TRANSPORT group Arriva yesterday said it had made "excellent progress" on contract gains, despite interim profits at its UK rail division taking an 81 per cent knock.

The Sunderland-based bus and train company said it was well positioned for profitable growth next year, and would continue to explore opportunities in new European territories.

It also said it had continued to expand operations at its headquarters in Doxford International Business Park, where staff figures have increased to about 180.

The upbeat announcement came despite an 81 per cent slump in operating profits at its UK rail arm, to £1.1m in the first six months of the year, from £5.9m last year.

Arriva said substantial expenditure on three UK franchise bids - East Midlands, New Cross Country and InterCity East Coast - was to blame for the fall.

However, it said success in winning the New Cross Country franchise will ''transform'' its trains division and bring in additional revenue of £600m.

Arriva's chief executive, David Martin, said: "In 2007, so far we have further strengthened our position in Europe, made excellent progress on contract wins and achieved improvements in operational performance in many parts of the group.

"With a number of contracts won and due to start over the coming months, we are already well positioned for 2008. The building blocks are in place for an exciting phase of profitable growth."

Arriva yesterday reported a six per cent lift in group revenue to £909.2m for the six months to June 30, and said operations in mainland Europe had again achieved double-digit revenue and profit growth.

Over the period, Arriva made a number of key acquisitions, including the purchase of 85 per cent of Osthannoversche Eisenbahnen AG in Lower Saxony, Germany, followed by a second bus business, near Prague in the Czech Republic, and Esfera, a privately-held bus company in Madrid.

Last month, the company completed the acquisition of Veolia's bus business in Denmark, the country's second largest operator with 640 buses.

Arriva also started operation of its first contract in the Swedish rail market and won entry into the Polish rail market, as part of a joint venture, with a three-year contract due to start operation in December.

Mr Martin said Arriva was looking in "every country" for potential opportunities.

He said: "We are also continuing to explore numerous additional opportunities for further development of the business, both in our existing operating areas and in new European territories.