AA is crashing

AA, the car breakdown rescue specialist, is having a tough time of it.

The company put out its half-year results on Tuesday and there are a lot of sore spots:

  • Revenue fell to £484.6 million, from £491. 7 million in the same period last year;
  • The group slipped to a loss of £63.6 million, from a £10.2 million profit in the first half of 2014;
  • Trading earnings before exceptional costs dropped to £199.2 million, from £211.9 million;
  • And the number of personal roadside assistance customers fell from 3.87 million to 3.72 million.

The only slight positives are an £8 increase in average earnings per customer to £138 and a rise in business customers — from 9.5 million to 9.9 million. The decline in personal assistance members is also slowing.

The company pinned some of the blame on a big restructuring drive that’s currently underway: AA is paying down debt, upgrading its IT operations, spending more on marketing and advertising, and restructuring.

The IT spend is the big cost, with £80 million earmarked for investment just this year. AA wants to save cash by collecting and storing data in a smarter way, equip its roving breakdown vehicles with smarter apps, and improve its back office operations.

But executive chairman Bob Mackenzie admits it’s more than just investment that’s hitting revenues and earnings.

He says in the results statement:

Strong competition in Motor Insurance, the reset of our Financial Services business and difficult trading conditions in Driving Services offset the 2.1% increase in Roadside Assistance revenue, resulting in an overall decline of 1.4% in Group revenue to £484.6m.

And he warned of more potential problems ahead, saying:

There are however two external factors to consider: first, the Government recently and unexpectedly decided to increase Insurance Premium Tax by 58% from November – yet another imposition on the motorist in the UK. The impact on the AA is that it is likely to create additional churn in both Insurance and Roadside Assistance. Secondly, EU legislation on holiday pay may increase operating costs.

The government announced an increase of the tax on insurance premiums from 6% to 9.5% in the July Budget, which Mackenzie thinks will lead more customers to shop around for a better deal (that’s what’s mean by “churn”).

The EU recently ruled that workers without a fixed office should also be paid for their commute to and from their first and last appointments. This would obviously have a big impact on AA’s breakdown assistance staff, who patrol the motorways.

Despite all this, AA reckons it’s still on track to meet full-year forecasts.

Investors aren’t happy — 10 minutes after trade started in London, AA is down 6.9%.

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