The country's largest bus company and one of the biggest operators of yellow school buses in the US also said in its trading update to the City ahead of interim results that it had seen good trading at its UK bus unit and strong contract retention in North America.

However, FirstGroup said it was particularly pleased with the start up of the new franchises First Great Western and First Capital Connect during the period, both of which it said were "trading ahead of initial projections".

The board of FirstGroup said it remained confident of the prospects for the group and its continued strong cash flows.

FirstGroup is also on recently announced shortlists for the Cross Country and East Midlands rail franchises which will be awarded in mid-2007.

Shares in FirstGroup, which have outperformed the travel and leisure sector over the past year, yesterday climbed 1%, or 5.25p, to 491.25p.

The Aberdeen-based company is scheduled to announce its half-year results for the six months to the end of September on November 8.

In May, the group cautioned that it expects rising oil prices to cut profits this year.

Adjusted pre-tax profit for the year to March 31 came in at £176.4m, up from £166.5m in 2005. Growth was driven by strong passenger volumes at the UK rail business, after a rise in fuel costs had cut group operating profits by £31m.

Earlier this year, at the company's annual meeting, FirstGroup pledged to stamp out management anti-union activities in its North American operation, amid claims that its staff there are toiling under poor working conditions.

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FirstGroup running well

Hemscott: 26/09/06

The bus and rail group has put out a bullish trading statement covering its first half to the end of September, justifying hopes of a double digit lift in the interim dividend.

The bus and rail group has put out a bullish trading statement covering its first half to the end of September, justifying hopes of a double digit lift in the interim dividend.

FirstGroup is meeting analysts this week and will tell them that the group has traded well and made a good start to its financial year to March.

Finance director Dean Finch will point to a strong performance across the UK rail division and say he is particularly pleased with the excellent start up of FirstGroup’s two new franchises, First Great Western and First Capital Connect, both of which are trading ahead of initial projections.

First ScotRail and First TransPennine Express continue to deliver profitable growth together with excellent operational performance, he will add.

FirstGroup has been shortlisted to bid for the East Midlands and New Cross Country franchises.

Trading for first six months in the UK bus division has been good, with revenue growing through increased passenger journeys, more routes and higher prices.

Costs have been closely managed to help to offset rising fuel costs.

In North America, all three divisions were successful in retaining contracts. First Student continued to expand, with new contracts to operate yellow school buses delivering further profitable growth. The start up of the new school year went well, according to Finch.

FirstGroup is committed to increasing the dividend by 10% a year and that aim looks likely to be fulfilled for the foreseeable future with the company expressing its confidence in prospects and in continuing to generate strong cash flow.

Interim results will be released on 8 November.

FirstGroup shares have risen strongly from 200p at the bottom of the market in 2003 to just short of 500p this month.