Student Transportation: Lost on the Way to School?
Student Transportation, Inc. (“ST” or the “Company”) has achieved tremendous growth over the past 18 years by effectively aligning its operating and business models. However, if ST succumbs to investor pressure to reduce the capital intensity of the business, it may lose this effective alignment and jeopardize future success.
Business Model
Founded in 1997, ST is the third-largest provider of school bus transportation services in North America.[i] ST delivers assets (buses) and services (performance of busing operations) that form an integral part of the daily operation of the school districts it serves.[ii] The Company’s fundamental business model is to provide home-to-school bus services during the K-12 academic year for its core public school customer base.
Operating Model
ST grew from 3 employees with no buses in 1997 to over 14,000 employees and 13,000 vehicles today by aligning its operating model with this business model.[iii] The Company’s growth strategy was nicknamed the “ABC’s:” Acquiring other private operators, Bidding on existing outsourced busing operations, and Converting school-operated fleets to the private sector.[iv] All three of these depended on an operating model with lower costs than its competitors and the school districts it serves. In particular, its bidding and converting strategies relied on ST’s ability to offer low rates as price is the primary criteria for a contract award.[v] ST achieved this lower cost operating model primarily through economies of scale:
- Fleet. ST pursues a “Southwest Airlines” fleet strategy: just as Southwest only operates Boeing 737s, ST’s preferred bus manufacturer is Bluebird.[vi] Although not always possible given specific contract needs, ST defaults to this type of bus to improve negotiating leverage with Bluebird in vehicle procurement as well as develop standardized preventative maintenance schedules across its fleet. Mechanics can focus on just a handful of bus types and need only stock replacement parts inventory for these models. This allows for materially lower bus acquisition and maintenance costs for ST’s 14,000 buses over the long-run than an individual school district or small competitor could achieve with only a few dozen or even a few hundred buses. Moreover, this unique relationship with Bluebird has allowed ST to stay on the edge of new bus technology, including the introduction of propane vehicles (ibid).
- Facilities. Like its competitors, ST achieved economies of scale by combining various school district contracts into one facility in urban markets.[vii] Unlike its competitors, though, ST learned how to achieve operating synergies in suburban and rural locations by having regional “hubs.”[viii] Although small districts still required local management, bus routing and dispatching, employee training, safety procedures, customer service, and other critical operations could still be standardized and scaled at a regional level. Importantly, regional sales teams that focused on non-school charter services improved asset utilization by generating revenue on weekends and during the summer from these hubs.
- Labor. Labor and related costs represent the single largest cost to school bus operators. ST’s scale allowed it to invest in human resources best practices and automated labor systems (e.g., driver check-in) that gave it a further cost advantage. These practices also encouraged good relationships with the largest national driver unions. Employee programs proved so successful in improving employee retention (and as a result reducing labor costs), that they have been expanded: Driver Appreciation Day became Employee Appreciation Week in 2012.[ix]
Going Forward
Press coverage turned sour in 2012 and 2013 as investors questioned the sustainability of ST’s monthly dividend.[x] In response, ST has tried to reduce capital expenditures by growing an asset-light operating model named SchoolWheels.[xi] This strategy is intended to turn ST into a contract management business by having its customers retain ownership of the bus fleets and facilities.[xii] It also includes SchoolWheelsDirect, which reflects a growth strategy added in 2012: the “ABCs” became “A-B-C-D,” as ST started selling direct to parents.
While novel ideas, this new business model may not align with the existing operating model. If school districts retain fleet ownership, it will be harder for ST to standardize its procurement and maintenance strategies. Customer-owned facilities may also limit ST’s ability to implement its regional best practices, including labor programs. Finally, will selling direct to parents distract the sales team from its core customers (the school districts) and managing asset utilization through non-school charter services?
[i] http://www.schoolbusfleet.com/research/default.aspx#Top50ContractorFleets
[ii] http://www.ridestbus.com/
[iii] May 12, 2015 Earnings Call.
[iv] 2011 Annual report. http://www.ridesta.com/reports.cfm?Year=2011.
[v] 2015 Annual Report http://www.ridesta.com/reports.cfm?Year=2015.
[vi] http://www.youtube.com/watch?v=8CfCUGvYBu4&t=1m40s
[vii] BMO Capital Markets Initiating Coverage. May 17, 2013.
[viii] September 15, 2015 Earnings call.
[ix] [ix] 2012 Annual Report http://www.ridesta.com/reports.cfm?Year=2015.
[x] http://seekingalpha.com/article/1702642-student-transportations-business-is-very-overvalued, http://www.valuewalk.com/2012/07/student-transportation-inc-stb-a-ponzi-scheme/
[xi] http://www.ridestbus.com/releasedetail.cfm?ReleaseID=755052
[xii] http://www.zitopartners.com/jim-cramer-talks-with-denis-gallagher-of-stb
Robby, I really enjoyed your post and your thoughtful comments on the future of the company. I agree with you, the success of the business seems to be largely built on the economics of scale they have achieved. The most compelling argument to me about their success was how they have managed the fleet. The economic benefits of large orders are clear but the fact that they try to use one bus type is an interesting approach to streamlining the whole process. It also seems to make a lot of sense since I would think people do not care about the bus model nearly as much as the contract cost. As you mentioned this is clearly repeatable in airlines but it would be interesting to look at what other contract based services could really cut costs by reducing offering variability.
Another concern I had with their future plan is that working with parents and focusing on services means you are providing things where people may actually start to care more about the quality than just the low cost. Thus they may really need to start pitching themselves on quality not just low cost which seems like a very different business model.
This business model has failed in Mexico as companies were not able to execute correctly the two roads you enlist – brining up utilization (selling to parents) and lowering capex outlay. Although, the Mexican government created artificial geographical monopolies for the ST version, the company is facing a re-structure (debt related).
Thank you for sharing this very interesting business and operating model and I will continue to watch over ST as transportation in my side of the world is still a big question on who should take over (private vs public) and how to approach the problem. For now, we are trying to replicate the U.S. model by making school transportation mandatory and allowing companies to take on the challenge.