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School bus contractors are under enormous pressure to deliver quality service at a reasonable price. This is no different than it has been for decades. However, some of the landscape has changed in the past 10 years, with continued consolidation of the contractor business, school boards placing a greater emphasis on cost and rising student discipline problems. To discuss some of these issues, SBF held a roundtable with three contractors with varying perspectives of the industry. Denis Gallagher is chairman and CEO of Student Transportation of America Inc. in Howell, N.J. The company was started last year and has since grown its marketshare to more than 850 buses. Floyd Palmer is president of Palmer Bus Service, a 210-bus operation headquartered in St. Clair, Minn. His operation spans rural areas of Minnesota and Wisconsin. Pete Settle is the vice president of marketing for Laidlaw Transit Inc., the largest contractor in North America with approximately 38,300 school buses.
SBF: Funding pressures have forced school boards to consider cost-cutting alternatives. Do you think school bus contractors are benefitting from this emphasis on the bottom line?
Pete Settle: Certainly, funding pressures force school districts to look at alternatives, including contracting the bus service. But the tighter school budgets are a problem for all school transportation operations, not just in-house operations. There's a fear that not only will school districts look at contracting as an alternative, but they may look at their local transit authority as an alternative or they may look at the alternative, as they have in California, of eliminating transportation.
Denis Gallagher: From our point of view we have found that there is a direct relationship between state funding and school districts' interest in contracting. When budgets are tight, school districts do look for alternatives. When budget problems arise, their interest does go up. However, we've also found in California, where we run a considerable amount of our fleet, that when school funding is increasing, there's a lot less interest in contracting. In states like Pennsylvania and New Jersey, where there are tight budgets, it's affording the opportunity for new bids and some privatization efforts.
Floyd Palmer: We contract in very rural Minnesota and Wisconsin. In the last couple of years, we've had two or three of our contracts put out for quotations, which we never had happen before. Doing a good job doesn't seem to matter anymore. These districts are just trying to save a buck. They're only looking at the bottom line. I've been in the business for 25 years. Twenty years ago we'd walk in and say, "We need a 3 or 4 percent increase." They'd say, "No problem, Floyd, you're doing a great job. See you next year." Now we're spending so much more time negotiating. The competition level is so much higher.
SBF: Do you all agree that school districts are looking at the bottom line rather than quality of service?
Gallagher: They're looking for both. Service is a given, and it's expected that it's going to be good. To Floyd's point, just because you've been there a long time doesn't hold a lot of water anymore. School boards are changing. There may have been a lot of longevity on the boards before, but that's changing. You get people on these boards now with diverse backgrounds, and they have no loyalty to a contractor. They have loyalty to their constituents. They're looking for service, which is expected, and price, which is their demand.
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.
SBF: Have we reached a point at which contractors will have to offer the same benefits that most school districts do?
Settle: I think we have to recognize that school districts are facing the same problems that contractors are in recruiting and retaining drivers. This is not a contractor issue. This is an issue of a strong economy. Trying to attract people to a split-shift job is very difficult.
Palmer: We've done a few things here that have made a difference. Before, we pretty much paid drivers a flat wage; now, we increase their wages based on how many years they've been with us. We've also accelerated the training program to get them licensed more quickly. We've been able to cut down the time it takes for the criminal background checks. People don't want to wait six weeks to start a job. It's pretty simple, but it works.
SBF: Tied into this problem of recruiting and retaining drivers is the growing concern about discipline aboard school buses. What have you done to deal with this particular problem?
Gallagher: We believe that our program is as effective as our relationship with our school principals and superintendents. We've made a real effort to get our managers to develop strong ties with the principal of the receiving school and the superintendent. Where those relationships are strong, our student discipline problems have decreased. Our job is to get the students to school safely and on time, but it really is the responsibility of the principals to deal with the discipline problems.
Settle: We've taken a collaborative approach, not only with just the building administrators but also with the parents. Ultimately, the responsibility for the children and the children's behavior rests with the parents and the exposure they receive at home. Student discipline is not a building administrator problem; it's not a parent problem; it's not a bus driver problem; it's a safety problem. We try to approach it from a safety aspect with these three constituents: the drivers, the administrators and the parents. We ask them to come together and help us deal more effectively with the discipline problems.
Palmer: In Minnesota they changed the law a few years ago where they turned over the discipline to the principal and they made it a privilege, not a right, to ride the bus. Boy, that's helped.
SBF: Another issue that I'd like to discuss is safety. Many states now mandate crossing arms on school buses and that trend will probably continue. What is your position on the mandatory addition of safety equipment on school buses?
Settle: We retrofitted our entire fleet with crossing arms last year. We see a whole lot of merit in them. I suspect that before long that will become a standard piece of equipment on school buses. From a Laidlaw perspective, we're pretty proud that we're one of the first major operators to retrofit our fleet and raise the bar for everybody else.
Gallagher: We are studying the impact of adding crossing gates. We have them on buses in some of our operations. We haven't decided to retrofit them, but anything new that we bring in has them. We're spending a lot of time on discussions about seat belts. We're leaning toward putting lap belts in all of our new equipment. We would still be interested in the shoulder belts, which we think would increase safety but obviously substantially limit the capacity of the buses. I think as an industry we have fought with the sabre being compartmentalization, and I think recent accidents have shown that there are pluses and minuses on both sides of the ledger here. Our company is taking an aggressive point of view that we're going to start putting them in and certainly a lot of customers have been asking us if we would make it standard operating equipment. I think the customers are going to drive the issue, more so than what the industry wants to do.
Settle: So is that a customer initiative with the seat belts? Our stance has been: If they're helpful, they're helpful; if they're not, they're not. There's a lot of conflicting reports out there. If it's a beneficial device, then it should be available to all children or as many as physically possible based on the design of the school bus and those sorts of issues.
Gallagher: Pete, I think it's hard to say that seat belts are helpful in New Jersey and New York, where they're required, and they're not helpful in other states. Those initiatives in New York and New Jersey were customer-driven. The first school districts to put them on buses in New Jersey were prepared to run their own buses if a contractor wouldn't do it. I think it is a customer-driven issue because the industry can't settle on what it wants.
Settle: Our position has been that we encourage the government to look at additional safety restraints. Compartmentalization was designed 20 years ago and a lot of advances have been made. We encourage the feds to go back and take a look at alternative restraint mechanisms so that we can be sure that we're providing the most up-to-date technology available.
SBF: I'd like to talk about the future of school bus contracting. In terms of market share, how much privatization will this industry see in the next several years?
Settle: We're very optimistic about conversion growth. We've had some signficant successes with some large school districts. Most recently, of course, we converted the district in Savannah, Georgia, with over 400 vehicles in that fleet. But what you'll find is that each district's reasons for converting are different. So it's very difficult to sit back and forecast a broad trend. We feel very confident that the trend is going to continue toward contracting.
Palmer: I think if we can prove to school districts that we can offer quality service at a fair price, then we can be successful.
Gallagher: We're optimistic about contracting. Obviously, that's why we started this company. We see a good opportunity in the ABCs of school buses, which is acquisitions, bids and conversions. I think as long as there's competition in the marketplace, districts will look to privatize. When competition ceases and there are fewer alternatives, then they are a little reluctant to do that. In regard to the numbers, we see over the next 10 years that the school bus contracting pie will get bigger. If we can get the contracted pie to grow from 33 to 35 percent of the overall market to about 50 percent, it would be a tremendous feat for all contractors. We see pricing and capital replacement as factors. More districts are going to be considering year-round schools, which will require more air-conditioned facilities. This is going to create some opportunities for all contractors because districts are going to have to make a decision about where they want to best spend their capital dollars. We think it's going to be in the infrastructure of the buildings and also in educational initiatives. Hopefully, transportation will be left to contractors, providing that there is competition and reasonable alternatives.
Settle: To that point, even if there is just one vendor who would be interested in a particular school district, that is a 100 percent increase in competition over just keeping it in-house. Any competition is good. It allows in-house operations to set up performance and cost measures for themselves.
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