BUS and rail group Arriva told shareholders that it had made substantial progress towards becoming a leading operator in Europe.

The company, based in Sunderland, said the positive start to the trading year announced last month had continued.

It said the acquisition of a German rail company earlier this month gave it an excellent foundation in a potentially significant market.

Arriva, which employs 10,000 staff in continental Europe, bought Prignitzer Eisenbahn Gruppe (PEG) for £4m.

The purchase heralded its move into the German rail market, where regional and local authorities are putting subsidised services out to tender.

Arriva also took full ownership of Dutch rail and bus operator NoordNed in December and Portuguese bus business TST in August. It now has operations in eight countries in the European Union.

Last month, the group saw profits rise four per cent to £83.8m, while turnover from continuing operations climb-ed 15 per cent to £1.6bn.

Chairman Gareth Cooper told the company's annual meeting: "The positive start to 2004 that we announced with our preliminary results in early March has been maintained, and we continue to trade in line with expectations."

He said Arriva would continue to deliver value through organic growth combined with targeted acquisitions.

Arriva said last month that it was ready to capitalise on a population boom in London.

It was encouraged by forecasts of an 11 per cent rise in passenger numbers this year.

While the group has enjoyed good growth on the Continent, its fortunes in the UK have been more mixed.

The group's train operations, Arriva Trains Northern, suffered a blow when it lost the Northern rail franchise.

It failed to make the shortlist for the route, which combines rural and commuter routes on both sides of the Pennines, which is expected to be provisionally awarded to either Serc/Ned Railways or First Group in the next few weeks.

ATN has already lost the Transpennine Express franchise to a consortium of First and French group Keolis.

However, the company won the Wales and Borders route and is shortlisted for the Scot-Rail franchise.