CAPE TOWN commuter transport company Golden Arrow Bus Services (GABS), now owned by Hosken Consolidated Investments, has taken costs on the chin in a bid to retain market share.

Interim results to end September show GABS growing its turnover by a strong 20% to R470 million. But a strategic decision not to pass the increased cost of diesel during the interim period onto passengers cut into margins, reducing operating profits by 20% to R67 million.

After reduced profitability of R117 million in the year to end March 2008, one might have forgiven GABS for passing on some of its cost through fare rates.

But it would seem that GABS has called the market correctly, and sacrificing margins for customer loyalty could pay off in the 2009 financial year.

With the marked drop in the diesel price recently there can be little doubt that GABS’ cost base will rapidly diminish, resulting in a restoration of profit margins.

Certainly the growth in interim turnover suggests demand for public transport is robust, which means GABS has quite an opportunity to profit handsomely from this growth at respectable margins – that is presuming the motorists that turned to public transport during the ‘fuel price crisis’ continue to make use of the bus service.

But aside from the reluctance to increase fares during the period of high fuel prices, the biggest risk GABS undertook was to start recapitalising its sprawling bus fleet.

In financial 2008 GABS went out on a limb by acquiring 110 new MAN Lion Explorer buses for the princely sum of R129 million. Another 22 buses were rebodied at a cost of R6.5 million.

This was considered heavy spending for a company which is feeling profit pressure. But lower profits are not GABS’ only problem. At the time of going to press, the company was fighting a court battle to compel government to immediately pay over R92 million in subsidies.

Withholding the subsidy – which the High Court has already ordered government to pay up – seems highly irresponsible considering the investment GABS has made in its fleet and the role the bus company plays in public transport in and around Cape Town. The Cape Town Regional Chamber of Commerce and Industry has already warned that the withodling of the subsidy could undermine the development of an affordable public transport system in the city.

Since HCI took control of GABS in early 2004 there has been an emphasis on recapitalising the fleet. Since April 2004 Golden Arrow acquired 279 new buses and refurbished another 113 – an exercise that has cost R326 million.

But revamping the bus fleet is one thing… Another major issue is that GABS needed to house the additional fleet, something which necessitated GABS extending its depot facilities (currently jammed next to the King David Golf Course) to “adequately attend to the service, maintenance and operational requirements of the bus fleet.”

So GABS found a separate new depot to accommodate 200 buses in Philippi at cost of R45 million.

The major spending by GABS really does put things into perspective – especially for those who believed (CBN included) that HCI scored a great deal when buying the bus company for just R270 million in 2004.

Recent spending on the GABS fleet and property pushes that effective price tag to closer the R700 million mark.

This responsible spending, though, could ultimately see GABS pushing profits closer to the R150 million mark – especially when additional transport demand from the 2010 Soccer World Cup comes into play.

In this regard GABS is engaged with Cape Town planning authorities in a bid to offer 2010 services. The company has indicated a willingness to operate a dedicated ‘inner-city service’ during the 2010 event.

So how about that R92 million subsidy then….

Source: Cape Business News