The bus and coach finance market is facing challenges
very much peculiar to its own sector. Key ones include regulatory
pressures, a demand for new vehicles, and a lack of fleet
management resources. Despite this demand continues apace and
residual values remain strong, as Russell Davies
discovers
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People interviewed for this piece:
Andy Page, the national sales manager for bus and coach finance
at Volvo Financial Services
Rob Hallworth, head of the bus and coach division at Alliance
& Leicester Commercial Finance
Alan Rhodes, sales and marketing director at Scania Finance
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By GlobalDataKeith Sangwin, sales director at Barclays Asset and Sales
Finance
The bus and coach market
This market is dominated by five major players – Arriva, First
Group, Go-Ahead, National Express and Stagecoach. Together they are
responsible for around two thirds of the market share. In the years
since market deregulation in 1985, ownership has been largely
consolidated into these ‘big five’. During the last two decades bus
industry acquisitions averaged around 17 a year, according to the
Bus Industry Monitor, although the main acquisition activity took
place during the mid to late 1990s. This century has been
relatively quieter. Since the 1950s bus patronage outside London
has been declining, according to the Department for Transport,
although there are indications that this decline is being arrested.
Across England as a whole, passenger trips have risen by over 7 per
cent since the turn of the century, reaching a total of over 4bn by
2005, about two thirds of the total of public transport journeys.
Most of this increase was down to London, however. In fact, London
can almost be counted as a separate market to the rest of the
country due to the fact that it is the only regulated market in the
UK, with routes under the purview of Transport for London.
Regulation and technical development
The industry has had to contend with various new regulations
which have necessitated technical developments in the vehicles. The
1995 DDA led to the introduction of new low floor buses to ease
wheelchair access, for example. Buses are also at the forefront of
the drive to reduce carbon dioxide emissions in the fight against
global warming. European regulations for reducing pollution from
heavy-duty engines are known as Euro I to Euro V. Currently bus
operators have to comply with Euro IV regulations. One of the
developments arising out of the need to reduce carbon dioxide
emissions is the hybrid bus. This vehicle uses a combination of a
conventional diesel engine and an electric motor. This combination
is said to reduce polluting emissions by at least 30 per cent,
compared with a regular diesel bus. Half a dozen single-decker
hybrid buses have been operating in London since last year, and in
March this year London also saw the introduction of the world’s
first hybrid diesel electric double-decker. Bus operators have also
had to develop digital tachographs, moving away from the current
manual tachographs, in order to automate the measurement of
drivers’ time, which has also been the subject of recent
regulations.
Replacement cycles
Buses have a fairly long life. According to Andy Page, the
national sales manager for bus and coach finance at Volvo Financial
Services, they can last for at least two, if not three revolutions
of an asset finance contract. With contracts typically five to
seven years, this means that buses can have a working life of
around 15 to 20 years. But there are shorter replacement cycles and
this can be a consequence of whether the market is regulated or
unregulated. In a heavily regulated market such as London’s,
replacement cycles are much more frequent, according to Rob
Hallworth, head of the bus and coach division at Alliance &
Leicester Commercial Finance, while in other areas, local
authorities will specify a maximum age for a vehicle. There are
also increasing pressures to bring in newer vehicles, and while
operators have been known to run vehicles that are 15-20 years old
on school contracts, this is one area that is coming under greater
scrutiny. Health and safety issues, for example having seat belts
in the buses, and environmental issues are being added to the mix.
“From the local authority’s point of view, it’s no longer just down
to price,” says Hallworth. “It’s really down to the quality of
product and the quality of service the operator is providing. By
that I mean that they can’t just turn up with a 20-year-old
vehicle.”
Greater professionalism
In the last few years, Page has seen an increased
professionalism amongst the bus and coach operators, as has Alan
Rhodes, sales and marketing director at Scania Finance, especially
in the small and medium-sized companies. They are basically
reaching the same level of expertise as that exhibited by the
finance directors of the large bus companies. Younger family
members or people new to the marketplace are coming in either with
a university education or a better general level of education.
Often the degrees are in transport-related subject areas. Keith
Sangwin, sales director at Barclays Asset and Sales Finance, sees
this as a necessary response to market demands. There is so much
more they have to deal with, from compliance with the DDA, to all
the developments around lower emissions targeting, such as
switching to more environmentally friendly fuels and the
development of hybrid bus technology. In addition, they also have
to get to grips with such issues as customer satisfaction, which is
being monitored by the government much more closely now. Says
Rhodes: “In days gone by it used to be a guy who liked driving
buses who ran the business.” Today it is professional managers.
Market experience and specialisation
Page, Rhodes and Hallworth all believe that lessors with
specialised bus and coach financing teams have a distinct advantage
in the market. While it is not necessarily too complicated for
non-specialist finance companies to enter this market, argues
Hallworth, they can have difficulties if they do not have the right
levels of expertise when it comes to disposing of assets. As part
of this market specialisation, it is also beneficial to have an
in-house used vehicle sales operation, he believes. Page agrees,
and points to Volvo’s own used vehicle sales centre in
Loughborough. Rhodes contends that it is important to understand
how the vehicles work and how they are operated, especially when it
comes to residual values. There are material differences, he says,
between buses operated on long haul routes between cities, on stop
and start routes in urban areas and on journeys in rural areas.
Sangwin can see both sides of the argument, but believes that
specialisation does not just come from having a dedicated team. His
relationship managers, he argues, have developed just such a
specialism through building up portfolios of bus and coach
operators and by maintaining regular contact with them.
Residual values
Bus residual values are still strong, according to Page, and the
few vehicles they do get back tend to be snapped up very quickly.
In his experience, these vehicles have often already been sold –
via word of mouth – before he has had a chance to tell his used
vehicle sales team. Volvo equipment is very good in terms of
second-hand value, says Page, and Volvo’s used vehicle sales team
generally sells over 200 vehicles a year, although not all of these
are manufactured by Volvo. The ability to set high residual values
is a function of both market expertise and having a used vehicle
reselling operation, says Hallworth. “The fact that we can resell
the asset ourselves means that we can put in stronger residual
values for the transaction and that in itself means a more
competitive rate for the customer.” Other funders who do not have
such direct routes to market will have to rely on selling vehicles
through another approach, for example through a dealer, who will
demand a share in the deal. This of course means that any residual
value will have to take into account the dealer’s share and any
transaction rate will have to reflect that share.
Hire purchase v operating lease
Currently, hire purchase is by far the most popular product in
the bus and coach market, and has been for some time now. There
still seems to be a preference on the part of operators to own
their vehicles rather than just renting them. In some cases, this
preference stems from a lack of understanding of the structure and
benefits that other leasing products offer, according to Hallworth.
“An operating lease has significant cash flow benefits for an
operator by virtue of lower rentals,” he says, “and it’s
particularly beneficial where an operator is buying a vehicle for a
specific, time-limited contract, after which he may not need that
vehicle.” Hallworth has seen an increase in operating lease
activity but he says it is still dwarfed by hire purchase, which is
popular across the whole range of operators, regardless of size.
Larger operators, however, have been looking to use operating
leases when there has been uncertainty over long term ownership of
the asset. An example of this is in the London market of four to
five years ago where operators were being awarded fixed term
contracts by Transport for London, and there was no guarantee the
contract would be renewed at the end of the term. There is little
point in buying a vehicle if it is not going to be needed for its
full working life.
Fleet management
The outsourcing of fleet management does not appear to be much
of a feature in this market, unlike in the car sector. The bigger
operators tend to do their fleet management in-house. Obviously,
all bus and coach operators would like to fix the cost of running
vehicles as far as possible, and this could be done through a fleet
management service, and there may well be opportunities at the
larger end of the market where issues such as vehicle ownership
have less traction. There was a period about four or five years
ago, says Rhodes, when the idea of fleet management came to the
fore, but then it rapidly dropped off the radar again, although of
late there has been further interest in the idea as operators begin
to think about the possibility of outsourcing their fleet
management requirements. However, it is still very early days. It
is probably fair to say that outsourcing fleet management is very
much in the early conceptual stage as far as the bus and coach
leasing market is concerned. It is also difficult to predict
exactly how much of an appetite there is for it in the market.
