What High Motorcoach Performance Looks Like

Martin Romjue
Posted on July 12, 2019
Motorcoach financial and operational consultants Jim McCann and Tom Holden review key performance indicators for bus operators in March during the International LCT Show in Las Vegas. (LCT photo)

Motorcoach financial and operational consultants Jim McCann and Tom Holden review key performance indicators for bus operators in March during the International LCT Show in Las Vegas. (LCT photo)

LAS VEGAS, Nev. — While your customer responses may provide a meaningful and personal measure of success, nothing sizes up your business performance like the numbers.

On that front, motorcoach operations collectively, while staying afloat, are confronting some challenges on the way to healthier profit margins, according to a seminar at the International LCT Show on March 26 titled “KPIs and Best Practices of High-Performing Motorcoach Operators.”

Led by Jim McCann, a consultant with Spader Business Management, which hosts 20 Groups for about 70 members, and Tom Holden, co-owner of Bus Advisors and a former operations manager at Rose Chauffeured Transportation in Charlotte, the session covered standard profit and loss benchmarks on key aspects of operations.

From a general consulting standpoint, a business is either management-driven or market-driven. Market-driven organizations tend to ebb and flow with the market whereas management-driven ones see consistent productivity and high performance, McCann told the audience of operators.

“The pressure we all feel on margin, the rising expenses, and the cost of goods, really has an impact on organizations,” McCann said. “The speed of change is just so rapid. Change is causing us and forcing us from a management point of view to look at our business and understand what's happening.”

For a bird’s eye view of the motorcoach business, McCann listed several challenges facing operations: Hiring, training and retaining employees; managing assets to maximize cost per mile; effective sales and marketing; succession planning; pricing strategies; gross margin pressure; rising expenses; legislative and regulatory issues; and technological change.

Related LCT article: A Walk Through Coach Profits

Industry Trends: Sales & Costs Up

When looking at numbers, operators need to focus on profits, efficiencies, budgeting, company structure, and benchmarking. Based on Spader 20 Group members who have been with their groups for at least two years, McCann cited the following numbers:

  • The motorcoach industry is up 7.6% in sales from 2017 to 2018, midway among other industries represented.
  • Gross margin, sales minus the cost of goods, is up 7.4% for the industry. Expenses, however, were up 7.7%.
  • The operating net dollars among coach operators in 2018 was 8.3%, compared to 8.6% the previous year.
  • Smaller fleet operators, defined as companies with less than $8 million in revenues, saw a decrease of 27% in operating net in 2018 compared to 2017 with a net of 8.6%. Larger fleet operators saw a net of 8.3%, rising by 4% compared to 2017.

McCann said the company survival benchmark net profit is 10%. “If we're not making 10% net operating income against our gross margin, then we are not surviving,” he said. “What's really happening is our sales, margins, and available income are all increasing, but our expenses are outstripping that.”

Tom Holden (L) of Bus Advisors previously worked as operations manager for Rose Chauffeured Transportation and Rose Charters in Charlotte, N.C. Jim McCann is a consultant for Spader Business Management, a host of 20 group roundtables for motorcoach operators. (LCT file photos)

Tom Holden (L) of Bus Advisors previously worked as operations manager for Rose Chauffeured Transportation and Rose Charters in Charlotte, N.C. Jim McCann is a consultant for Spader Business Management, a host of 20 group roundtables for motorcoach operators. (LCT file photos)

How Much Money Operators Make

In a second set of slides, McCann focused on the performance of all Spader 20 Group members in 2018. In the groups, operators supply their financial data on a monthly basis, which is compiled into data reports.

The monthly reports list the average of all operators to rank the top and bottom 20% in net operating income. “We’re here to focus on what the top 20% are doing, and what are the practices of the high performers? What does that look like and what do those numbers look like?”

  • Using 10% net profit as the benchmark, the top 20% of motorcoach operators in the 20 Groups had an expense ratio of 77.8% or a net of 23.2 cents, 23.2%. “So out of every dollar of the gross margin that they bring in, they keep 23.2 cents of that dollar. And that's what high performance looks like in the motorcoach industry,” McCann said.
  • Smaller fleet operators, defined as companies below $8 million in annual revenue, had an expense ratio of 89.7% (10.3% net) while larger fleet operators,$8 million+ in annual revenues, had an expense ratio of 91.2% (8.8% net). McCann attributed the larger group’s higher expenses to personnel costs related to expansions (44.5% v. 40%).

Benchmarking Expenses

McCann breaks expenses into the categories of personnel, maintenance, transportation, and variable revenue equipment financing, and other fixed expenses.

What financially successful operations have in common is they adhere to benchmarking regardless of what individual components look like, McCann said. All benchmarks are measured against available income (A.I.) or gross margin dollars.

“They all have 100% of their gross margin available to pay their bills. So what we do in looking at our benchmarks is we divide. We look at the actual personnel expense and divide it into the gross margin dollars to get a clear picture of percentage of expense ratio.”

Personnel Expenses

In looking closer at personnel expenses, McCann pointed out how the average fleet operator spends 43.5% of gross margin income on personnel, whereas the upper fifth most profitable operators spend only 36%.

In calculating personnel benchmark costs, Spader includes all employees and their employment related taxes, 401(k) plans, health insurance, etc. Among those expenses, the costs of health insurance and benefits are rising the fastest.

Based on data from the 20 groups overall, personnel expenses for smaller-fleet operators rose from 38% in 2016 to 40.1% last year, and for the larger fleet operators, from 40% to 44.5%.

“A lot of that has to do with (company) footprint size, but a lot of that also has to do with what we're paying drivers and technicians because those folks are so critical to our organizations and are costing us more money,” McCann said.

“One commonality across all industries is if you spend 50% or more of your gross margin on personnel, you'll never hit survival net. It will never happen because you can't cut low enough to do that. Approaching that 45% for those large operators is really concerning me, and their ability to sustain high performance. And I wonder what we’ll have to do in order to shift that for them.”

Based on Spader’s analysis of driver retention rates, the average operator keeps about 77% of drivers for at least one full year.

Driver, Technician Wages

Regarding drivers’ wages, over the last three years the average for all 20-group operators has risen from 23.4% to 24.5% of gross margin. In the top fifth of operators, the wage percentage rose from 19.4% to 21%. For the bottom fifth of performers, it went from 24% to 27.5%.

“We're really seeing drivers' wages increase. And we have to understand we may need to give up some of our operating net income or figure out how we can get our rates higher to help pay for that.”

McCann said he understands why many operators are planning to raise driver pay to remain competitive in a tight job market. “But if we do that, then where do we take it from? Because we don't want to work harder and make less of money. We have to figure out what the formula looks like.”

Technician wages are rising faster than driver ones. Among the top fifth of performers, those wages rose from 3.5% to 5.5% in the last three years. “We're going to continue to have that difficulty in hiring mechanics because you're competing against the whole world. We're competing against transit and a lot of other industries for those technicians. It will be another challenge we face as we try to gain productivity and efficiency within our shops.”

Pricing Strategies

McCann attributes the top fifth’s success to pricing strategies. “That’s really the story. You'll notice the top 20% really are dragging expense ratios lower, not because they're spending less money but because they're really dragging their gross margin higher through variable pricing and understanding what that pricing strategy looks like, implementing it, and managing against that.”

McCann advised operators to practice cost-line pricing, where you know your costs and adjust rates during nonpeak times to reach an acceptable gross margin. It also means knowing how high to take your rates during busy peak times.

“We also know that when we're really busy, we can go as high as we want. As high as the market will bear is where we need to go. And the real question is do you know your cost and do you know how low you can go and be profitable in the nonpeak time? That's the blend of pricing that becomes so critical. And that's where the top 20% just shine when it comes to the pricing structure.”

Maintenance Costs

The average operators spend 7.6% of gross margin on equipment maintenance, Among the top fifth, the expense is 7.1% compared to the bottom at 8%. That category would include contracted maintenance labor, parts, accident repairs, road service, tires, garage and shop supplies, cleaning supplies, and sublet cleaning.

Among smaller fleet operators, equipment maintenance costs fell during the last three years from 9% to 8.8%. For larger-fleet operators, it went from 8.5% to 7.2%. McCann attributed the steeper decline for larger fleet operators to newer fleets that require less repair and maintenance.

To get an accurate handle on cost outlays, operators should factor in the maintenance personnel and equipment costs in evaluating the efficiency of the shop.

That combination is the second largest expense for a motorcoach operator, which should prompt them to look at how their company is structured and the workflow of the shop.

Warranties and repair quality can also factor into such costs, especially when operators typically keep motorcoaches for 20 years or longer, Holden said.

In looking at newer versus older and used coaches, McCann found that maintenance costs spiked once warranties expired. “The technology is one of the things causing equipment maintenance to be higher.”

Transportation Expenses

The average operator in 2018 spent 13.3% of gross margin in transportation expense. Such expenses include fuel and oil, which make up about 80% of that category, and driver meals, tolls, and permits.

Among the smaller fleet operators, transportation expenses rose from 10.9% to 13.8% of gross margin over three years, and the larger operators went from 11.8% to 13.2%.

McCann recommends transportation expenses be structured as “pass-through,” meaning funded by added fees or surcharges for clients, whether included as part of the overall rate or listed as an add-on. Overall, the motorcoach industry is inconsistent in how it handles costs that can and should be passed through to customers, he said.

Variable Expenses

These are a combination of minor but recurring miscellaneous expenses that can be controlled, such as accounting, bank charges, credit card fees, offices supplies, telephone, and legal fees. Most operators are spending at or slight above 6% of gross margin on these.

“You may have an opportunity to cut those expenses through better pricing, better negotiations, or just better control,” McCann said. Overall the trend for variable expenses has been down during the last three years, indicating operators are controlling them rather well. It really is about looking at, identifying, implementing, and managing those processes.”

Equipment Financing

The average motorcoach operator spends 11% of gross margin on equipment financing, with 9.4% for the top fifth and 10.8% for the bottom fifth. Those expenses include the cost of vehicles factoring in equipment depreciation or interest. For the small operators, equipment financing has fallen from 13.6% in 2016 to 11.7% in 2018, and for large operators, from 13% to 10.8%.

Fixed Expenses

Fixed expenses — occupancy costs, utilities, insurance, property taxes, etc. — range from 9.4% of gross margin for the average operator, 8.2% for the top fifth, and 11.9% for the bottom fifth.

Among smaller fleet operators, fixed costs as percentage of gross margin rose from 9% in 2016 to 9.3% in 2018. For large operators, it rose from 8.5% to 9.4%. “Some of the changes have a lot to do with occupancy costs because of companies creating multiple locations. In the fixed expenses, very seldom do I see fixed expenses being the reason that a company is struggling or just at their survival stage. It's usually those non-operating expenses or those operating expenses that really drive that.”

While the Spader 20 Groups look at EBITDA, the focus is more on what they call net profit before financing expenses, which is similar. [Earnings before interest, tax, depreciation and amortization (EBITDA) is a measure of a company's operating performance. It's a way to evaluate it without having to factor in financing decisions, accounting decisions, or tax environments].

“In most cases, we measure all of our expense ratios against gross margin dollars with the exception of that one. We also measure that against sales because outside of this world that we live in and Spader that would be a number you would measure against sales. So just to give you an idea, the top fifth in 2018 ran net operating profit before financing expenses of just over 38% of sales. The average was at about 21% of sales. So there are some real significant differences between the average and the top fifth.”

Total Expenses & Net Profit

The average expense ratio for all operators is 90.8%, with the top fifth at 77.8% and the bottom fifth at 99.4%. Among small operators, the total expenses were 87% in 2016, 87.4% in 2017, and 91.2% in 2018. So nets are going down while sales are rising. “I don't like the fact we're working harder and making less.”

Among larger operators, expenses totaled 89.2% in 2016, 91.5% in 2017, and 89.7% in 2018.

The average operating net profit for all operators was 9.2% in 2018. “We believe fiercely that 10% is the survival level. It's not thriving. It's not growing. It's just surviving. So we need to get everybody up to surviving. Our top 20% are making 23.2% of the gross margin. And the least profitable are about a break even.”

One defining difference for the top fifth of performers is the culture of sales. “The average operator of motorcoach as a sales department is really more of an order taking kind of sales department, not very aggressive in trying to close sales. And I do a lot of mystery shopping and I'm shaking my head sometimes with the things that we do to try not to get a sale.”

The operating net for smaller fleet operators went from 13.1% to 8.8%. The large operator went from 11% to 10.3%.

“We’re seeing that the small operators are getting squeezed a little bit and the expenses are starting to be problematic for them.

Motorcoach Usage Rates

One component that factors into a sales strategy is how often buses are out on client runs. “The way we measure usage is we have our 20-group members tell us how many coaches they have,” McCann said.

So in 2018, the top fifth had a 49.5% usage rate. The average operator had a 51.5% usage rate. “The most profitable operators aren't the ones running 60%, 70% usage.”

A 55% usage with the right revenue per day over a year is a high-performance look, he said. Operators should look at motorcoach revenue per day and total revenue per day. Operators can also have contracts or fixed routes that contribute to revenue per day.

Sales, vehicle usage, and pricing all tie in together to ultimately influence net profit. McCann recommends seasonal and tiered pricing based on demand and bookings. High performers know how to price for a slow day in February versus a Saturday in June, he reiterated.

“It’s all about how we price. It's a matter of holding onto those pricing strategies.”

Related Topics: benchmarking, business growth, charter and tour operators, driver pay, employee wages, finance, ILCT 2019, industry consultants, industry education, motorcoach operators, operating expenses, operation growth, profits, revenue growth, Tom Holden

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