Wednesday, 11 March 2009

Business Opportunity - UK Public Transport – Object Lessons for teaching US Greyhounds to Chase the UK's National Rabbits

These recessionary times - predicated as "the Age of Turbulence by Alan Greenspan - creates the harsh conditions that not only gives rise to sector consolidation and renewal (as we see with Autos) but for a period creates distinctive winners and losers.

The collapse of the private vehicle market has obviously sent global rictures of pain felt by the auto-supplier, manufacturer and dealer sectors. Weakened disposable income through all levels of the social strata has affected the public en mass and so alter their mobility behavior. Investors and markets instinctively recognise that in such straitened times Porter's Five Forces play-out more fervently, and the Substitutional Effect takes hold. As the depth of pockets shrink so the consumer downgrades his/her normative (pseudo-luxury) habits, substituting with cheaper products and services.

Here in the UK the most obvious battleground is in food retailing, the lower-end stores (Asda, Morrison, Aldi etc) stealing custom from the mainstream (Sainsburys, Tesco etc), but more subtle has been the shift in mobility purchase patterns. As new car sales sharply retract to record modern lows, so replacement buyers are either a) looking to better value used car purchases, b) not replacing at all if a 2nd family car (of lesser utility), c) replacing a commuter car with maybe a low-cost motorcycle, and lastly more amenably d) looking to public transport options.

Thus across the nation public transport has been the counter-point beneficiary to the shift in consumers' mobility needs (NB 'needs' replacing pseudo-luxury 'wants' or 'desires'.
The UK Government, as part of its drive towards reduced CO2 and the normative 'social-contract' has been proactive in PR and policy-spending, perhaps best regionally illustrated by the London example under the previous and current Mayors. For all their criticism of empty day-time running, London's swarm of European-made 'Bendy-Buses' added capacity and so mobility ease for the city's commuters at rush hour periods and weekend visitors.

That story of regional bus growth has been similar up and down the country, providing a greater business rationale for the bus (and rail) operating companies. Just as we see consolidation presently in Autos, during the Autos boom-time there was a period of rationalisation for that once plethora of bus operators.

Perhaps the greatest protagonist/activist was FirstGroup, an Aberdeen based FTSE 100 enterprise led by Sir Moir Lockhead, that grew rapidly in the days of operator-deregulation, abundant liquidity/leverage and ambition. After an original MBO and incarnations as GRT and FirstBus (after M&A with peer Badgerline), it became FirstGroup when it encompassed rail aswell after the privatisation and break-up of British Rail (including passenger & freight) and operates a 'light-rail' tram service in London. Today it is a sizable empire that spans the Western Hemisphere, across: the UK, Ireland, Sweden, Denmark, Germany, Canada and the USA (having sold-off its previous Hong-Kong interest).

With competitors such as StageCoach and Arriva, perhaps the greatest (bitter?) rivalry is with National Express, having been questionably banned from competing against for the East Anglia rail franchise.

Given the size, dynamicism and complexity of the UK public-service mobility market, FirstGroup will want to maintain as great a hold as possible given that massive revenue stream and theoretical relative stability of the city & regional UK market.

Changing social trends and shifting government social policy are growing opportunities in the public mobility sphere, perhaps the most high-profile currently being the growing propensity for longer-distance travelling school-children. For the UK, inter-school 'allied' teaching and the growth of extra-curriculum activities (eg sports events, educational excursions and increased school holiday trips) requires a greater capacity for 'student transit'. That once small but burgeoning market was previously fed by private companies, often private enterprise consisting of little more than a single-person operator or perhaps couple running a small fleet of 2-5 mini-buses. But that amateur style, convenient and lucrative at the time for small scale operators has passed, safety and responsibility issues arose, semi-piecemeal school transportation budgets altered and greater 'full-service' demands have arisen. A time of re-orientation, privateer retraction and sector consolidation.

To summarise, the model for UK student transit is presently undergoing continued transition toward a US style template, one that offers new opportunities for larger scale enterprises throughout its value-chain - from mini-bus manufacture (as described in the previous LDV item dated 25.02.09) to fleet operation for the very well placed FirstGroup.

As stated, First Group own US interests. Crucially these interests include perhaps the 2 most iconic brands in the US bus sector. And given the cultural influence the US has had on the world via TV & Hollywood, more importantly, both these brands are indelibly imprinted into the psyche of the US & UK public at large. These 'priceless' assets are of course:

1) Yellow School Bus (previously operated by Laidlaw under the FirstStudent division)
2) Greyhound Bus Lines (previously owned by Laidlaw

[NB Laidlaw acquired by FirstGroup on 07.02.07]

Infact, the UK has been adopting a US style 'school-bus' service for some time, as early as 2000 infact, with FirstStudent UK - a subdivision of FirstStudent, migrating the template from its US parent for Hampshire & Dorset schemes. As such, FirstGroup has been able to transfer and exploit the years of embedded operational learning endemic within FirstStudent USA and the Laidlaw Company - possibly including influence as a political lobbyist (an almost formal and de facto activity in the US). Instead of starting from scratch, FG has utilised its own large regional bus service infrastructures as the 'linch-pin' of the new service.

As of Q308, 185 UK full-size Yellow buses had been running in selective areas nationwide as part of an exploratory scheme that started 5 years previously. To paraphrase Nicola Shaw (MD of FirstBusUK) "FG's survey results from Yorkshire indicated that a high proportion (85%) of 1500 parents surveyed preferred the improved security of the SchoolBus idea". Various business models have been explored ranging from 100% LEA (Local Education Authority) financing through to wholly private payments by parents - estimated up to about a 5 Pounds. [However the exact criteria that gave rise to the 85% preference was not reported - did Yorkshire operate the no-fee model?] A Government Commission set up by David Blunkett in mid 2008 is due to report soon, but it seems almost inconceivable that the government will not expand the scheme given the massive funding now being appropriated to school-based social-policy infrastructure projects.

[ This is also the mentality of the UK van-maker LDV's Board, given it's recent niche marketing of yellow school mini-buses for the UK]

Juxtaposing FG's current full-size SchoolBus against LDV's small-size mini-bus highlights the shifting-sands of the school transportation sector. Those large buses are useful for high-mileage, high-capacity pick-up rural areas, but a very different product is needed for suburban and urban fleets ranging from midi-size (ie the Hoppa Bus) to small van based minibuses. Al the same, there's a lucrative and growing business model for respected and credible operators like FirstGroup which provides a non-cyclical and expanding element to its holdings; adding yet further 'defensive' properties to its already 'defensive' investment nature for lower-risk, long term investors.

That investment mindset is all the prevalent given today's dour times, and so companies like FG will have to consider exactly how it might best perform under such conditions, maximising their 'take' from the on-going headwinds.

As such if the recession/depression becomes more 'long-U', 'W' or even 'long L' in character, stretching into the mid and long-term of 3-7 years, would it not prove beneficial for FirstGroup to exploit the Greyhound brand and, just as it has done with 'Yellow School Bus', bring that US icon to the UK. It would follow in the footsteps, or rather tire-tracks, of Airstream of recent years and help further cement US-UK business, social & political relations.

Greyhound Lines has a certain mix of both romanticism and affordability. Indeed part of its mystique (for foreigners at least) has been in the past the (only) transport of choice for those 'down at heel'; ranging from dust-bowl migrants in the 1930s, the Beatniks of the 1940s & 50s and even stylized 'down and outs' such as Dustin Hoffman's Rizzo in the 1969 film Midnight Cowboy heading for 'a better place' (ie Florida). In short Greyhound Lines is bound together in the fabric of Youth Culture and the American Dream.

That youth culture is being targeted under FirstGroup in the US, directing advertising toward 18-24 year olds and the large and burgeoning Hispanic community. And at long last, after years of 'out of character' updating, its livery is now being returned to reflect its glory-days of the 1950s using 'aluminium gray/grey' and accent blue and white along with accordant modernisation of bus-terminals and depots.

Add together the tightened travel budgets of the UK, the global 'perceptional reach' of the Greyhound brand and its revitalisation and there could well be an argument set forth for FG to introduce the Greyhound brand to the UK, relating to the modern young Beatniks who travel widely & frequently (as seen via EasyJet & Ryan Air) given their lack of responsibility aswell as elements of the lower-end over-60s 'Saga-set' who as Baby-Boomers well recognise the Greyhound allure. And beyond all those others who seek cheaper travel than short-haul air, expensive rail or indeed relatively expensive national UK coach-travel offers.
Could Greyhounds catch the ' Rabbit-ear' coaches of National Express? The 21st century equivalent to the early 20th century Charabang?

The UK public bus scene is set for a period of learning and possibly a 'day at the races'.