal, which included the iconic Greyhound bus brand, roughly quadrupled its net debt to £2.2bn. This pushed it to almost four times top line earnings, the sort of multiple that depended on a bright future even in those credit-drunk times.

The pressure duly mounted when the market turned and First began running into problems with its new US student bus division. Since then, however, this situation has been improving thanks to stringent cost-cutting and improving customer service. It is now possibly off the critical list, unlike the net debt pile. It is still three times top-line earnings at circa £2bn, even after the share issue, and is central to the pressure from the ratings agencies.

Having said that, it might have been manageable were it not for the third and perhaps most important reason for First’s problems: it has made a total hash of its UK bus business. This can’t be blamed on government blunders or market failures, but rather years of bad decisions that took a long time to come to the fore.

Unlike rivals such as Stagecoach and Arriva, who prioritised customers, First’s bus strategy was always built on ruthless attention to costs. Consequently buses were too often old, scruffy and prone to breakdowns and timetable changes. When customers voted with their feet, First would raise bus fares to minimise the damage to revenues. This gave passengers another reason to go elsewhere, which prompted First to put fares up some more. What a great way to encourage the public out of cars and on to public transport.

Now it has reached a point where the elastic in this strategy has snapped. Operating profits in the most recent year are down from £134m to £91m. First has been blaming rising fuel costs, government cutbacks to subsidised fares and the weak economy, but rivals have been making a decent fist of exactly the same situation.

Main competitor Stagecoach managed a 13% rise in its UK bus operating profits in the first six months of its financial year and is indicating that the second half of the year has been going well too, for example.

Now comes the fight back. First Bus has had to exit London to achieve its plan to sell £100m of its assets. It seemed set on disposing of other bits and pieces around the country until the Competition Commission made clear that it was not keen on any of the usual suspects getting bigger.

The other main plan is to invest a pile of money, with the UK bus and US student divisions to receive the lion’s share of a £1.6bn investment over the next four years. This will include refurbishments and new buses in the UK, improved maintenance and also probably fare cuts after the company made positive noises about a pilot in places like Manchester in the past few weeks.

Will it work? It had better, if First is to stand any chance of recovering its reputation, especially amid mutterings that a new Labour Government might cause further pain to rail franchise companies by renationalising the system. (And bear in mind that the likes of First would be in even worse shape if their rail franchises were not entitled to annual fare rises above inflation.)

The councillors were responsible for paving the way for First to dominate bus services in cities like Aberdeen and Glasgow will be long gone, but their legacy is not pretty. The company has squeezed its customers at the very time when they can least afford it.

It would be ironic if market forces now finally delivered decent affordable bus services to these cities. If consumer power can achieve that, you begin to wonder what else might be possible.