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June 01, 2006  |   Comments (0)   |   Post a comment

Q&A: Rising Fuel, Bus Prices are Key Challenges

International's Michael Cancelliere says school bus operators need to examine idling practices and routing efficiency to minimize the impact of high fuel prices. Meanwhile, he predicts a 5 to 8 percent increase in volume of bus sales this year.

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Do you have much of a backlog of orders? If so, are both plants working close to capacity?

We have a healthy backlog of orders right now. Our business is up significantly on a year-over-year basis. Both plants are operating at capacity, and we’re considering measures to increase the daily build rate as required to meet the needs of our dealers and customers. We expect 2006 to be a very good year. Continued success and acceptance of our new CE and BE products have contributed to what’s making 2006 a big year for us.

Beyond the additional cost that they bear, how do you think the 2007 engines are going to affect end-users? How much help will they receive from your dealers in regard to the learning curve of operating 2007 engines?

In addition to the anticipated price increase of $5,000 to $6,000, we expect customers to align with other operational changes related to meeting the 2007 emission levels. No. 1, the ultra low sulfur diesel [ULSD] is expected to cost about 5 to 10 cents more per gallon, so fuel costs will likely go up for our customers.

Note that the petroleum companies are adding lubricants to ULSD to allow pre-2007 engines to run on it. We heard in some industry workshops that customers are concerned about how the pre-2007 buses in their fleet will perform with ULSD. The new engines will also use low-ash oil to extend service intervals. We expect oil change intervals for our engines to remain the same. And, of course, the diesel particulate filter will require periodic cleaning. We expect no issues with the new aftertreatment equipment as long as customers do not use non-ULSD fuel in the new engines. Finally, I think it’s important to note that we’ve been producing Green Diesel Technology with the fundamental technology of EGR (exhaust gas recirculation) to achieve lower emissions for the past five years.

Is the school bus market becoming more competitive? How is that affecting margins?

The forces of supply and demand are well at work in our industry. As we look to the future, we see a fairly stable market on the horizon. The school bus industry does not have these wild swings and fluctuations as the truck industry. Nonetheless, bus manufacturers continue to have more capacity than the marketplace demands, and to remain competitive and viable over the long term, manufacturers must have scale, quality and distributor outlets that can meet school bus customer demands after the sale.

Do you expect bus prices to continue to spiral upward?

Rising commodity prices continue to adversely impact us as well as the rest of the industry. This is particularly critical because 70 to 80 percent of the cost of a bus is in the materials. If this was an industry that had high margins to begin with, the OEMs could absorb some of these increases. But that’s not the case.

It’s a very competitive business, with about 70 percent of the buses procured through school district bids and the other 30 percent sold to private contractors. So we must continue to improve our efficiencies to offset whatever costs we can, but in the last few years, the increases are coming at a greater pace than the savings are.

Outside of that, healthcare costs and salaries continue to increase each year as well. As a result, customers should expect to see school bus prices continue to increase. Compared to any other passenger transportation option, whether it’s Mom in an eight-passenger SUV for $50,000 or a 40-passenger city bus for $400,000, one can make a case that a school bus delivers the highest value and the greatest safety.

Is IC Corp. planning any major design changes in the BE, CE, RE or FE?

As you know, both of our BE and CE models are very new, and we believe they’re on the leading edge. We do have plans in place to further invest in our FE and RE models to meet specific needs of our customers. These changes will be implemented over time starting in 2007.

How are sales of the BE 200 faring?

We are pleased. Sales growth is slightly ahead of forecast. In fact, we project this model to account for nearly 20 percent of the Type A/B small bus market in this, its first full year of production. Customers like the commonality with their large bus models as well as the one-stop shopping and overall durability of the BE 200 vs. the typical cutaway bus. Drivers are the biggest fans of the BE!

What in particular do they like about it?

They like its visibility. They like the maneuverability. They like the entry-egress to the passenger compartment. They like the 78-inch headroom. They like the dash and the steering wheel, which can be equipped with controls for the power doors and eight-way warning light system. How long do you think it will be before a hybrid propulsion school bus is ready for the market? Will pricing be a major hurdle?

We’ve already announced the first HEV [hybrid electric vehicle] for the school bus industry. A major customer will be taking delivery soon. We’re very excited about the potential of this technology. The frequent stops that school buses make are a great fit for a hybrid system, which captures and makes use of regenerative braking energy. Hybrid technology is not free, of course. Prices will be high until the volume grows enough to lower costs. To overcome this cost hurdle, we are working with industry associations to help get federal legislation and funds available to make them more affordable.

What kind of interest are you seeing in your telematics package?

Interest in the AWARE telematics package for the school bus industry has far exceeded our expectations. Customers really connect with the ability that AWARE provides for real-time monitoring of the safety, location, diagnostics and performance of the school bus. The importance of knowing where a school bus is at all times continues to increase. This also fits with the work led by NAPT [National Association for Pupil Transportation], NASDPTS [National Association of State Directors of Pupil Transportation Services] and NSTA [National School Transportation Association] on advanced safety legislation. While customers are interested in the safety aspects, such as the ability to know where their buses are at all times, the maintenance aspects and the efficiencies gained through reduced idling and performance diagnostics are also important. AWARE makes sense for today and the future. We are working on ways to package the upfront costs and monthly fees to make this technology available to more customers.

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