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March 12, 2010  |   Comments (0)   |   Post a comment

Contractor Roundtable: The Current Business Climate

School bus contractors offer insights on the advantages of contracting in the current economic climate as well as the impact of state and national regulatory issues.

by Claire Atkinson - Also by this author

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John Benish Jr.,chief operating officer Cook-Illinois Corp.,Oak Forest, Ill.

John Benish Jr.,

chief operating officer Cook-Illinois Corp.,

Oak Forest, Ill.

As private business entities, school bus contractors can offer an interesting perspective on the ups and downs of the U.S. economy as well as legislative and regulatory matters.

SBF Senior Editor Claire Atkinson spoke with executives at several contractor companies to get their take on issues currently affecting the pupil transportation industry.

SBF: What are the advantages for a school district in contracting out transportation services?
Gallagher: The advantages are that they get to really concentrate on education issues. More and more, Americans today are asking districts to tighten their belts and focus on their core education issues. Having predictable costs for long-term contracts is a huge advantage for districts. Contractors can also be flexible in routing and scheduling changes and in fact should be in there offering solutions. 

Benish: When is the last time the district had someone come in from the outside and evaluate all of their bus routes to check their efficiencies? Bidding your transportation allows someone besides the inside person to conduct a real evaluation of what the district is currently doing. Advantages include savings in driver times and pay practices.

Gatto: In contracting out transportation services, a school district will be able to initially cash in on the equity of its equipment, if any, and/or its facilities. In the succeeding years, there will be no need for capital expenditure and there will be reduction in payroll expenses and fringes, including health insurance and pension costs for drivers, mechanics and staff. Exposure to liabilities due to vehicular accidents will be reduced as well.

Private contractors are able to spread the costs of equipment, overhead and labor through non-district trips, such as charters. In an area where a contractor provides transportation to several adjoining districts, the savings are even greater, as fixed costs are spread out to more entities.

A school district need not spend for stringent environmental compliance requirements for fuel storage and vehicle emissions. It will also be able to easily add or reduce routes and trips without incurring the costs of additional vehicles or sunk costs associated with unused excess vehicles. All in all, I would say that the cost will be 15 to 20 percent less for a school district.

David Duke, sr. vice president, business development, First Student Inc., Cincinnati

Duke: Many districts choose to outsource for one or more of the following reasons: operating efficiencies, problem resolution, cost savings, expertise, and improved safety and technology. According to the National School Transportation Association (NSTA), 90 percent of its members who completed conversions from 2001-2006 reported savings ranging from 10 to 30 percent.

Because a contractor’s reputation heavily rests on its safety record, a significant investment in both fleet maintenance and safety programming must be made to ensure its safe, efficient operation. In fact, a contractor’s safety training and technological investments often exceed state or school district requirements.

How has the economy changed the contracting option for school districts over the past five years or so?
Gallagher: This is my 34th year full time in this business. I have seen all kinds of things changing in the economy and back again. The economy has forced people to look at the entire budget and say, we need to spend money on education.

Fowler: Budgets are getting tight, superintendents and school boards are looking for every angle to reduce their costs, trying not to reduce the service, but that makes it very tough. There’s another reason why outsourcing transportation is good.

Thomas: When the state isn’t reimbursing for bus purchases, they start looking at the state minimum requirements by law for school bus services and unfortunately, buses are coming off the road.

Gatto: The past five years have been challenging — the fuel crisis and volatility, terrorist alerts, credit crisis, real estate downturn and the recession. With the resulting tight budgetary situations of municipalities and school districts, administrators have to cut costs and services or be more creative in operating with the same or less funds.

In the past, school districts have been hesitant in contracting out their transportation services because they have employees with long tenure who would end up with less pay and benefits. With private contracting as an option, more districts are looking for increased services with less money, sometimes to the point of having unrealistically high expectations without due consideration of the true hard costs of the contractor’s services.

How competitive is the contractor market these days?
Gallagher: It has become more competitive. I assume manufacturers are interested in selling new buses and that has fueled some of the recent uptick. The issue of the national health plan that will be coming eventually as well as other issues may tighten up things later, but all in all, it has increased.

Thomas: It’s brutal. The competition, the pricing on contracts, is cutthroat. As a matter of fact, it’s so low that I don’t think it’s sustainable. The market’s trying to respond, but I think the pendulum has swung too far and it’s going to be a tough road coming forward.

Donald Fowler, president, Fowler Bus Co., Richmond, Mo.

Fowler: It’s getting very competitive, and I feel sorry for the districts and the states that have to take the low bid. Those are the ones that are really suffering because our equipment all costs about the same, so they’re going to be cutting corners other than equipment.

Benish: The contractor market is very competitive — another reason to look at contracting. Over the past five years, more than three national contracting companies have entered the business and can bid anywhere in the country.

Gatto: It depends on the geographical area. I see some unrealistic price strategies that may benefit school districts in the short term, but may eventually end up causing inconsistencies in service quality and safety. While I believe that private contractors provide savings, the market penetration strategies of some companies who use voodoo economics in calculating returns on investment and price below true hard operating costs in order to eliminate competitors will lead to financial and service problems for these companies and districts in the long run.

Duke: The market is highly competitive. In addition to the major providers, there is a continuous supply of new entrants into the marketplace. Although an increased emphasis has been placed on the cost-savings realized by outsourcing, it is essential that all contractors — large or small — remain focused on a point-by-point comparison that looks at costs, long and short-term goals, safety and reliability for the best transportation solution.

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