The Investment Opportunity in School Bus Operators
Gum under the seat not included
Many parents around the country are asking the same question: will children be able to return to school? And for good reason. It’s not just a question of learning outcomes, but a question of safety, sanity and livelihood.
But it’s not just parents that are thinking about when students will return to school. While we don’t usually think about it, there’s an entire industry dedicated to safely and efficiently transporting students to and from school each day: school bus operators.
However, as schools have shut down across the country, the need for school transportation has shut down too. Instead of transporting children twice a day, buses are sitting empty in parking lots across the country. A sleepy industry, school bus operators are an essential job with over 600,000 drivers in the United States. Yet some school bus operators are even going out of business due to the lack of demand.
In this market situation might lie an interesting investment opportunity. During normal times, school bus operators are strong businesses with deep moats. They are have sticky sales contracts and have exclusivity on school bus routes. Once you own these assets, they are easy to defend.
In this article I take a look at the makeup of the school bus operator market, what it takes to run a school transportation service, and how there might be an opportunity for investment (that is, if you can stomach the Covid-19 risk).
Approximately one third of all students get transported to school via a yellow school bus. This comes out to about 480,000 buses transporting 26 million students every day of the school year (source). The total market is estimated at $13.5 billion annually with minimal growth.
Of these 26 million students, about 60% are transported by the school district themselves. They own the buses and manage the drivers. This part is largely out of an investors control. But the opportunity is in the other 40%: the students who are transported by private school bus operators.
The largest private school bus operator in America is the First Group division of First Student. They make up about 20% of the private market and are over twice the size of the next biggest player, National Express. Beyond that, there are hundreds of smaller operators. Some of these have fleet sizes of several hundred buses while others serve just one or two districts.
The opportunity is to purchase a bunch of these small operators — many of whom are family-owned — and roll them together into one business.
Previously, owners might have resisted selling their business (or resisted improving operations at all). If they were earning a good wage, what would be the point of selling? Slowdown (or halting) of their operations due to the pandemic might cause them to reconsider. And a savvy buyer could purchase these businesses at cheap prices then spruce them up to improve margins. At scale, the combined company could be a stable cash flowing business with a strong moat.
A Deep Moat
As previously mentioned, school bus companies are great businesses to own. Consider a few of the barriers to entry. The first is that the business is capital intensive. New school buses cost between $65,000 and $100,000 and operators need several buses just to service one school district.
Additionally, there are operational complexities in managing a team of drivers, maintenance workers and dispatchers. This operation doesn’t develop overnight.
Beside the capital and operations involved, new entrants would also have to compete for valuable government contracts. Sales cycles range from four to six years which means it’s nearly impossible for the contracts to change hands quickly, and a good sign for existing vendors.
But the most important moat is the bus routes. These routes are extremely defensible. Each student only needs to be picked up and dropped off by one school bus. And even more importantly, each route is only serviced by one bus. Children don’t pick and choose between different school buses, they just get on the one closest to their house. Plus, the risk of children riding anything besides a school bus is quite low. Busing is a very economically and environmentally efficient way to safely transport students everyday. Using single cars, rideshare, carpooling, or any other form of individual or small group transport would have a higher per-student transportation cost.
The elephant in the room is also the biggest opportunity: will schools reopen? And if so, how will student transportation change?
One challenge is that school reopenings are not uniform, and neither is the process to decide if they open. In New York City, the mayor decided to close school buildings, only to have the governor proclaim that it wasn’t the mayor's decision to make. A school district in rural Idaho wanted to reopen as normal, only to have the local public health officials wave it off (after the state board of education granted required their approval). According to the Center for Disease Control (CDC), all decisions should be made in “collaboration with local health officials and other state and local authorities.”
In terms of the Covid-19 impact, there have been fewer cases for children. Children make up 22% of the population but only 7% of the cases, and there’s also some evidence to suggest that children have a lower death rate as well. On the flip side, children also likely spread the disease faster than adults. Regardless of the safety of children relative to adults, the data isn’t always the main criteria for making decisions. Like many many Covid-related questions, the data is messy. And even if it was, decision makers across the ecosystem have different incentives and decision criteria.
So what is happening on the ground? Are students going back to school or not?
It might seem foolish to bet on a vast re-opening. After all, stocks like Zoom and Shopify — which benefit from the shift online — continue to outperform expectations. What once was “a few weeks” has turned into six months and likely much longer.
However, there are a few interesting data points to consider.
For example, there are more students going back to university than you might think. American Campus Communities is a public real estate investment trust (REIT) that owns and manages real estate in college towns. They own 159 student housing properties containing about 96,400 beds. And as of July 2020, they are 90% pre-leased for the upcoming year, only down 3.4% from last year. That’s not a very big difference considering the perception of Covid-19 in the media. And while this is university, not grade school, and it’s housing, not transportation, it does show that parts of the education system are operating at near normal levels.
Additionally, in Europe schools have been coming back using a variety of methods. In Germany, 152,700 students returned to the classroom for the first time since March. They are using a cohort model to spread students throughout the day to limit the amount of students together at one time. In Scotland, schools reopened with precautionary measures. After three weeks, there haven’t been any major outbreaks. And Norway has been adopting a “traffic light” system where a green light indicates schools can run as normal, yellow means having some precautions and red means schools must limit class sizes. They are currently operating in the yellow light, which requires some precautions such as stronger hygiene.
Many schools in the US are scheduled to begin classes the week after Labor Day. Regardless of the initial data, we won’t know the short, medium or long term consequences of the pandemic. It’s the biggest question with this business: will students still need the same amount of transportation as they did pre-Covid? If you can develop conviction that it will return to normal, there’s an opportunity here.
Households across the country are struggling with Covid-19 in different ways. I can only imagine what it’s like trying to be a parent right now with children at home. And that’s the reason I would be excited about buying school bus operators. Even if school provides nothing more than daycare, it is still an essential service. I anticipate school buses will return back to normal in a couple years, if not sooner.
However, the short term impact might be too much to bear for small mom-and-pop school bus operators. A capital provider could give baby boomer-aged owners retirement liquidity in exchange for an under-optimized asset. Done enough times, it could turn into quite the business.
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