Revolutionizing intercity passenger travel…mega head-ache or mega deal?

We all have a Megabus story – bus broke down, driver reached maximum working hours half way through the journey and left you stranded at a rest stop (ahem…this happened to me over Thanksgiving) and whats with the elusive $1 fare that’s plastered all over their busses as if it were commonplace.
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Contrary to what I thought I would find, Megabus business and operations strategies are actually quite aligned. Megabus prides itself on its value proposition: providing safe, convenient, low cost, daily express bus service in the US and Canada. A subsidiary of Stagecoach Group in the UK, Megabus US is operated in by Coach USA and part of a rapidly growing portfolio that includes a UK rail business and bus lines across the UK, and Europe.  This decentralized operating model across a diversified portfolio of transportation alternatives has enabled them to capitalize on the significant growth in the intercity bus market. They are creating value for customers (30% of whom are college students) by adding routes that are currently underserved by conventional bus lines, offering comfortable buses with wifi, recharging outlets, wheelchair-accessible service, convenient stop locations, frequent travel times. Megabus extracts value through a an online booking system and dynamic pricing model that increases closer to the day of travel, they cut costs by avoiding cost of waiting rooms doing curbside boarding on public streets, parking lots, college campuses.
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Operational strategy – Tangible and intangible investments:
Strategic planning of routes to ensure maximum utilization. Verdict: #megadeal
Megabus has transitioned from a pure hub and spoke model (in the Midwest) to incorporate a point to point model (East and West Coasts) – by making additional stops along a single journey they are able to cut the costs of having additional hubs.
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Scope – rapid expansion through partnerships and organic growth. Verdict: #megadeal
Capitalizing on the liberalization of the French coach industry by the french government, in Sep 2015 Megabus announced it is doubling its work force in France investing $2.7 million Euros in fleet of 10 buses, 75 employees to reach a total of 27 domestic routes. In 2009, they purchased two Chinatown bus companies, which enabled them to meet demand for increased routes as they expanded throughout US. This explains why theres a mix of start of the art double-decker coaches and old livery coaches.
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Investment in Human Capital and safety. Verdict: #megadeal
Staff go through intense training and background checks before they hit the road. Drivers are only allowed 10 hours of drive time daily and must comply with off duty and night driving policies. Buses are tracked in real time and coordinates/footage from on board cameras are monitored in central support center in Paramus, NJ. This is positive news compared to the bad safety reputation of players such as Fung Wah, which was shutdown after the Federal Motor Carrier Safety Administration crackdown in 2013.
Quality and user experience. Verdict: #mega head-ache
You know you have a customer service quality problem on your hands when you are a top contender on pissedconsumer.com with only 3 resolved issues and over $130k worth of claimsMegabus is lacking in process controls that would enable them to provide a more streamlined customer service experience.
Megabus has achieved strategic alignment in key areas across its business and operational model – this has certainly fueled their growth. I wish I could say the poor customer service is something they should watch out for, but I fear it wont make a dent in their business. People will still ride Megabus. I know I will!
References:
http://www.stagecoach.com/~/media/Files/S/Stagecoach-Group/Attachments/media/publication-financial-reports/ar2015.pdf
http://www.stagecoach.com/media/news-releases/2015/2015-09-22.aspx

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5 thoughts on “Revolutionizing intercity passenger travel…mega head-ache or mega deal?

  1. Jennifer, this is a great analysis. I thought your description of point-to-point vs. hub-and-spoke strategies was particularly interesting because so many US airlines are focused on hub and spoke models, even for short-haul flights. Megabus is a great alternative to airline low cost carriers for price conscious consumers, and I wonder if their routes will eventually start to affect airline prices between competitive city pairs.

  2. I was very interested to read both the negative and positive aspects of Megabus in your post. I agree that some of their lower cost operating model elements (multiple stops, reach) would help support their business model of being a low cost provider. In addition, providing additional amenities that appeal to consumers would help drive demand (e.g. wifi, frequent travel times, convenient and abundant stop locations). However, I wonder if you think there will come a time when their unreliability and cheap brand image will drive customers to competitors, such as other bus services or more expensive trains (less likely scenario, given the value proposition to their target customer market)? Maybe their focus on operational safety will be enough of a competitive advantage to support their business versus other bus services. Great read, Jennifer.

  3. Interesting analysis Jennifer! I really see the strength of their proposition given large distances (especially US) and cost of alternatives (e.g. train, flights). I’ve used Megabus on a number of occasion and generally find them a great value-option for getting from A to B. Given the number of complaints you mention, I do wonder how they can improve the customer experience and whether their ability to address this issue will determine their performance in the future. I draw parallels with Ryanair which has become one of the most successful European airlines by capturing the no-frills, low cost segment of the market. Despite numerous complaints about treatment of customers (and employees), they were very profitable for a number of years. Somewhat, however, recently there was a backlash against their poor service, forcing company to make a number of changes in the operating model to improve customer experience and remain competitive against a number of low-cost challengers (EasyJet, Wizzair). I would imagine that bus transportation is even more competitive given lower required investment which leads to a question whether they can maintain growth and profitability with the current approach. Lowest fares attract passengers but might come at expense of investment in customer service or improved operations. Cost-conscious segment (students) is quite sticky, but I wonder what their operating capabilities are unique enough in the long run. If I’m not mistaken, they’ve had a few tough years in the US and were forced to cut a number of routes due to profit reasons.

  4. Thank you Jennifer! I enjoyed reading your post and a lot of what you said resonated with me as I have had varying experiences with Megabus through the years. It was interesting reading your post and then contextualizing some of my thoughts about the Megabus business plan and operational efficiencies. For me, Megabus was always convenient because it provided a service on a route that only they offered (between my hometown in Pennsylvania and New York City) and so it was not only cheaper but also a lot more convenient than flying or renting a car. I found the service on Megabus to be relatively standard – but always viewed the experience as a value proposition for getting the most for my money – and was willing to sacrifice comfort and better service for price and convenience. For instance, when considering other travel on potential Megabus routes (New York to Philadelphia or Baltimore/Washington D.C.) I never considered Megabus because of the other transportation options available. I did not find the value proposition great enough to outweigh the uncomfortable conditions or lower-quality experience. Also, on my traditional Megabus route between PA and NYC I saw fares jump up sharply over a few years as demand also shot up. By the end of my time in New York, I was constantly looking for other options, other than Megabus, as it was no longer an obvious great value. I am curious how their strategy will evolve in the future. I think they will continue to concentrate on their hub and spoke model and focus on routes between areas, especially with deal-seeking customers such as collegetowns, and major cities – but I wonder if their prices will continue to rise. There seem to be relatively low barriers to entry for these types of routes and services, so if they are not distinguishing themselves on service and price, or schedule and convenience, will they eventually raise fares until they price out some of their customers and have lower-fare competitors enter the market? To me, Megabus always stood for affordable value for more “random” routes – but this strategy seems easy to replicate, so I am interested to see how Megabus retains its market share in the future if more competitors enter the market.

  5. Great port Jennifer, and a great point about the pure hub and spoke model vs a point to point model. But I think that the customer service issue that you mentioned is a serious one that might have some ugly consequences for the business especially if a competitor with similar amenities starts offering the same service with better customer experience.

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