Bloomberg News

Greyhound Taps Airline Pricing Models to Boost Profit

May 21, 2013

Greyhound Taps Airline Pricing Models to Make Bus Business Pay

Greyhound bus riders find ways to pass the time on a morning trip from West Palm Beach to Orlando, Florida. Photographer: Erik Lunsford/Palm Beach Post/Zuma Press

Greyhound (FGP), the iconic U.S. bus brand, has turned to pricing models used by the airline industry as it seeks a ticketing system capable of boosting profitability by charging more for travel during peak periods.

FirstGroup Plc (FGP), the U.K. company that owns Greyhound, will spend as much $40 million on computerized yield-management technology to replace Greyhound’s flat-rate charging plan, and has engaged a U.S. carrier to help with the design, Chief Executive Officer Tim O’Toole said.

“No longer will a trip on Greyhound cost the same on July 17 as the day after Thanksgiving,” O’Toole said in a telephone interview from London. “Pricing will be much more dynamic.”

Yield management was introduced in the airline business in the 1980s, when Robert Crandall, CEO of American Airlines, began employing mathematicians to develop models able to predict demand during given time periods and price tickets accordingly. It has since become a critical tool for most of the world’s carriers, as well as in other businesses such as hotels.

O’Toole declined to say with which airline Dallas-based Greyhound is working as it bids to lift its $1 billion in annual sales. The plan also includes an airline-style loyalty program.

Dominant Player

Founded in 1914, Greyhound operates 1,700 buses to 3,800 destinations and carries almost 25 million passengers a year -- making it 10 times the size of its nearest rival -- yet lacks a system able to analyze who is getting on where and when.

FirstGroup, which acquired Greyhound via the $3.4 billion purchase of Naperville, Illinois-based Laidlaw International Inc. (FGP) in 2007, has already applied yield-management tools at the Greyhound Express service introduced in late 2010 with routes serving Chicago and other cities in the U.S. Midwest.

The Express unit, pitched between the traditional brand and the BoltBus unit that FirstGroup runs in the northeastern U.S., increased passenger numbers 10 percent last year, faster than the old Greyhound, and serves 900 cities after entering markets as far apart as California, Louisiana, Delaware and Canada.

“You’re selling seats on a bus,” O’Toole said. “The trick is to take your management system and graft it onto the bigger Greyhound, which requires a lot of computer work. You need algorithms to constantly be balancing the business.”

The introduction of yield-management technology comes as O’Toole seeks to steady FirstGroup following the loss in October of a 5.5 billion-pound contract to run Britain’s West Coast rail line, one of the busiest in Europe, after the U.K. Department for Transport discovered flaws with the bid-assessment process.

Rights Offer

Aberdeen, Scotland-based FirstGroup said yesterday it would raise 615 million pounds from a three-for-two rights offer, helping it to retain an investment-grade credit rating, remove balance-sheet constraints and ease spending plans.

The company plans to invest 1.6 billion pounds over the next four years across five divisions that include First Student, operator of more than 50,000 yellow school buses in the U.S. Some of that money will go towards an overhaul of its information technology systems.

Megabus, owned by FirstGroup’s U.K. rival Stagecoach Group Plc (SGC), has employed yield management since it began operating in North America in 2006. The unit links more than 100 cities with 250 buses after growing via the 2012 purchase of nine Coach America Inc. units from bankruptcy protection for $134 million.

Mexican Foray

“Getting the pricing right has been particularly important in the current economic climate because everyone needs to make their dollar stretch further,” spokesman Steven Stewart said from Stagecoach’s headquarters in Perth, Scotland.

Greyhound, which already has routes in Canada, is gearing up to commence operations in Mexico after becoming the first U.S. bus company certificated there, O’Toole said.

“We’ve always moved people in partnership with Mexican bus lines, but now we can actually go into Mexico,” he said. We’re completing a terminal and we’ll be initiating the service soon.”

The first route will start this summer, with 10 buses running from Nuevo Laredo, across the border from Laredo, Texas, to Monterrey, Mexico’s third-largest city, about 140 miles away.

The Greyhound brand was introduced to Britain in 2009 as FirstGroup sought to tap demand from motorists no longer willing to get behind the wheel on crowded roads.

Leather, Wi-Fi

The U.K. buses, given women’s names from American songs including “Sweet Caroline,” “Peggy Sue” and “Jolene,” have more in common with the Bolt and Express fleets and are fitted with power sockets, leather seats and air conditioning. Passengers get a complimentary newspaper and free wireless Internet access.

Similar upgrades will be soon rolled out across the main Greyhound fleet in the U.S., according to O’Toole.

“You’ll notice the old Greyhound white bus being replaced by a blue and gray one,” he said adding that the makeover will include features such as wi-fi access. “I hope we’ll make substantial progress over the next two years.”

FirstGroup shares fell 30 percent yesterday after it halted dividend payments to focus on the rights offer, saying the next award will be for the six months ending March 31 next year.

Chairman Martin Gilbert will also leave when a successor has been found, after 17 years on the board.

To contact the reporter on this story: Andrea Rothman in Toulouse, France, at aerothman@bloomberg.net

To contact the editor responsible for this story: Benedikt Kammel at bkammel@bloomberg.net


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