RedBus needs to go single
We hope you had a chance to attempt solving the RedBus case on your own. Below you will find our suggested approach, but rest assured that this is not the only one possible.
Q1: How would you approach helping our client?
First of all, we will need to analyse the financials of RedBus to identify opportunities for improvement.
Revenue: number of passengers x fare per ride; segment passengers by route, are some routes more profitable than others? Are we offering any auxiliary paid services? E.g., private travel
Cost should be split to fixed and variable cost.
Fixed cost:
Bus depreciation: can we move to cheaper buses? Can we extend the useful life of the buses?
Maintenance: can we consolidate maintenance contracts? Can we bring maintenance in-house and save money?
Bus insurance: can we renegotiate contracts?
Overheads: do we have a large corporate office? Can we outsource some functions to save cost?
Variable cost:
Fuel: can we consolidate fuel contracts and negotiate lower wholesale price? Can we switch suppliers? Can we optimise our routes to reduce the number of miles driven?
Labour: can we reduce salaries or other compensation related costs? How is our drivers’ utilisation as compared to industry benchmarks.
Next, we would need to look at the market environment to understand the range of possible options.
Competitors: Who are the other players in London? Are they experiencing the same issues? Do they do anything differently?
Customers: What is the trend within our customer base I terms of bus usage? What do they care about most? How can we convince them to use buses more?
Regulation: What is the regulatory environment for bus operators? Can we ask for subsidies? How much flexibility do we have with route / timetable decisions?
Q2: What is the breakeven number of passengers for a double decker bus?
An easy warm-up question. It is important to start by deciding on the units (day, route or mile). If we were to select the breakeven amount per route:
BE = Cost / Revenue per passenger
Cost = 1*20 + 20*1 + 50/10 + 3*20 = 233
BE = 105 / 1.5 = 70 passengers
Takeaways: 70 passengers per route sounds like a lot, it means that the bus needs to fill up more than once over one route. Since people are generally travelling in one direction during rush hours (i.e., from home to work or from work to home), and that a full bus cannot pick-up any more passengers, that could be a challenging target, especially outside of rush hours. Bus depreciation is the highest cost component, we should check whether we can reduce the cost of buses or increase their useful life.
Q3: The client has shared passenger information on 5 of its routes. What can you learn from the information?
Key Insights:
If possible, the client needs to adjust frequency of buses to make routes more profitable
Client should try to cancel route D, as it is never profitable
Route C is very profitable, but might be running out of capacity during peak hours, therefore its frequency should be increased
If the frequency cannot be reduced, the client should consider using smaller buses
Q4: Math: Unfortunately, the frequency of buses is regulated and RedBus cannot reduce it. However, RedBus is considering acquiring single decker buses to fully operate on some routes, and during off-peak hours on others. Their investment threshold is a 3 year payback period. Should they do it?
The candidate should calculate the difference in cost per trip of a single decker vs a double decker bus, and calculate how many trips are required to payback the investment.
Cost per trip = (Depreciation per mile + fuel per mile) * number of miles per trip + Insurance per trip + labour cost
Cost per trip = (420k / 300k + 0.5) * 10 + 10,500 / 350 / 10 + 20 * 1 = £61
Difference versus a double-decker = 105 - 61 = £44 per trip
Number of trips to payback the investment = 420k / 44 = ~9,500
Number of annual trips per route = 10 * 350 days = 3,500
Takeaway: replacing some double deckers with single deckers does make sense, as the payback for investment is less than 3 years as required. The client can further improve their payback period if they are able to sell some of their double deckers to other operators. One risk to consider is the potential revenue due to lower capacity, hence we need to be careful when selecting routes / times to operate with a single decker.
Q5: Creativity: After looking at the cost side, RedBus would like to evaluate some ideas for increasing revenues.
Suggested buckets with example ideas:
1. Get more passengers
Advertise the bus service – e.g., greener option message
Re-design route to serve a larger population
Offer benefits to frequent users (e.g., loyalty programme)
2. Increase income per passenger
Increase fare if possible from regulatory perspective
Sell drinks / food on board
Provide paid WiFi service
3. Generate revenue via auxiliary services
Offer buses for private hire to corporates
Increase advertising space inside and outside the bus
Gather and monetise usage data
We are meeting with the CEO of RedBus, what would you tell her?
I would recommend RedBus to start operating single decker buses on some of their routes to improve profitability, for the following reasons:
Cost per route of a double-decker is £105, which requires 70 passengers in order to break even
Some routes, like D, never reach 70 passengers, others are losing money during off-peak hours
RedBus could acquire single decker buses for £420k, which will cost £61 to operate and will pay back the investment in less than 3 years
As a next step, I would recommend looking at options to dispose of some of the double decker buses to further improve the payback period, as well as ways to attract more passengers to the buses, for example by launching a loyalty programme.
How similar was your response to the example answer? Feel free to post your questions or feedback in the comments section. Don't forget to review the preparation plan for tips on approaching this and other cases. Book a coaching session to get expert feedback on your performance and ways to improve.