We are a Canada bus transport service operating between major cities. We have been losing money for the past 5 years. Our new CEO thinks that we need to aggressively cut costs in order to return to profitability. We also suspect the over-operated routes as well as the new routes to be the cause of the loss. How do you suggest we should face this problem?
The case is designed to be presented to the candidate by an interviewer, who plays the role of a representative of a Canada Bus transport operator.
Short Solution (Expand) (Collapse)
The following information could be provided to the interviewee if requested:
- The company is in a tight cash position
- Fuel is the major cost for any bus transport operator
- Due to insufficient monetary resources, the firm has not been able to upgrade to latest machines, infrastructure, etc
- The firm has substantially invested (real estate) in terminals
- Routes can be classfied into three types: short, medium or long. More than 50% of the revenue comes from long routes
- The last CEO focussed a lot on top line. For instance he started the "anywhere pickup" plan
The candidate should use the profitability framework and focus more on costs.
Costs can be classified as fixed and variable.
Fixed costs: Buses, terminals, salaried employees, etc
- Variable costs: Fuel, contractual employees, maintenance, etc
- Unprofitable routes should be identified and scrapped or scaled back
- Bus route fleet optimization could be performed to improve efficiency
- Fuel contracts for protection against fuel price fluctuations
- Lease new equipment to improve fuel efficiency and decrease maintenance costs, downtime
- Instead of "anywhere pickup", freeways could be utilized to improve schedules
Additionally, extra service offerings could be realigned with customer needs. For example, seats with extra legroom could be charged for.
III. Concluding Observations
The company should scrap the unprofitable routes, perform bus route fleet optimization and lease new equipments to improve fuel efficiency and to decrease maintenance costs.
Question 1: How would you identify unprofitable routes?
Answer 1: Passenger load factor, or load factor could be calculated to measure the capacity utilization of the bus transport service
Question 2: If the company figures out multiple new routes which maybe profitable, how would you suggest we go about starting services on the new routes?
Answer 2: The company should compare the following:
- Operating costs per route
- Kind of potential customers that use these routes and if they are likely to be the riders of the company's buses
- Whether the company's infrastructure could support the new routes