Stagecoach, the rail and bus operator, saw profits at its British rail franchise fall as the faltering economy hit passenger growth, particularly at its flagship South West Trains franchise operating from Waterloo.

The Perth-based company reported a £3.4 million fall in operating income at its UK rail division in the year to April 30, with earnings dropping back to £55.7 million.

That came despite Stagecoach having the benefit of the first full year of ownership of the East Midlands franchise. Rail revenues were up 25.7 per cent to £977.7 million, but margins dropped 1.9 percentage points to 5.7 per cent.

Robert Spiers, the company's chairman, conceded that Stagecoach had suffered from "slower rates of revenue and passenger volume growth, particularly in the second half of the year". Commuter rail fares into London have been particularly affected by falling employment.

Stagecoach is in dispute with the Department for Transport over the level of subsidy payments it will receive in the year to April 2011 for its South West Trains franchise. There was no new update on the row today, and Stagecoach repeated that its rail division would "incur a significant operating loss" if the dispute was not resolved in its favour.

However, group pre-tax profits profits rose 2 per cent to £170.8 million, largely because of a strong performance from the British bus operation. Bus operating earnings were 14 per cent ahead at £125.6 million, as cost-conscious consumers switched from trains and cars to buses. Passenger volumes on Stagecoach routes were 3.2 per cent ahead.

Operating profits in the US bus business were marginally higher at $42.3 million (£25.2 million), compared with $42.2 million a year ago, helped by reduced losses at its intercity megabus.com business as its North Eastern network develops.

In a sketchy outlook statement, Stagecoach said that trading in the current year "was in accordance with our expectations", but added: "The difficult economic environment presents some challenges for the group, in particular in its rail businesses as a result of declining UK GDP and rising central London unemployment".

The final dividend is 4.2p, up from 4.05p, and giving 6p for the year.

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