Transport group Arriva has said growth in the European train market had almost offset its soaring fuel bill and the loss of a rail franchise in the UK.

The Sunderland-based firm - which is considering bids for the new West Midlands and East Midlands rail franchises which come up next year - saw operating profits fall 2.5 per cent to £123.1 million.

That came after after its diesel costs for UK bus services rose by £6 million in 2005 and its failure to keep the Northern trains service meant its UK train earnings more than halved.

However hedged fuel bills, the growth of rail operations in Germany and the Netherlands and the sale of its vehicle rental business left Arriva in "good shape", the company said.

The firm said 2005 pretax profit fell £107.9 million.

Arriva, which operates in seven European countries as well as the UK, has around 30,000 employees and provides more than one billion passenger journeys every year. The company runs buses in and around the Midlands.

A spokesman said the company faced an extra £14 million on its fuel bill next year.

Price increases were "one tool available to us" in offsetting that cost, he said. The introduction of free off peak local bus travel for over 60s and passenger with disabilities in England would stimulate some growth, the company said.

It was also in talks with local authorities about offering subsidies for covering some, mainly rural, routes.

The July terrorist attacks hit its London sightseeing business, The Original Tour, with 40 per cent less passengers during the tourist season. Numbers had now returned to previous levels, Arriva said.

It said the Arriva Trains Wales franchise was attracting more passengers, especially in the South Wales valleys, and it had added 950 new services in December 2005.

However it missed the input of the Northern train franchise, which ended in December 2004 and had brought in £285 million that year.

Arriva has pre-qualified to bid for the South Western Franchise.

Group operations manager David Martin said that while it would continue to look for UK rail expansion, mainland Europe offered many opportunities.

He added: "It's a large market where we are one of the major private operators but despite that are still quite small in the scheme of things."