Q&A: School Bus Manufacturers Beset by Higher Costs

Posted on December 1, 2005
Thomas Built Buses President John O'Leary (left) poses with racing legend Richard Petty, who made a special appearance at the Thomas exhibit during the National Association for Pupil Transportation's trade show in Austin in November.
Thomas Built Buses President John O'Leary (left) poses with racing legend Richard Petty, who made a special appearance at the Thomas exhibit during the National Association for Pupil Transportation's trade show in Austin in November.

From its headquarters in High Point, N.C., Thomas Built Buses has an excellent perch to view the changing landscape of the school bus industry. The landscape, however, is dotted with challenges, for manufacturers, suppliers and end-users.

Among the greatest challenges for manufacturers and suppliers is the rising cost of raw materials, sparked by the increasing global demand for supplies such as steel, plywood and copper.

John O’Leary, president of Thomas, wrestles with these challenges daily as he oversees the company’s product line of Type A, C and D school buses.

The newest offering — the C2 conventional bus — has been in production for approximately a year, coming out of a $40 million manufacturing facility in High Point. O’Leary says there are about 3,000 C2s on the road. He expects orders to increase this spring and is prepared to ramp up production accordingly.

O’Leary believes profitability is the greatest challenge for school bus manufacturers. He recently spoke with SCHOOL BUS FLEET Editor Steve Hirano about this issue and others.

SBF: How does the school bus market look for the 2006-07 school year?
John O’Leary: We think it will be flat compared to 2005. However, there could be some pre-buying of school buses in 2006 because of the stricter engine emissions standards set to go into effect in 2007. The 2007 engines will be more expensive, so we suspect that some customers — primarily contractors, who have more control over their funding — will try to pre-buy 2006 buses. School districts will be less likely to do that.

Are costs associated with raw materials still rising?
Some of that is still rippling through. The majority of it has hit us in the past six months. Steel is still significantly higher than it was 18 months ago, and some petroleum-related products such as rubber and plastic are higher. If you were to compare a bus you ordered today versus one that you ordered a year or 15 months ago, you’re probably looking at a 5 or 6 percent increase in price. It has definitely gone up.

Are these price increases obvious to the customer?
Nowadays, you see more sophisticated purchasing going on across the board, not just by the big corporate contractors but also at the school districts. You have more intelligence about what’s going on, with the sharing of information through the Internet and people talking. They see the increase and don’t like it. Nor do I when I get increases passed along through my suppliers, but it’s a fact of life. We’re living it every day, and other bus manufacturers are, too.

How is the high cost of fuel affecting your factory operations?
We have an inbound freight rate that we attach to every part that comes in here, and that has gone up significantly over the past six months. The freight companies that ship parts to us are definitely passing their increased costs on to us.

On another topic, are you still fine-tuning the design of the C2?
The good news is that because we put a lot of focus-group attention on it, we don’t have any major revisions that have to be made. Like with any product, however, you have what sounds good on the design board versus what actually gets into production. You make those changes. At this point, it’s not so much design changes as it is option availability. When we first rolled out the C2, we knew we had to have 70 percent of the market covered with options. So what we’re trying to do is flesh that out and offer the same options on the C2 that you can get on the FS-65.

Are you planning any changes to your transit-style products — the HDX and EF — such as creating a stronger design link to the C2?
The HDX has a family resemblance to the C2. One of the thoughts behind the design of the C2 was to make it look like the HDX. There are shared design characteristics. The EF is not in that league, and we’re definitely working on some styling changes to make its appearance more like the C2 and HDX.

Are you concerned about your engine offerings meeting the EPA’s 2007 emissions standards?
I’m not really concerned about whether the engines will work. We have a number of 2007 test engines in trucks and buses undergoing testing at Freightliner, and we’ve got engineers monitoring those on the Mercedes-Benz side. The initial feedback has been fairly good. The bigger issue revolves around the cost implications. When you’re looking at paying an extra $5,000 or $6,000 per bus because of the 2007 engine, people sit up and take notice. That’s roughly a 10 percent increase.

And there’s still the 2010 EPA standards down the road.
Yes, our engineers are doing preliminary work on 2010, but the lion’s share is for ‘07. From everything I see, meeting the ‘10 standards will probably revolve around urea injection, at least on the heavy-duty side. On the medium-duty side, I haven’t heard much from the engine suppliers as to their game plan. It will definitely take some radical moves to get there.

What do you think of the potential of hybrid diesel-electric for school buses?
I think it’s a perfect application for that technology; however, it is far from being affordable. And I know how sensitive this industry is to pricing. As the hybrid technology develops and people get more comfortable with it, they’ll buy some of them. There will be some early adopters and hopefully the volume will kick in and drive the price down, but I think it’s a long way from being affordable. At this point, it’s more of a novelty.

How are things going at the C2 plant in High Point?
We’re building 24 units a day — 16 on the first shift and eight on second shift. That’s really going well.

How is that in terms of meeting your orders?
It’s good. We’ve got a backlog out to March 2006 on the C2 right now. We’re going to be at 24 units a day until at least February. When orders start picking up in the spring, we’ll ramp up to the 44 per day that the plant was designed for.

What is the greatest challenge facing bus manufacturers today?
Profitability. We had one very small Type A manufacturer exit this year. There are, from all indications, several others that are barely hanging on. At least one of the big bus companies is still losing money. It is very difficult when you have a finite market with little growth. Manufacturers are all chasing the same customers. Also, you have a situation where school districts’ budgets are tight, and that puts a lot of pressure on margins. I worry that it’s going to inhibit major reinvestment in the industry.

The question of manufacturer market share seems to create a lot of confusion in this industry. How do you address this issue?
I get asked all the time about the 60 percent market share that one of my competitors claims. I guess it depends on how you define the market. We include the entire school bus market, not merely the Type C chassis market. The entire market is typically in the 35,000 to 40,000 unit range each year. They define it as 26,000 or 27,000, so I guess they’re leaving out the Type As. We triangulate the numbers with some of our suppliers who also sell to the other OEMs. Based on that, we believe that we have 38 to 39 percent market share, and that the second-place guys are down around 34 percent. Thomas will sell nearly 16,000 school buses this year, so the market share math is pretty easy.

What would you tell a prospective customer about why they should buy a Thomas school bus?
I would tell them that we’re definitely going to be around for the long run. We are totally engaged and dedicated to the industry and have the financial horsepower behind us to remain a player 10 years from now and beyond. If you’re going to run that bus for 10 or 20 years, we’re going to be here. I would also tell that person that he or she should take a look at lifecycle operating costs. I constantly see districts making purchasing decisions based on a one-time savings of $50 on the acquisition cost of a bus even though they could save $1,000 to $2,000 each and every year over the life of that bus. How? By focusing on improved fuel economy, which is offered by the Mercedes-Benz engines available in Thomas type C and D products.

Related Topics: Thomas Built Buses

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