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For one East Midlands bus operator, “all change” is not the end of the line

Posted: 11 November 2008 | Rob Hicklin, Finance Director, Nottingham City Transport | No comments yet

Keeping up with Nottingham’s public transport requirements has needed a few gear changes.

Nottingham City Transport (NCT) is the primary public transport operator in the historic East Midlands City. Winner of UK Bus Operator of the Year at the Bus Industry Awards in 2004, NCT employs 1,130 people in Nottingham, and sees almost half the population of the city use its services. It generates annual dividends for both the city council, the majority shareholder, that has seen a total return of £6.9 million in the past 20 years, and for Transdev, the multi-national transportation company, which owns an effective 18% stake in NCT. In 2007, the company generated an EBITDA of more than £6 million, enabling reinvestment in both vehicles and staff.

Keeping up with Nottingham’s public transport requirements has needed a few gear changes. Nottingham City Transport (NCT) is the primary public transport operator in the historic East Midlands City. Winner of UK Bus Operator of the Year at the Bus Industry Awards in 2004, NCT employs 1,130 people in Nottingham, and sees almost half the population of the city use its services. It generates annual dividends for both the city council, the majority shareholder, that has seen a total return of £6.9 million in the past 20 years, and for Transdev, the multi-national transportation company, which owns an effective 18% stake in NCT. In 2007, the company generated an EBITDA of more than £6 million, enabling reinvestment in both vehicles and staff.

Keeping up with Nottingham’s public transport requirements has needed a few gear changes.

Nottingham City Transport (NCT) is the primary public transport operator in the historic East Midlands City. Winner of UK Bus Operator of the Year at the Bus Industry Awards in 2004, NCT employs 1,130 people in Nottingham, and sees almost half the population of the city use its services. It generates annual dividends for both the city council, the majority shareholder, that has seen a total return of £6.9 million in the past 20 years, and for Transdev, the multi-national transportation company, which owns an effective 18% stake in NCT. In 2007, the company generated an EBITDA of more than £6 million, enabling reinvestment in both vehicles and staff.

However, Nottingham’s major bus operator has not always been such a success. When the bus industry was deregulated after the 1986 Transport Act, Nottingham City Transport came into existence – replacing City of Nottingham Transport – although it was not the happiest of births. The company languished, reaching the lowest point in 2001, when running buses alone was barely breaking even for the year, with serious investment required.

Disaster was averted thanks to income from bus-side advertising, funds from the sales of buses and interest earned from cash reserves. Yet the position was increasingly untenable, and the situation engendered a wholesale change in the company’s modus operandi. Indeed, we have referred to 2001 as our “Big Bang” moment, when NCT realised that it was going to have to change dramatically, and went about doing so.

The tram system

However, change was – to a large extent – being thrust upon us. The City and County Councils had taken a decision in 1999 to have a tram line put into operation through the city. At that time, NCT received an investment from French transportation company Transdev – in return for an 18% holding in NCT.

This funded NCT’s stake in Arrow Light Rail, the company set up to handle the construction and operation of the tram system. Arrow consists of five partners. Two of which – the investment funds Galaxy and Innisfree – provided the required finance, and hold current stakes in Arrow of 24% and 36% respectively.

Building the tram line and the trams was the role of Canadian rail and aviation manufacturing firm Bombardier, which owns 13% of Arrow, and Carillion, the UK support services and construction company, which has since sold its stake to the remaining shareholders. NCT and Transdev own 14% and 12% of Arrow respectively, and formed the Nottingham Tram Consortium (of which each owns 50%) to operate the trams.

With more than eight million passenger journeys recorded each year, the tram has definitely proved a success with the people of Nottingham – exceeding the buses that previously ran on the tram’s geographical corridor by two million journeys annually.

Yet all this meant the state of managed decline on the buses was either going to be accelerated, or be arrested by a drastic rethink. At NCT we decided to reverse the decline. Fresh management came in, including myself as Finance Director, and Nicola Tidy as Marketing and Communications Director, while Mark Fowles took over as Managing Director after a spell as Deputy MD. We sat down and decided to completely reinvent the company – starting with the network.

Certainly, the establishment of the tram necessitated some major changes for the bus operations – physically, as road layouts were altered (partly due to a simultaneous pedestrianisation initiative in the city centre), and logistically, as bus routes needed to be re-calculated to provide the optimal offering.

So, routes running from one side of the city to the other via the city centre were abolished – not least because we had established that less than 3% of passengers travel through the city and out the other side, while such routes were responsible for one in three of our congestion delays. These changes led to new bus stops and interchange points, which provoked some public ire.

NCT also divided the bus operations into two brands – Go2 and Nottingham Network. This allows the former to serve commuters with regular and rapid arterial routes into and out of the city centre, while the latter provides the less direct routes with deeper penetration into residential areas.

However – despite a public information campaign run by NCT that saw over 3.4 million leaflets printed and distributed – the launch of the new routes on 30 September 2001 created a great deal of public dissatisfaction.

This storm was eventually weathered, however, and one of the particular benefits of being associated with Transdev was the reassurance their involvement gave the council that the sweeping changes being pursued were the right ones, especially when they were not initially being met with general approval.

Vehicles

In due course, complaint levels fell away, while usage of the services increased. The efficiency benefits created by the changes can be seen by the fact that NCT now carries as many passengers, and runs as many services, as it did prior to the overhaul – while now operating three buses for every four that were in service previously.

This has been instrumental in the rejuvenation of the fleet we planned in 2001. Before 2001, we had an average bus age of 13-14 years, including many ageing double-deckers. We immediately adopted and adhered to a policy limiting the maximum vehicle age to 12 years, and today the fleet average is just 5.3 years.

This has required investment in the vehicles. £18.8 million has been spent on buses between 31 March 2003 and 31 March 2008, and over the course of the current financial year we will spend £5.6 million on 36 new vehicles. Indeed, being introduced this year are 20 Optare Versas, high-spec buses with leather seats, air conditioning, and, like 85% of NCT’s buses, CCTV.

We tend to finance our buses through hire purchase schemes, inviting bids from a shortlist of preferred financiers: Alliance & Leicester Commercial Bank, Barclays, Fortis, HSBC, Lloyds TSB and Lombard.

Hire purchase is ideal for us, as having the buses as assets on our balance sheet generates tax benefits, and we know we will have use for the vehicles until they are too old for the fleet. Also, at the vehicles’ maximum age, the company sells them on – which allows us to make back some of the initial investment.

Indeed, NCT has a reputation for top-end vehicle maintenance, which obviously has a positive impact on the residual values of the vehicles when we are disposing of them, as well as minimising any problems arising while they are in operation in Nottingham. The buses tend to have another 10 years of life in them when they are sold.

We now have a fleet which is 85% low floor, and we anticipate confidently that we will run a 100% low-floor fleet within two years, comfortably ahead of government requirements to do so. NCT will be fully DDA complaint by 2013, again ahead of Government targets.

On the Go2 routes in particular, we have a maximum vehicle age of six years. Mid-life vehicles are put onto other routes, while older ones are sold.

NCT is proud of the quality and modernity of the fleet, and is prepared to make the investments necessary to maintain that level. Certainly, we are not solely focussed on penny pinching and cost cutting – although the financial returns generated by NCT are also a source of pride. The 1986 privatisation – creating NCT – cost the council £4.5 million, and since that time NCT has so far given the local authority a total of £6.9 million in cash dividends – on top of providing a service that gives the city a valuable social dividend.

Money matters

NCT is essentially a steady and predictable service business. We know when and how much money is coming in and going out, over a 12 month period. We know, for example, that there will be a 10-15% dip over the summer, due to school holidays and people going away. We know that there will be a boom in October, when the University terms begin and The Goose Fair takes place, and that the busiest day of the year is always the last Friday before Christmas.

However, clearly a bus operator has to deal with a lot of cash. To ensure the smooth running of the business, it is therefore imperative that we have efficient cash management systems in place. The daily fare revenue collected on the buses is £70,000 to £80,000. This is handled by a specifically employed team, which takes away the cash for counting, after which we are sent the sum as an electronic payment.

The other main source of coin income is our Travel Centre, in the heart of the city, which brings in £20,000 to £60,000 per day. This cash has always been dealt with by Alliance & Leicester Commercial Bank – going back to when they were the Girobank – and we receive a cash deposit service each day via the bank’s network of cash centres.

Indeed, the very stability of our cash flow allows us to generate some income from lending money to financial institutions such as ALCB when they have a short-term need for currency.

One area causing some concern for this steady enterprise, however, is in NCT’s outgoings. Staffing has always been the primary outgoing, but the second major cost is fuel – and it is increasing. In total, we purchase 8.5 million litres of diesel a year, and so like any other operator, we are a victim of soaring prices.

We have taken some measures to address this – after seeing prices rise above what we had thought were bullish predictions in our last budget, we put in place a hedging arrangement in May – fixing the price for 50% of the remainder of our fuel requirement for 2008. This has paid off, ensuring a bit more certainty in uncertain times, especially as we have since seen further price increases in the market.

Of our other major costs, pension scheme contributions are another that have risen significantly. Since the privatisation, NCT has operated an open final salary scheme. These schemes are now offered by less than one in five companies, as they place an open-ended liability on the employer. Any employee with six months service can join, contributing 6.8% of their salary, to which we add 13.6%.

And we have a further pension scheme, which is a legacy from pre-privatisation. It is part of the Nottinghamshire Local Government Pension Scheme, under which employees who have been with us since before 1986 – numbering approximately 150 – can contribute 6% of their salary, to which NCT is obliged to add a further 33%. These schemes mean that NCT’s total pension contributions for the last financial year were £3.9 million, which is a £400,000 increase from the previous year.

Next stop…all change

Yet greater challenges await. The success of the trams has led to two further lines being planned, for a 2013 start. The initial tram line operates on what had been the city’s most popular bus route. This inevitably had an impact on levels of bus patronage, but by 2007, NCT had reached passenger journey levels of 50 million per year – equal to those attained prior to the tram’s introduction. However, the two new proposed tram lines will run on the two next most heavily used bus corridors, setting a new challenge for NCT.

Yet the mandate for the operation of the new tram lines has been put out to competitive tender, despite the success enjoyed by NCT and Arrow. Indeed, there is substantial interest in running the new tram lines, and bidding will no doubt be competitive, as the operator of the currently running line recorded a £1 million profit, turning over £8 million.

Further, the winner of the contract for the new lines will also operate the existing line. So while Arrow will certainly be among the bidders, we are also certain to go through another period of major change, as we will either cede control of the current tram line, or retain it and take control of the building and operation of two more. Yet it is certainly our intention that “all change” does not mean the “end of the line”.