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Bus and Motor Coach Library

Fiscal Responsibility

Author – Brian Niddery (2004)

We may be starting to see some blue sky on the horizon; however, we cannot afford to forget some very hard lessons that the bus industry has had to learn over the last few years.
In the rather "booming" period of the mid to late nineties, aggressive equipment manufacturers, easy financing, and emotional buying decisions on the part of fleet operators led us to the disastrous "bust" years that we've had to live through since.

Now that we may be turning the economic corner, one of the most important lessons that the people of our industry must remember as we move into more prosperous years is fiscal responsibility.

Fiscal responsibility is in part the ability to determine what equipment is best suited to serve one's client base, or potential client base, and avoid the financial pratfall of acquiring expensive equipment that one really doesn't need.  In other words, the ability to match your fleet mix to your particular market. 

Unfortunately the mid-nineties saw an emotionally-driven marketplace, where literally the market was flooded with thousands of new motorcoaches, highly financed at low rates of interest.

It soon became increasingly apparent that it was beyond the ability of the market to sustain the high debt-ratios that this flood of new coaches foisted upon this industry.  For too many operators the result was inordinately high monthly payments and long-term crippling debt.  The inventory of late model coaches for sale or repossessed grew, driving down inventory book values - causing significant financial injury to virtually every coach operator in North America.

As an industry the motorcoach segment became extremely vulnerable to even a minor economic downturn.  As fate would have it, a string of events took place beginning in 2001 that would prove catastrophic to the industry.  

Before one even considers the purchase of any equipment, new or used, one must first determine what size and type of equipment is needed.  To do this we must firstly clarify and define one's particular market or market opportunities.  As a fleet operator it is important to analyze your current customer base and revenues.  It is only through such analysis that one can more accurately match equipment specifically to one's market, or a contemplated market.

As a businessman, it is imperative to have a simple basic business plan. You need to define the market segments in which you are already engaged, or wish to expand into, identify the services you intend to offer to your customers, and how you intend to differentiate yourself from your competitors. Will your business strategy be to focus on charter/low end tour business; international tours, selective/packaged tours; long or short run tour and charters, or other kinds of services?  Do you plan to operate regionally, nationally and/or across the borders into Canada and Mexico? What will be your major business focus -  tour and/or charter or intercity scheduled routes?

Once you have properly defined your business, you need to develop a financial plan. Sales targets, sales volumes and revenues, expense budgets must be contemplated and identified.  You should also set growth and profit targets at least for the short term (1 to 3 years).

In today's very competitive marketplace, one can no longer wait for the phone to ring; rather a more aggressive marketing and sales effort is required.  One must develop and implement marketing and sales activities that will support your business plan and enable you to sign up and contract the customers you need to achieve your sales and operating profit targets.

Finally you need to set up some good simple internal controls that will help you monitor revenue and expenses and measure equipment and employee performance.

Now you should be all set to properly evaluate your equipment needs based on your business plan objectives. The kind of equipment, age or capital cost can be significantly different, depending on whether one's business plan orientation includes intercity schedule routes, high end selective packaged tours, international tour contracts, long term contract work, local charters, or any of the other varied services that are offered by the bus industry. 

A good analysis of the market you are planning to focus on will determine the average daily revenues you can expect to earn for your services. Based on a current assessment of the market, this can vary substantially from a low of $500/day for low end tour and charter contracts to around $750/day for international tour contracts and sometimes a $1,000 or more for selective packaged tours. Scheduled intercity routes or contract work such as casinos often can generate high daily revenues and the highest utilization rates - virtually 365 days per year in many cases.

Before trading coaches and/or adding coaches to your fleet, you need to do a thorough cash flow analysis which will help you in deciding whether you can afford to add to your fleet or trade up, and whether you should buy new or used. The price you can afford to pay based on revenue expectations will help you make the decision on what kind of equipment you can safely afford and justify.

It is important to consider the difference between a cost analysis and a cash flow projection.  A cost analysis is used to confirm profitability, while a cash flow projection, that will include monthly repayment schedules, will serve to identify any potential cash flow shortages that may be experienced, particularly in the slower seasons.

One needs to develop a costing model, that includes not only the direct operating costs of a newly acquired model, but also includes a reasonable portion of your company’s fixed overhead, soft costs, sales & marketing costs, and of course a reasonable profit margin.  Obviously this cost model is representative only, and will most likely vary from one region to another, and according to one's particular operation.  It should be noted that this a cost model is not a cash flow projection in that it does not reflect the actual monthly repayment schedule in the purchase of new equipment.  It does, however, account for the interest and depreciation as cost factors.  Further, interest and depreciation, although cost factors, do not affect cash flow, as any interest costs are already blended into one's repayment schedule, and depreciation is a factor only in determining residual value whenever equipment is sold.

So let's turn our attention back to our cash flow analysis.  If one contemplates the purchase of a new coach, or trades up to a newer coach, then one must consider the impact that any repayment schedule will have on a monthly cash flow.  Currently a new coach runs about $350,000 to $400,000.  If highly financed (with a low down payment), the monthly repayment schedule might be as high as $5,000 per month.  Based on a 20-day per month utilization rate, this may translate to $250 per revenue day.  This cost outlay is in addition to your monthly operating costs (i.e. costing model).  The repayment schedule together your operational costs will determine your cash flow outlay.  The question now becomes, based on your revenue projections, what is the maximum repayment schedule that your current or anticipated cash flow can safely support?
If you wish to ballpark your costs in more simplistic terms, you need only consider your direct cost outlay for a single revenue day.  If you add this $250/day finance payment to the cost of a driver, fuel, insurance, and maintenance costs, which works out to about $325/day, it means that you must bring in a minimum of $575/day based on a 20-day utilization rate just to pay for your out of pocket expenses (cash flow).  You will have nothing left to pay for your fixed overheads and your administrative expenses; in other words at $575/day, this new coach will be losing money.

It is vitally important that you focus on the market you want to serve and identify the equipment to properly service that particular market. It is not always necessary to purchase new if you find that a late model used coach can do the work. You should buy the right sized vehicle for the market you target. This is not necessarily always a 45' high end coach.  Most importantly, one should avoid making emotional purchases.  Easy financing may look attractive but one must still make the monthly payments over a long period of time.
If your market is highly price competitive, it may not generate the necessary cash flow over the long term that you will need to support the purchase of a new coach.  If your analysis determines that it would be very difficult to justify the capital cost of a brand new coach, keep in mind that there are still good opportunities today to buy late model used coaches or repossessed coaches at very attractive prices.
Do not minimize the importance of a good maintenance program. A well maintained, reliable, and clean fleet can be very attractive to customers, no matter what the age of equipment. Remember that customer satisfaction is ultimately derived through clean and comfortable seating, well-maintained interiors, and up-to-date passenger amenities, combined with friendly, courteous, and professional levels of service. 
The onus for fiscal responsibility not only rests with coach operators. In future the manufacturers must also show the necessary restraint, and incorporate strict sales and marketing policies within their respective organizations if they wish to avoid the disastrous market situation of the past 3 years.  Manufacturers will be well advised not to create artificially high demand for new coaches through aggressive marketing incentives and easy financing programs. This is irresponsible!

A good equilibrium between supply and historical market demand will lead to long term benefits for both the manufacturers and the operators through more stable prices and higher residual values for used coaches.
On the other hand, artificially increasing market demand for new coaches through short term price incentives will have disastrous financial consequences for both the manufacturers and the operators.
It does appear that the market is finally turning around, albeit gradually. However it may be a long road ahead as there are too many market uncertainties still upon us not to proceed with caution. Global terrorism remains a threat to our economy and to the travel industry, as are a number of other factors such as SARS, rising interest rates, and the price of oil.  Therefore it is advised that great care should be exercised in our business decisions, particularly when committing to long term capital commitments.

The market will most likely not reach the peak it established in 1999, at least in the near term.  There are however opportunities on the horizon that bode well for the future growth of the industry.  In conclusion it remains the continuing responsibility of both fleet operators and manufacturers to maintain an equilibrium between supply and demand in the coming years, so as to avoid those pitfalls that we have all experienced over the last several years.