Double trouble

Additional information to share on request:

• Single-decker bus capacity: 30
• Double decker bus capacity: 60
• Cost of a ride: £1.50

Suggested approach

First of all, we will need to analyse the financials of RedBus to identify options for improvement.

• Revenue: Number of passengers x fare per ride; segment passengers by route, are some routes more profitable than others? Are we offering any auxiliary paid services? E.g., private travel

Cost should be split to fixed and variable cost.

Fixed cost:

• Bus depreciation: Can we move to cheaper buses? Can we extend the useful life of the buses?
• Maintenance: Can we consolidate maintenance contracts? Can we bring maintenance in-house and save money?
• Bus insurance: Can we renegotiate contracts?
• Overheads: Do we have a large corporate office? Can we outsource some functions to save cost?

Variable cost:

• Fuel: Can we consolidate fuel contracts and negotiate lower wholesale price? Can we switch suppliers? Can we optimise our routes to reduce the number of miles driven?
• Labour: Can we reduce salaries or other compensation related costs? How is our drivers’ utilisation as compared to industry benchmarks.

Next, we would need to look at the market environment to understand the range of possible options.

• Competitors: Who are the other players in London? Are they experiencing the same issues? Do they do anything differently?
• Customers: What is the trend within our customer base in terms of bus usage? What do they care about most? How can we convince them to use buses more?
• Regulation: What is the regulatory environment for bus operators? Can we ask for subsidies? How much flexibility do we have with route / timetable decisions?

Proposed solution

An easy warm-up question: It is important to start by deciding on the unit to work with (day, route or mile). If we were to calculate the breakeven amount per route:

Takeaways: 70 passengers per route sounds like a lot, it means that the bus needs to fill up more than once over one route. Since people are generally travelling in one direction during rush hours (i.e., from home to work or from work to home), and since a full bus cannot pick-up any more passengers, that could be a challenging target, especially outside of rush hours. Bus depreciation is the highest cost component, thus, we should check whether we can reduce the cost of buses or increase their useful life.

Key Insights

• If possible, the client needs to adjust frequency of buses to make routes more profitable
• Client should try to cancel route D, as it is never profitable
• Route C is very profitable, but might be running out of capacity during peak hours, therefore its frequency should be increased
• If the frequency cannot be reduced, the client should consider using smaller busses

• Other costs are the same as for a double decker bus
• Assume buses operate 350 days per year

Suggested solution

The candidate should calculate the difference in cost per trip of a single decker vs. a double decker bus, and calculate how many trips are required to payback the investment.

Takeaways: Replacing some double deckers with single deckers does make sense, as the payback for investment is less than 3 years as required. The client can further improve their payback period if they are able to sell some of their double deckers to other operators. One risk to consider is the potential revenue impact due to lower capacity, hence we need to be careful when selecting routes / times to operate with a single decker.

Suggested structure with sample ideas

1. Get more passengers
   • Advertise the bus service – e.g., position as a greener, cheaper option
   • Re-design route to serve a larger population or shorten travel time
   • Offer benefits to frequent users (e.g., loyalty programme)
2. Increase income per passenger
   • Increase fare if possible from regulatory perspective
   • Sell drinks / food on board
   • Provide paid WiFi service
3. Generate revenue via auxiliary services
   • Offer buses for private hire for corporates
   • Increase advertising space inside and outside the bus
   • Gather and monetise usage data

I would recommend RedBus to start operating single decker buses on some of their routes to improve profitability, for the following reasons:

• Cost per route of a double-decker is £105, which requires 70 passengers in order to break even
• Some routes, like D, never reach 70 passengers, others are losing money during off-peak hours
• RedBus could acquire single decker buses for £420k, which will cost £61 to operate and will pay back the investment in less than 3 years

As a next step, I would recommend looking at options to dispose of some of the double decker buses to further improve the payback period, as well as ways to attract more passengers to the buses, for example by launching a loyalty programme.