BUS passengers in Scotland's cities will bear the brunt of service cuts and fare hikes due to changes to the way government subsidies are handed out, two of the country's biggest operators have claimed.

The Aberdeen-based transport giant First Group and the council-owned Lothian Buses claimed changes to the Bus Service Operators Grant (BSOG) from April will penalise urban bus services used by the vast majority of passengers in favour of rural services.

Bus firms are already reeling from a 20% cut to BSOG, which accounts for around one-tenth of running costs, announced in last November's Budget. However, senior figures in the industry believe firms operating in urban areas could, in effect, see cuts of up to 40% to BSOG, pushing up fares and leading to more marginal routes being cut.

The cuts have been seized on by Labour, who have claimed that despite the SNP's support for free bus travel its policies are having a devastating impact on bus networks already squeezed by falling passenger numbers and soaring fuel costs.

Lothian Buses last week announced it was putting up the cost of an adult single by 10p, to £1.40, while First Glasgow, which carries more than 115 million passengers a year, will today announce a series of cuts to services and frequencies in its network.

Until now, BSOG has been used to subsidise the diesel used by buses but will be changed from April to subsidise bus mileage. However, bus companies say this will penalise urban operators who spend more "dead time" travelling from the depot to the start of the bus service and tend to be less fuel-efficient as their routes involve driving at slower speeds with more braking and acceleration.

Neil Barker, First Bus Regional Managing Director (Scotland), said: "The Scottish Government's decision to change the way it calculates BSOG is bad news for hundreds of thousands of Scottish bus passengers. Urban operators, in particular, will be adversely affected and we are already seeing fare and service reviews."

Ian Craig, managing director of Lothian Buses, said: "Lothian Buses has been disproportionately affected by the changes to be introduced. This is as a result of the Scottish Government revising funding arrangements that favour rural operations. This is over and above the very significant cut to the budget for BSOG."

Industry sources say dozens of small firms operating in cities will also lose out due to the changes, and fear many will be put out of business.

The changes have also been criticised by Stagecoach, the Perth-based transport giant, which said it would be worse off. A spokesman said: "The new system was devised and decided by Transport Scotland. Along with other operators, we have expressed our concern at the significant cut in public funding support for bus passengers, which will put pressure on fares and bus networks."

Alistair Watson, a Labour councillor and former chairman of Strathclyde Partnership for Transport, said the impact of cuts to bus services was one of the biggest issues raised to candidates and would feature in this May's council elections. "We're now very close to a situation where there will be virtually no off-peak services," he said.

Richard Baker MSP, Labour's transport spokesman, added: "This will put up the cost of travel for thousands of people in our cities at a time when they can least afford it."

A Transport Scotland spokesman said: "The Bus Service Operating Grant calculation currently means payments reward fuel inefficiency.

"The changes we are making will encourage operators to move to cleaner, greener, and more fuel-efficient vehicles and help us meet our ambitious climate change targets.

"To support the industry in making this transition, we are providing £3million this year for those operators most affected – with Lothian Buses and First Glasgow among those benefiting. The changes to BSOG will also lead to a redistribution of funding to longer and more rural services."