Stagecoach shares moved almost 4 per cent higher today despite a 28 per cent fall in the transport group's half-year profits.

The Perth-based bus and train operator, which tried to agree a merger with its troubled rival National Express Group earlier this year, said that pre-tax profits for the half year to the end of October fell sharply to £75.5 million, from £105.2 million in the same period last year.

The profit fall occurred despite increasing revenues as business costs, for fuel, pensions and rail franchise premiums, climbed.

However, analysts, who had been braced for worse news from the South West Trains operator, were pleased that the company reported growth in its UK rail and bus operations, whose revenues climbed 5.4 per cent and 4.4 per cent, respectively.

Brian Souter, founder and chief executive, said: "We have performed well in the face of the continuing challenging economic environment and increased cost pressures. We have successfully taken action to control costs across the group. We have also taken steps within our bus operations to match our transport services to changing levels of demand."

Mr Souter added that the group had made a good start to the second half of its financial year and that current trading was in line with management expectations.

Many transport groups have seen a decline in revenues as the recession and mounting unemployment have led to fewer people travelling around the country.

Stagecoach has also been hit by falling sales to commuters, especially in its South West Trains franchise from Surrey and Hampshire to central London, but it has made up the shortfall by selling more leisure and budget tickets, targeting "staycationers" who holiday in Britain.

That has led to a sharp fall in the profitability of its rail business from a margin of 6.5 per cent to margin of 2.9 per cent.

Stagecoach has also seen a steep increase in the rail franchise premiums that it must pay to the Department for Transport (DfT) and the company is currently disputing the payments.

The level of payments was decided when Stagecoach won the franchise in 2007, against a backdrop of intense bidding from rail operators to secure key franchises.

Like National Express, Stagecoach predicted a much higher level of passengers than it is now experiencing and is finding the high payments challenging. National Express's problems on the East Coast franchise led to it having to to hand back the rail line to the DfT.

In contrast, Stagecoach's dispute with the DfT will come before a Railway Industry Dispute Resolution tribunal before the end of the current financial year in April 2010.

On the Virgin west coast franchise, in which Stagecoach has a 50 per cent stake, the company said there were signs that business passengers were returning to its trains. However, profitability of Virgin Trains fell sharply because the service, which has seen a 30 per cent increase in capacity, has significantly higher costs than it used to.

Stagecoach said it was on track to achieve £70 million in savings in the UK rail business, after a year in which about 400 people have left the company.

The savings are £20 million higher than first expected.

In the US, high unemployment shrank revenues by 6.5 per cent as passengers cut back on discretionary leisure travel. Results also suffered on the weakness of the pound.

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