Management & Operations

Surviving the Motorcoach Rate-Cutting War

Posted on June 1, 2005 by Janna Starcic, Senior Editor

In a world where consumers drive out of their way to find the cheapest gas prices, it’s easy to see how price has become the deciding factor when it comes to shopping. In the motorcoach industry, it’s no different. The existence of cut-rate operators and stagnant pricing structures has helped fuel a low-bid pricing mentality and dramatically devalued the industry’s services for years. With current economic conditions becoming more favorable, motorcoach operators have a great opportunity to take control of the market by raising prices and educating consumers to value service and safety above price. Industry voices have varying opinions on the topic but are unanimous about one thing — something must be done to stem the profit losses. Curbside operators
Lowball operators can take many forms. In the line-haul market, they are known as curbside operators, small businesses, often owned by immigrants — primarily Asian — operating routes in the northeast corridor. Bob Schwarz, executive vice president of Peter Pan Bus Lines in Springfield, Mass., says he has seen these curbside operations for the past eight years. They started as small services using vans to transport Asian Americans to and from New York City and grew into full-fledged, multicultural bus services. Schwarz says these companies mainly use the Internet to book customers drawn to the cheap prices, particularly college students. The name “curbside operator” refers to the makeshift tactics formerly employed by these companies, which would routinely pick up customers on street corners and run them back and forth between Boston and New York, says Schwarz. Meanwhile, intercity bus companies such as Peter Pan and Greyhound were required to operate from an intermodal facility. “You have to pay gate fees and departure fees — approximately 33% of every dollar — either to South Station in Boston or the Port Authority in New York in rental fees,” he says. Instead of working out of the intermodal stations, curbside operators would pick up customers from Boston’s or New York’s Chinatown, charging only $10 for the Boston/New York trip, while Peter Pan was charging around $25 to $30, Schwarz says. With the money saved by not paying intermodal facility rental fees, curbside businesses had no trouble maintaining disproportionately low fares. According to Schwarz, two companies in particular, Fung Wah Transportation Inc. and Travel Pack dba Lucky Star Bus, were working street corners and running aggressive hourly services. “You could ride to New York for $10, so it became a phenomenon,” he says. “They really captured market share.” Provoked by the fact that the carriers were not complying with city ordinances to operate out of an intermodal facility, Peter Pan brought the issue to city officials, the Massachusetts Bay Transportation Authority and the state Department of Transportation. Curbside carriers were forced to comply, says Schwarz, and have since raised their rates to compensate for the rental fees. “Since they’ve come back into South Station, we’ve recaptured the market share from Boston to New York City, because now they have to play by the same rules.” Enforcing the rules
In 2004, the Federal Motor Carrier Safety Administration (FMCSA) formed a multi-agency task force to look into the curbside carrier problem. “We’ve put operators on notice for these violations, and they’ll be penalized up to $10,000 per trip if they fail to fix them,” says the FMCSA’s Phil Hanley, who discussed the issue in a presentation at the United Motorcoach Association’s (UMA) annual Expo last February. According to Hanley, most of the carriers’ violations of FMCSA regulations occurred in driver drug and alcohol testing and hours-of-service compliance. Also at the UMA meeting, Hanley reported that the task force had conducted 14 compliance reviews and prepared 10 enforcement cases. Some still aren’t convinced that enough has been done. “The federal agency is not being aggressive enough,” says American Bus Association (ABA) President Peter Pantuso, who was quoted on the subject in the Jan. 28, 2005, edition of the Wall Street Journal (WSJ). The newspaper, which ran a piece about Chinatown bus carriers competing with Greyhound and Peter Pan, noted within the story that one bus owned by Lucky Star continued to operate with a cracked windshield and inoperable speedometer, both of which are safety violations. “Every time we confronted one of these carriers, they did what was necessary to become authorized,” Jim Lewis, an FMCSA spokesman told the WSJ. Despite actions taken by the FMCSA, curbside carriers are still violating regulations, especially in terms of ADA compliance (see sidebar below), says Schwarz, who notes that carrier Fung Wah’s buses are not equipped with wheelchair lifts. In contrast, new Peter Pan coaches are lift equipped to meet ADA requirements, at an extra cost of $33,000 per coach. In May 2005, the ABA initiated a meeting with the chief counsels of the U.S. Department of Transportation, the Federal Transit Administration and the FMCSA to discuss the non-compliance of curbside operations. “We wanted to make sure that the DOT and its enforcement capability are putting everybody on the same plane,” says Pantuso. “Everybody’s got to follow the rules and regulations, not only so that there’s a level economic playing field, but so that the customer is getting the same level of safety and protection regardless of the company they use.” Schwarz, who was present at the meeting, says he is discouraged by the federal response to the problem. Citing ADA violations, Peter Pan filed an objection to an April 2005 request by Fung Wah to operate a new scheduled service between Boston and New York. Despite the protest, Fung Wah was issued operating authority in May 2005. Through its attorney, Peter Pan issued a written complaint to the FMCSA, which has not responded. The protest appears to have fallen on deaf ears, says Schwarz. Out to survive
While the issue of cheap curbside operations and their non-compliance with regulations is in federal hands, the issue of lowball pricing remains firmly in the lap of the motorcoach industry. Rock bottom prices, while a staple of curbside operators, are also prevalent throughout the tour and charter industry, set by those commonly known as lowest-bid operators. The existence of lowest-bid operators has been harmful to the motorcoach industry, says UMA President Victor Parra. “It’s been devastating. Revenues have been flat at best when the cost of doing business has gone up tremendously in the last 20 years.” Operator revenue has remained flat since 1982, averaging between $112,000 and $125,000 per coach per year, he says. Meanwhile, the cost of a new coach increased about three times between 1982 and 2000 to an average of over $350,000, according to UMA research. One possible explanation for the existence of lowball pricing is the notion that some operators price just to survive rather than to turn a profit. “I think it’s just a cash crisis,” says Gale Ellsworth, president and CEO of Trailways Transportation System. “People think they have to have all of this equipment, and then they get worried about how to keep those coaches running so they charge less just to keep the cash flow coming in.” The glut of new entrants into the business, creating more competition for market share, is also partly to blame. “Anyone who wants to can buy a bus, get insured and apply for the $350 license,” Schwarz says. But how many new entrants can the market accommodate? “What is the demand for our product, and are we building too many buses or consuming more buses than there’s market growth to keep up with?” says Dave Bolen, owner of New World Tours in Bristow, Va. Ellsworth agrees. “Maybe if we didn’t have so many operators with maybe more equipment than they need, this could be solved.” Trailways offers a program for its network members allowing operators to swap drivers and pool together equipment when needed, so operators don’t have to take on more responsibility or payments than they can handle during slow periods, she says. Unnecessary sacrifices
In some instances, operators that offer lowest-bid pricing are likely shirking some other part of their business in order to do so. “Some people may think they are the next JetBlue or Southwest Airlines when it comes to pricing, but in reality they usually are just cutting some other vital area of the business,” Bolen says of the lowball operator issue. Vital areas in which these operators may skimp include employee benefits and medical coverage, or other areas that affect the long-term health of the industry, he says. Skimping on employees is not something Gary Pard, vice president of operations for DeCamp Bus Lines in Montclair, N.J., takes lightly. “We are a premium price company,” he says. “We are also a union shop, so I’m paying close to $30 for my line operation, and for my charter I’m in the $15 to $17 per hour bracket.” Most cut-rate operators are paying $9 an hour with no benefits, he adds. “The cut-rate operator can run cheaper, but they cut the price so low that they’re only concerned about making payday and paying for insurance and fuel.” Other ways cut-rate operations can exist on such razor-thin margins is by not properly maintaining equipment. “There are companies out there that don’t have a yard where they can keep their buses, so they park wherever they can,” says Tom Giddens president of Garden Grove, Calif.-based Pacific Coachways Charter Services Inc. Some companies don’t even have their own maintenance facilities, so they rely on the dealership to maintain their vehicles, he says. Customer is always king
For some operators, matching a competitor’s lowball pricing to keep a customer is just as harmful. While the customer may be king, this aspect of the motorcoach industry has done more harm than good. “We have created the situation that we are in today,” says Lynn Smedley, owner of Atlantic Coast Trailways in Hagerstown, Md. “The industry has been too customer driven for a long time, and it does whatever the customer wants.” Lowball operators are training the public to think that that’s all trips are worth. Smedley says that he has developed a pricing structure that he sticks to. “I never negotiate a price.” Although he may lose 10% of his customers a year due to pricing, he is comfortable with that, he says. If DeCamp’s customers threaten to take their business elsewhere, Pard says he let’s them go, but says they eventually come back and say they weren’t satisfied with the competition’s service. “We try to sell service and quality. That’s what we sell and that’s what we stick by.” Some feel that the dilemma of customer’s focusing on price is not unique to the motorcoach industry, and is instead a symptom of a greater societal trend. “I think the general public is so conditioned to name its own price, and I think the advent of Internet shopping has a lot to do with it,” says Ellsworth. Another reason some operators offer services at unreasonably low prices is because they don’t know the true cost of doing business. “If you buy a hot dog for a dollar and sell it for 90 cents, you can sell a bunch of them, but how long are you going to stay in business?” says Pard. ABA’s Pantuso agrees, “There are many hidden costs that people don’t see or don’t think about until they are faced with them,” he says. “It’s easy for any person, regardless of what the business is, to know the bigger cost picture, such as payroll, fuel and equipment costs. But that doesn’t take into consideration extra driver costs to meet the hours-of-service requirements and the depreciation costs on the equipment.” Operators need to be cognizant of often obscure aspects of the business that will affect its future, particularly lifecycle of equipment — the air conditioner, the engine, components, tires — and factor in what it will cost to cover the replacement of those items. “Those are the kinds of things that I think a lot of business people, and not just coach and bus operators, don’t think about,” Pantuso says. Educate consumers, operators
Education is one way to curb the problem of rock bottom pricing by operators. Both customers and operators need to understand the stakes to control the situation. “I think the industry as a group, whether it’s the ABA, UMA or the industry at large, needs to help educate all operators so that they are good business people as well as good operators,” Pantuso says. “That way they will know the costs of business and be prepared to deal with them.” “Part of our job is to convince people why our prices are higher than somebody else’s,” says Giddens. When customers tell Giddens they have chosen a competitor with a lower price, he cautions them to look at the company’s facilities. It’s important, he says, to encourage people to be sure the company they are going with has a full operation for safety purposes. Customers need to look into a company’s safety record to make sure it has adequate insurance levels, says industry insurance expert Jack Burkert. To that end, the UMA offers a consumer checklist on its Website that informs consumers of what to look for in a potential trip provider. The list includes proof of operating authority, licensing, insurance, USDOT safety rating, proof of vehicle’s mechanical inspection and existence of subcontracting agreements. Finding selling points
While educating customers is key, learning how and what to sell to the customer is just as vital. “Selling price educates the customer to only look at price,” says the UMA’s Parra. “If you sell value, then you educate your customers to look for value.” People are beginning to travel again in record numbers, and an improved economic environment, coupled with high fuel prices, puts operators in a good position to sell overall value again. “The idea of the cost of fuel going up is an opportunity for us to really get people out of their cars and onto coaches for all sorts of experiences,” Parra says. Operators need to create opportunities for customers. “Instead of having golfers hop in their cars to caravan down to Myrtle Beach — a big destination here on the East Coast — you can take that opportunity and say, ‘Hey, why spend the money on fuel? Hop on a coach and we’ll make a great experience for you,’” Parra adds. “If we get people excited about the experience, price becomes secondary.” Although it won’t happen overnight, Parra believes that the more operators emphasize a quality experience, the more the industry will be able to introduce value into the thinking of customers, instead of price. Because value is based on the customer’s needs and wants, it is important to learn about the customer first. The best way to learn about a customer, Parra says, is to ask. “Ask open-ended questions to start dialogue, get details, determine their needs and preferences.” Coach operators also need to distinguish themselves in the marketplace to standout from a lowball operator. “I try to find a way to be as different as I can be from the people in my market, my competitors, so I can justify to the consumer paying me a little bit more,” New World’s Bolen says. Various ways operators can set themselves apart from the lowball operator include marketing the whole experience of a coach trip, promoting safety record and performance history and emphasizing the quality of service, employees or equipment. A shift toward raising prices
Once customers are sold on the value of the motorcoach industry’s services, they will be willing to pay more for them, and operators can begin to incorporate pricing structures that are profit based and in tune with current costs. According to Graham Foster, international speaker and author of “The Power of Positive Profit,” raising prices is the most effective way to increase profit. The three ways to change a business is to sell more, cut costs or change prices. “Most people in the motorcoach industry book coaches more often or cut costs. Whereas, mathematically you can prove that price is the strongest factor,” he says. Foster, who was a keynote speaker at Trailways’ 2004 annual conference, says the minimum amount motorcoach operators should raise their rates is with inflation (currently 1.5% U.S.). “When I asked operators how much they were charging per day for a coach, their answer was $600,” he says. “When I asked them how much they would be charging in 10 years, they said $600.” Because of the competitive nature of the business, operators are fearful of losing customers if rates are raised. But raising prices is an important part of balancing the entire business, says Foster. (See sidebar on page 34 for creative ways to boost profits.) During his presentation, Foster recommended that operators set a goal to boost sales by 1%, reduce costs by 1% and raise prices by 1%. “If you balance these three facets, you will find enormous increases in profitability down on the bottom line,” he says. Like the rest of the television-viewing public, motorcoach operators are constantly bombarded with commercials boasting lower-priced products, which reinforces the notion that cheaper is better. Foster compares General Motors’ (GM) current employee-priced sales campaign to the motorcoach industry by saying the focus on lower prices will only increase sales volume and not help the company at all in the long run. “Within a month or two you’ll find out that General Motors, having sold a lot of cars, will have made no money,” says Foster. “That’s the problem, they are preoccupied with sales volume.” Even companies with the best intentions, if preoccupied with price or sales volume, can become lowballers. For example, when large companies such as GM begin employing price-trimming tactics, the majority of people will begin to believe that the way to run a good business is to cut prices, which opens the door for more lowball businesses. “A lot of lowball operators are just nice people who never set out to make a profit,” says Foster. “They only set out to make a living, and that drags the whole industry down.” Markup vs. margin
Another business hurdle Foster sees in the industry is the confusion between mark-up and margin. “People think if you add 20% to something, you make 20%,” he says. “But you don’t because you divide 20 by the sale price of 120, not 100, and you get 16.7%.” This discrepancy can have a dramatic impact on the bottom line. “If there’s only 10% in your bottom line and you’re running with a 40% gross profit, you make 28.2%, so you don’t even have enough to pay your bills, and your bottom line is gone.” Adding a fuel surcharge to ticket prices is also essential for boosting profits to updated levels. While researching a presentation for the American Trucking Association, Foster says he asked to be referred to a company with good finances. “This trucking company was making 67% gross profit margin, which is unbelievable. And it was on account of their high fuel surcharge.” All motorcoach operators should be doing the same, he says. “It’s not a happy story to tell the customer, but it’s a necessary story.”

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