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December 01, 2005  |   Comments (0)   |   Post a comment

Q&A: School Bus Manufacturers Beset by Higher Costs

The rising cost of raw materials — and the impending introduction of 2007-compliant engines — is driving up prices for school buses, says John O'Leary, president of Thomas Built Buses. Profitability is the greatest challenge.

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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.

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