A case analysis of bus operator viability in a post-Covid world

Bus route viability – the funding of routes in particular – is under scrutiny now more than ever, following changes in our commuting and leisure patterns in the years since the pandemic, and the increasing squeeze on household finances due to the cost of living crisis. In this study, Sweco Principal Transport Planner Dermot Hanney seeks to understand bus operator demands prior to Covid, and where routes and services now fit into our post-Covid, net zero-focused world. 

Part 1 – Past bus service performance

Main data source

The DfT publishes Annual Bus Statistics on the local bus sector in Great Britain[1], presenting information on passenger journeys, vehicle miles, levels of revenue, costs and government support, the vehicle fleet, staff employed and other indicators including punctuality.

This piece will mainly focus on using the data source to explain the picture before Covid to help then try to understand the likely outcome if all of its related post-Covid funding dries up.

A quick summary of some additional terms to understand for this piece are:

• Concessionary passengers are people with passes whereby the Government pays some or all of their fare to bus operators in the form of a top up per trip
• Government and Local Authority funding includes Bus Service Operators Grant (BSOG) and Gross Public Transport Support (bulk of these costs will be accounted for by payments to operators providing tendered or supported bus services)

Bus viability analysis (2009 – 2019) – The Average Bus Company (ABC)

Taking the data from the DfT Annual Bus Statistics for bus services in England excluding London I have indexed data in nominal values to understand the changes for bus operators outside London. To give extra context I have created a fictitious ‘Average Bus Company’ that will follow the trends of the data between 2009 and 2019 to help better understand the scale of impacts on bus operators.

Table 1 The ABC key metric performance based on DfT Annual Bus Statistics:

The decade 2009 -2019 saw a fall in passenger journeys by about 11%. However interestingly revenue for ABC from full fare paying passengers grew. With bus vehicle miles dropping by approximately 14%, this highlights that fare paying passengers have ended up contributing more to bus operators’ revenues whilst seeing a reduction in bus network coverage and services. This impact can be seen in the below table in the growth of the full fare non-concessionary percentage.

Figure 1 Revenue mix for bus operators between full fares, concessionary fares and Gov/Local Authority support

With a significant drop in government funding between 2009 and 2019 (BSOG saw a 22% drop and local bus service support dropped by 27% over this period), this has meant bus passengers have had to contribute more to the revenue of bus operations (up 15% in total revenue share). By increasing the revenue burden onto full fare passengers; bus fares have risen over this time period to help maintain profit margins. RPI tracks the rise in full fare prices as an increase of 54% between the 2009/10 – 2018/19 time periods[2].

What is also noticeable from DfT data is that operating costs per bus mile have shot up 31% over this time period. This increase is likely to be primarily driven by three key factors:

1. A rise in fuel costs (up 6%)[3],
2. A rise in bus driver wages (up circa 20%)[4]
3. An increase in delay to bus services – unfortunately this is not well captured in DfT data.

Overall, comparing on per bus mile basis, one can see from the bus statistics data that revenue per mile has not kept pace with the growth in costs per bus mile (18% vs 31%) in the past decade[2].

Part 2 – What level of bus service is now viable

Post Covid Outlook

When changes in patronage are taken into account, we can see from our fictitious ABC bus company that the profit margin has shrunk from 18% in 2009/10 to 5% prior to 2020.

It is worth considering the real-world operator examples from the annual reports from three of England’s key bus operators. I have then taken a look at what changes in profit margin these bus operators have observed up to the post-Covid period.

Table 2 Major UK bus operators non-London bus services profit margin:

The data shows a fall in profit margin up to 2019, though not as pronounced as our Average Bus Company. It shows a larger drop in profit margin for both Stagecoach and First Bus bus services outside London between 2011 and 2019. The fall for Go Ahead is less pronounced. However, all operator accounts show that post-Covid their profit margin has significantly contracted.

In general, apart from Stagecoach in 2011 as it was establishing itself in London, both Stagecoach and Go Ahead show a lower yet more stable profit margin in London compared to the Regional bus services. At this moment, stability has remained in London for its franchised bus network but the picture overall has inverted for Regional bus services where profit margins have fallen significantly from 2011 levels. This may point to a benefit to operators of franchising in terms of lower risk, that though expected peak margins may be potentially lower the profit margins overall appear to be much more stable. It will be key see the next and subsequent annual financial reports for major UK bus operators to understand if this trend is just a blip or a long-term change.

It is noted that First Bus have given themselves an explicit target for a bus operating margin of 10%. This is below the value of profit margin for the three UK bus operators in 2011. The 10% target both shows potentially a new normal in terms of expectations for regional bus services in England but also that a significant change in profitability will be needed post-Covid. Under current trading conditions, in order to achieve this, either patronage needs to start rising, subsidy will need to increase, or services will need to contract. The negative impact of continued lower profit margins might mean a delay to fleet renewal decisions. It also might impact operator’s resilience to any further shocks which could include reliability impacts created by traffic growth locally.

The current signs are mixed. The latest DfT patronage data is showing bus boardings outside of London on for average weekdays in May 2023 were circa 90% of the volume observed on the same day in the third week of January 2020. Though the UK government Bus Recovery Grant (BRG) revenue support will end on June 30^th 2023, from 1 July 2023 new funding will be available to support commercial bus operators via the Bus Service Operators Grant Plus which will cover the period to April 2025 at £140 million.

The Bus Fare Cap Grant will receive an additional £200 million from the latest government announcement and will run to 30 November 2024, albeit with the cap rising to £2.50 from 1 November 2023. £160 million of the recent Government announcement goes to local transport authorities (LTAs) as BSIP Plus with 50% allocated via tendered mileage, weighted by metrics of deprivation and car ownership and 50% based on population, weighted by delivery confidence. This differs from the BSIP mechanism until now whereby money could not be used to support existing routes and is intended to allow LTAs to make the call on how services are planned and delivered. It is positive to see the latest government funding to LTAs looks to bring in deprivation and car ownership metrics to better tackle transport deserts and inaccessibility for people without car access.

Part 3 – How will ‘viable’ bus services fit around wider future goals

Government call for reform

It is not clear that the current model will not suffice in generating significant growth in future bus demand. It is noticeable from the recent Government announcements that the Parliamentary Under-Secretary of State for the Department for Transport Baroness Vere outlines the need to reform bus funding:

“We must reform bus funding in the long term, and we will work with the sector to better understand its impact before moving ahead with any implementation. We must adapt to new levels of patronage, acknowledge that these are extremely challenging financial circumstances and balance the needs of taxpayers, the travelling public, operators and local authorities.”[6]

The wider sustainability need for change

The potential for reform lands at the same time that the Climate Change Committee (the CCC) is saying what is required to deliver net zero in the UK. The CCC identifies the need to shift circa 11% of private vehicle trips to bus by 2030[7]. Translating this change into bus demand, that is an increase of circa 50% bus trips compared to 2019. Any bus reform should not lose sight of the need for additional capacity and demand on the network into the future.

Using a broad calculation to get a gauge as to the level of investment needed to achieve this, it’s worth looking at the historic trend in department spending on roads and local public transport in the past decade or so. This data comes from the HM Treasury Public Expenditure Statistical Analyses[8]. Spend on Local Public Transport fell from £3.9bn in 2009/10 to £2.5bn in 2018/2019, a fall of 38%. At the same time, spend on all roads has been flat, at just over £10bn on national and local roads combined. Over that decade on average bus demand fell by 11% whereas car demand only fell by 5%.

By taking the above analysis it’s possible to then extrapolate what sort of spend profile is needed to reverse the decline in bus patronage whilst at the same time meeting the CCCs targets for car and bus trips. From reviewing the spend data for transport with the modal trip demand, we can derive an approximate elasticity factor to understand the impact on modal trip demand for every £1 spent on that mode.

This analysis points to a need for major change in how much the UK funds its bus services (and other sustainable transport modes), as without significant extra funding the country will not hit its bus patronage targets to meet its sustainability targets. Though there has been £3 billion allocated to the Bus Strategy and £5.7 billion in funding to level up local bus, tram, rail, walking and cycling networks in England’s 8 city regions as part of City Region Sustainable Transport Settlements (CRSTS), these are multi year strategies with some the funds diverted to pay for impacts under Covid lockdown and for other modes of transport.

Evidence of change where investment is made

Where investment has been made in a concerted way, we can observe positive impacts. The £2 bus fare cap under the BFCG scheme will cost circa £170m per year under current plans covering the period from the start of 2023 to November 2024. As of May 2023, an additional investment of £500m has also been earmarked up to April 2025 for bus services and operators. The fare cap scheme undoes some of the issue of the previous decade whereby bus passengers were expected to pay higher and higher fares for similar or worse levels of service. Initial DfT analysis published in May 2023[1] on the impacts of the bus fare cap saw 10% more of people make more journeys by bus . Of the additional bus journeys made approximately 20% were made by who would have otherwise used a car / van as a driver or as a passenger.

Based on the £170m per annum extra investment for fare capping, the bus fare cap scheme only equates to 2% of the additional budget for public transport identified as needed to meet Net Zero. This example both shows investment makes a positive difference but also that significant levels of funding way beyond what have currently been earmarked will be needed if the Government is serious about generating modal shift from car for travel and meeting bus patronage targets by 2030 and beyond.

Summary and Final Thoughts

This analysis shows that bus services were being adversely impacted in England outside London before Covid. The preceding decade saw bus fares rising, government and local authority funding falling and costs for running bus routes on the up. This all meant an 11% fall in bus passenger journeys 2009-10 to 2018-19.

The Government recognised the need for change, with many emphasising the need to invest in providing more bus priority for bus services. However, whilst the Bus Back Better and BSIP plans have been formulated, Covid has hit underlying demand and so has brought about a ‘new normal’ in terms of a reset of baseline bus demand somewhere around 10% lower than pre Covid levels. Consequently, a further gap in financing bus services has opened up that the Government has tried to fill with additional funding such as the Bus Recovery Grant (BRG) revenue support and the Bus Fare Cap Grant (BFCG) scheme. However, the Government recognises that these are only short-term solutions and that there “must reform bus funding in the long term”. Reform should not be used to simply reduce Government costs to support a reduced bus demand network.

The early evidence from bus fare capping shows that focussed bus investment can generate new bus patronage and reduce car use. However the wider evidence base based on the CCC analysis shows that this is impact is minimal in the wider scheme of things and significantly more funding for public transport will be required to hit mode share and modal shift targets by 2030. There is still a long journey to travel to meet the Governments’ call in Bus Back Better of “growing patronage, increasing efficiency, improving the environment and securing modal shift from the private car.”

Given the UK Government acknowledges bus funding reform is required, what will viability look like for our bus services going forward? Key areas to look at include:

1. How do we bridge the viability gap, especially in a post Covid environment, between the bus demand and services we currently have and the future targets we want?
2. How do we fund the likely step change in investment required? Is this through simply pumping more money into the system or do we need more targeted routing in higher demand areas or do we need new planning rules to support bus patronage? What would any reform look? Does the latest Government changes around funding based on deprivation, car ownership and population point to a way forward?
3. With journey time reliability data being patchy, we can’t see what might be causing issues to solve. How can we bridge this gap?
4. How do we stimulate more bus demand through targeted investments similar to bus fare capping?