The Sunderland firm, which has posted a 7.3% rise in profits, said partnerships with local authorities like Durham were the way forward.

The company predicted a revival in popularity of bus travel as it reported half-year operating profits of �60.1m.

It said it believed the government's transport White Paper could underpin a "resurgence" of regional services.

International developments

Arriva said it expected to invest about �40m in new buses and other improvements this year.

A company spokesman said: "We believe that if local authorities and bus operators work closely together, they can deliver real benefits."

It said its Arriva Northern rail franchise, which it is due to hand over to a consortium of Serco and Dutch railways, was currently achieving the highest levels of operating performance since privatisation in 1997.

However, the handover has been delayed and the Strategic Rail Authority has approached Arriva about a short extension of its tenure to ensure services continue to operate.

Operating profits in the rail division dropped to �14.5m from �14.9m previously, which it attributed to the loss of its Merseyrail franchise in 2003 and the handover of trans-Pennine services to rival operator First Group.

It said it was seeing "exciting developments" in its rapidly growing international division, which has operations in Germany, Denmark, Italy, the Netherlands and Portugal.