Rail and bus operator Stagecoach Group - owner of Warwickshire bus firm Midland Red (South) - yesterday posted higher annual profits at the top end of expectations after growing passenger numbers at its operations helped offset higher fuel costs.

Stagecoach, which last week agreed to sell its London bus business, forecast flat earnings this year but said it planned to expand its bus and rail operations in other parts of England and North America.

"The group will continue to look for further organic growth and bolt-on acquisition opportunities in our UK and North American bus business and opportunities to grow our rail portfolio," said chief executive Brian Souter.

Stagecoach said pretax profit excluding amortisation and exceptional items for the year to April 30 came in at £140.6 million compared with £131.2 million a year ago.

This compared with the median forecast of £136 million calculated on the basis of 11 analysts' forecasts. Turnover rose eight per cent to £1.53 billion.

Stagecoach said it was comfortable with market expectations for current year pretax profit of £137 million.

Stagecoach's London bus operations were bought by Australia's Macquarie Bank for £263.6 million.

Deutsche Bank analysts said the results were at the top end of forecasts, but said some investors may be disappointed the company was not planning to return funds from the London bus sale to shareholders through a special dividend.

Stagecoach said proceeds from the sale would be used to pay down debt.

Mr Souter said the company also wanted to focus on its provincial British bus operations outside the capital and expand operations in North America.

The company said acquisitions in Europe were not a high priority.

Stagecoach, which has a rail joint venture with Sir Richard Branson's Virgin Rail Group, lost a competition to operate the Greater Western and Thameslink/Great Northern rail franchises to rival First-Group in December.

The company hopes to retain its South Western rail franchise, which it must bid against rival transport companies for. The Government expects to award the franchise in autumn 2006.

UK rail revenues rose 5.7 per cent in the year, while its North America revenues increased 11 per cent. Soaring oil prices increased bus fuel costs.

Stagecoach said its fuel bill on a like-for-like basis was up £22 million in the last financial year - a rise of 25 per cent to 30 per cent - and it forecast an increase of a further £30 million to £35 million this financial year.

Chairman Robert Spiers said: "Cost pressures remain a challenge for the group and we are continuing to manage these as part of our overall cost base.

"We believe we that we have achieved the correct balance of retaining and growing our customer base while main-taining a financially robust business."

Stagecoach said that while it carried out promotions in order to drive up passenger volumes it also managed to offset many of the pressures brought on by the higher price of fuel through cost controls.

Mr Souter added: "The group has achieved another strong set of results, delivering continued organic growth in our bus and rail operations in the UK and North America.

"Despite continued cost pressures, this has been a very successful year for the business."