SCOTTISH transport giant FirstGroup narrowed its losses but warned of “continuing material uncertainty” amid the pandemic as it separately reached an agreement with the Government over the termination of two rail franchises.

The Department for Transport (DfT) has accepted that no payment is required in return for scrapping Avanti West Coast’s contract as the brand was “performing well prior to the pandemic”, according to the Aberdeen-based company.

However, a contribution of £33.2 million is required by FirstGroup to end South Western Railway’s deal.

It comes as the group saw its loss before tax narrow to £100.1 million, from £187.1m in the first half of last year, while revenue dropped more than 12 per cent to £3.1 billion.

The group, which is seeking to sell its US school bus, transit and inter-city coach businesses and is in talks with a number of “credible potential buyers”, warned in July of a “material uncertainty” over its ability to continue as a going concern.

READ MORE: Stagecoach says coronavirus to be ‘pivotal’ for public transport

It told the City on Thursday: “Despite the reduction in overall risks identified as part of our full year results in July, the possibility of multiple downside potential risks remains, principally related to lower service levels and the pace at which our markets recover from the pandemic, giving rise to continuing material uncertainty.”

The bus and rail company has had support from UK and Scottish Governments to maintain services for key workers throughout the pandemic, as have other major transport providers, after passenger numbers plummeted from the end of March.

The latest rail negotiations were part of Emergency Recovery Measures Agreements (Ermas) introduced due to the collapse in demand caused by the coronavirus crisis.

Under the terms of Ermas, the DfT has taken on the financial liabilities of rail firms and is paying them up to 1.5% of their pre-pandemic operating costs.

READ  MORE: Scottish transport giant hails UK Government Covid rail deal extension

This will leave taxpayers with an £8bn bill for the current financial year, with a further £2.1bn allocated for 2021/22.

Ermas also contain provisions to allow operators to walk away from franchise contracts if a deal can be reached on what additional payments they should make.

Having reached this stage, FirstGroup is now negotiating with the Government over the terms of directly-awarded management contracts for Avanti West Coast and SWR.

These would see it continue to run services when Ermas expire for SWR in March 2021 and Avanti West Coast in March 2022.

Matthew Gregory, FirstGroup chief executive, said: “We welcome this agreement, which marks a further evolution of the contractual framework for our SWR and Avanti train operating companies, both in the context of providing resilient services throughout the coronavirus pandemic and also a more sustainable long-term approach.

“These new directly-awarded management contracts will focus on passengers and operational performance, with a more appropriate balance of risk and reward.

“We look forward to working constructively with the DfT to make this a reality, and to use our expertise and understanding of the needs of our customers to deliver improvements that we know passengers want.”

Mr Gregory also said: “Whilst the outlook remains uncertain due to the pandemic, we performed ahead of our expectations in the first half, have taken prudent action to reinforce the balance sheet and are confident in the resilience of the group.

“We continue to progress our plans to rationalise the portfolio as the best means to unlock material value for all shareholders. With respect to the divestment of our North American contract businesses, we are in discussions with a number of credible potential buyers who have a long term perspective, which the company and our advisers are exploring and evaluating.”

Stuart Lamont, investment manager at Brewin Dolphin Aberdeen, said: “The transport sector remains among the most challenged by the Covid-19 pandemic and FirstGroup continues to feel the effects of that. However, there are signs of resilience in the company’s results, with some of its operations coming in ahead of expectations.

Shares in FirstGroup closed at 66.25p, down 2.7p, or almost 4%.