Should bus fares go up?

Today, the Straits Times had an article called "Bus fares may go up to help improve drivers' pay". In it, it states that our Transport Minister Lui Tuck Yew expressed that drivers need to be paid more, and that public transport operators will be allowed to do so in the ongoing fare review. 

The name of this article is obviously to skew the reader's opinion - in that, bus fares will go up to help the drivers. It shifts the attention from the profits of the public transport operators to the plight of the bus drivers, who are not getting paid enough, apparently. But as a member of the public, why should I care? SMRT, as a group, still made around S$120m of profits in their financial year 2012. Why are we forced to pay more just because you can't make money? For other goods, if merchants were to increase prices, customers have the option not to buy it. But for public transport, this isn't possible. 

But the intention of this post is not to complain about SMRT raising fares. Enough has been said (or is it complained?) on this - on social media, forums, etc. But what if we look at this from the perspective of a private company?

A private company's purpose is to make profits. From SMRT's annual statement, one can see that SMRT has several revenue divisions, namely trains, LRT, buses, taxis, rental, advertising, and others. The bus division lost S$1.7m in FY2011, and S$11.6m in FY2012. If I run SMRT, would I still be willing to increase costs when the business is not making money, and is not foreseen to turn profitable anytime soon? And for SMRT's benefit, group profit after tax for their financial year 2012 has gone down rather significantly (although it is certainly still positive).

FY2008: S$149.9m

FY2009: S$162.7m

FY2010: S$162.9m

FY2011: S$161.1m

FY2012: S$119.9m (25.6% drop from FY2011)

FY2012 also coincides with a big increase in capital expenditure, increasing from S$100m to S$190m in the previous four financial years to almost S$500m in FY2012. But one thing to note is that FY2012's revenue is actually the highest since FY2008 (I didn't bother to look before FY2008). If revenue was highest and yet profits were lowest, we can deduce that costs would be the main determinant, although this is spread out across all their divisions. 

The public would demand SMRT to cut costs and be more efficient. From the top of my mind, here are some of the costs I can think of when it comes to the bus division: wages (bus drivers and other staff), depreciation of buses, motor insurance, employee insurance, cleaning services, petrol, inspection, bus maintenance and servicing. It doesn't seem like these can be cut so easily, assuming that they have already looked into cutting them. They stated that they are exploring vehicles using alternative energy, such as electric buses, but this does not seem possible to realise in the short term.

So what is easiest would be to increase revenue. Advertising is one thing, which they should already be doing. Another is to increase bus ridership. But the more direct measure would be to increase bus fares. Let's take another look at the bus division's numbers.

FY2011: Revenue was S$213.1m, while earnings before interest and taxes (EBIT) was -S$1.7m. 

FY2012: Revenue was S$220.4m, while EBIT was -S$11.6m.

Simplistically speaking, we can assume that costs were S$232m in FY2012. If I am able to increase bus fares by 8%, this would point to a revenue of S$238m with S$6m profits, or a profit margin of 2.5%. This doesn't look too unreasonable. But how much would be a 8% increase in bus fares?

From their website, bus fares range from $0.73 to $1.96. In practice, if bus fares were to increase, it would not go up uniformly across all distance tiers. But a simple calculation would give some insight. Fare increases would range from 6 cents to 16 cents. And according to LTY, fare increases have only been 0.3% cumulatively over the past five to six years, while operating costs have risen by about 30%.

However, SMRT reports advertising revenue separately from the bus division, so perhaps it would be fairer to allocate the advertising revenue from buses back to the bus division. There is no breakdown of advertising revenue, so I am unable to determine how much of their FY2012 advertising profit (S$19.2m) came from the bus division. But if we were to allocate it proportionately, it should make the real figures look better, and perhaps fare increases need not be 8% but 6% to 7%, for example.

So from the perspective of a private company, I would not necessarily support the fare increases, but I would at least understand the rationale behind it. Of course, whether SMRT should be publicly or privately run is a separate issue entirely.