SBF: Are smaller contractors eventually going to be acquired - or forced out of business - by the larger operators?
Palmer: I can speak for most contractors in rural Minnesota. These people have a real fear of Laidlaw and Ryder [Student Transportation Services]. In fact, in Minnesota there are six contractors that formed a group called Vision to combat Laidlaw, which has purchased a number of businesses in Minnesota. And a lot of the small contractors are afraid that Laidlaw is so big that they can't compete against them and the small guy hasn't got a chance to expand. When we start negotiating with a school district on a contract, the first thing we hear is, "You guys are too expensive; we'll get Laidlaw because they're cheaper." They just throw that right in your face.
Settle: Floyd, that's no different than how a school district uses a contractor to threaten an in-house operation. But I want to address the issue of large and small. Will the small operator become obsolete? Obsolescence is not going to be an issue of size. A large company could be obsolete if they're not providing the value that their customers want and demand. It's really not an issue of size but an issue of the value that the school district receives from its provider. That could be a 15-bus provider in a small rural town or it could be a large provider. In some instances, a large organization such as Laidlaw can provide significant resources to address some issues or problems that a school district might have. That might be difficult for some other operators to duplicate, such as computerized routing. But the bottom line is the level of service and the value that the district receives.
Palmer: In rural Minnesota, I feel that there is always going to be a spot for the mom-and-pop operators. There are a lot of operators with one, two or three buses. The average size contractor in Minnesota probably runs between eight and 20 buses. And the local boys have been there forever.
Gallagher: We think the trend toward consolidation will continue. Besides some of the mega-companies like Laidlaw and Ryder, regional companies have grown via acquisition. We're seeing companies in Connecticut that are growing by buying companies around them; we're seeing it in the Midwest and certainly now even in California. There's even some consolidation among smaller players who want to become regionalized players. I think one of the things we're concerned about in terms of the mega-sized companies is how long the FTC [Federal Trade Commission] will allow Laidlaw to continue to dominate the market in such big numbers. Is there another major mega-deal coming down the line?
Settle: I'd like to address Denis' comments. First of all, Laidlaw doesn't dominate any single market. Secondly, the conversion market is a very active market as well. School transportation is a $14 billion business, and we hold a small part of that, less than 7 or 8 percent. The consolidation trend will continue. I suspect that it's going to lessen its pace, but it will continue.
SBF: I'd like to talk about the driver shortage. What are your companies doing to address this problem?
Gallagher: We've had to get very creative in certain markets, not only to maintain our existing workforce but also to bring in new people. We've put in wage programs that are competitive not only with other contractors but also with school districts. In addition, we've implemented bonus programs, health insurance and other things that most contractors are trying to do. We still are and always have been competing with other service industries, specifically in the transportation sector. Because unemployment is so low in most of the markets where we are, it's more the effort to maintain what you've got. We spend a lot of money making sure that the people who are with us, stay with us.
Palmer: We do, too. We spend more time on recruiting and retaining drivers than we ever have.