Buses are the future – at least according to bus companies. As the world toils to reduce its carbon emissions, National Express (NEX) predicts a “modal shift” away from cars, with public transport coming out on top.
It already has the upper hand on this front. According to figures from the Department for Transport, it is greener to take a diesel coach from Glasgow to London than to drive there in an electric car, when 'indirect emissions' – such as those produced through the generation of electricity – are taken into account. Predictably, petrol cars are even lower down the rankings.
Bus companies cannot afford to be complacent, however; they are also on the cusp of a major change. For while diesel buses are good, electric buses are better, and transport groups face the urgent task of transforming their fleets before combustion engines are phased out entirely. Whether they are in a position to do this is another matter.
Slow coaches
No firm date has been set for ending the sale of new diesel buses. In a consultation published last month, the government proposed sometime between 2025 and 2032. Companies have set their own deadlines. Go-Ahead (GOG) and Stagecoach (SGC) have pledged to be zero emission by 2035, while National Express has set a deadline of 2030 for its UK bus division. (Its coach business and international arm will move at a more leisurely pace.)
Despite the rapidly approaching deadline, however, there has been little movement so far. The government estimates that just 2 per cent of England’s bus fleet is currently zero-emission, and Go-Ahead – which describes itself as the largest operator of electric buses in the UK – has just 300 e-buses, out of a fleet of more than 5,500.
This apparent ennui is evident elsewhere in the sector. Figures published by the Society of Motor Manufacturers and Traders (SMMT) show that, last year, UK bus and coach registrations fell to their lowest level since records began in 1996. Numbers dropped by 17 per cent year on year, with just 3,467 vehicles joining UK roads.
The figures have been described as an “alarm call” by Mike Hawes, chief executive of SMMT. “The sector, and the millions of people who depend on it for essential mobility, is at a critical juncture, as Covid-19 has led to declining ridership which, in turn, has damaged demand for new fleet investments.”
Hawes has urged the government to release more funds in order to encourage investment. His words echo those of Andy Palmer, chief executive of electric bus maker Switch Mobility, who said government money has been slow to come through, meaning purchases have been delayed. Much like buses themselves, it seems, government grants may prove elusive until they all turn up at once.
It's clear from bus company accounts that spending has come down. Go-Ahead's capital expenditure on buses stood at just £112mn over the course of 2020 and 2021, compared with £212mn in 2017 and 2018. This is hardly surprising: public transport has had two of its worst years on record, with full recovery some way off. Between October and December 2021, passenger journeys in Great Britain were still languishing at 776mn, 30 per cent lower than pre-pandemic levels, although there are signs of improvement in the latest quarter.
However, it has resulted in older fleets and mounting depreciation, making the task of replacing assets ever more pressing. At the same time, companies are dealing with large piles of debt that built up during the pandemic. Both National Express and Stagecoach were forced to renegotiate their covenants in lockdown, and National Express has agreed to pay no dividend if gearing exceeds 3.5 times. As of 31 December 2021, gearing stood at 3.6 times.
Route to net zero
One big question is how much electrification will actually cost, both in the immediate term and when fleets are operational. Part of the difficulty is around technology: the future of battery power, hydrogen, and charging infrastructure is nebulous, and therefore hard to wedge into a financial model.
There have already been some impressive leaps in technology. The UK's first full-sized, self-driving bus took to the roads in Scotland this month. At the moment, however, regular electric fleets seem the most viable option – and they don’t come cheap. A study published by Stagecoach states that an electric bus costs £798,000 over the course of its lifetime, compared with £672,000 for a diesel equivalent.
There are several reasons for this. E-buses are more expensive to buy – Stagecoach estimates a single-decker costs £330,000, compared with £238,000 for a diesel equivalent – and they need to have their batteries replaced mid-life. They also require expensive infrastructure such as charging stations.
Concerns about the range of electric buses have largely been quelled, particularly in urban areas where routes tend to be shorter. However, refuelling remains an issue. It takes less than 10 minutes to fill a traditional single-decker up with diesel, but to recharge its electric equivalent takes roughly six hours. Stagecoach predicts that this will force operators to increase the number of buses available in order to maintain a frequent and reliable service.
As well as upping the upfront cost of the transition, this will put even more pressure on depots, which will already be clogged up with charging equipment. Stagecoach’s current estimates see each zero-emission bus taking up 25 per cent more space than a traditional equivalent – adding more costs, especially in dense cities.
It’s not all doom and gloom, however. As with any new technology, the European Bank for Reconstruction and Development predicts that the cost penalty of e-buses will fall as manufacturers and operators scale up their electric operations.
The government is also stepping in to help. Under England’s Zero Emission Bus Regional Area scheme – better known as Zebra – £270mn is available this financial year to accelerate the launch of e-buses outside of London. The funding is designed to cover 75 per cent of the uplift in costs between diesel and electric vehicles.
Other incentive schemes are popping up, too. Traditionally, bus operators get money off the price of diesel to help counter the cost of running a service. In a bid to level the playing field, the government has announced that zero emissions buses will also receive 22p for every kilometre driven, as part of the Bus Service Operators Grant.
New roadmap
Companies are also rethinking their business models. In its latest annual report, National Express says it is working with a company called Zenobe to accelerate its green transition. Zenobe provides ‘charging as a service’, ensuring that vehicles are refuelled on time. It also replaces old batteries and repurposes them and, for the likes of National Express, even provides the vehicles themselves.
“[Buses] become a bit like Zipcars”, said Steven Meersman, a director of Zenobe. “Operators use the vehicle when they need it and we guarantee that it will be available.”
This type of service reduces the upfront cost of going green, and transfers some of the risk onto the battery company. National Express said it would enable the group to transition its fleet faster than it could otherwise do, and aims to replicate similar structures in North America and Spain.
Similar companies seem likely to spring up in the coming years, particularly given the abundance of low-emission investment available. Meersman predicted that there would be a particular focus on data analysis, as the industry tries to figure out how to transition most efficiently.
The need for collaboration is clear, therefore. After decades of privatisation and owning their assets, bus companies now need all the help they can get. This new state of affairs isn’t guaranteed to be harmonious. While government funding is always welcome, intervention is often resented, and Whitehall seems keen to wield more control over operators. Stagecoach recently lost a legal challenge against plans to bring Greater Manchester’s bus market back under public control.
Peel Hunt analyst Alexander Paterson is upbeat, however. “It should be a golden era for public transport going forward. It is possible for these operators to go to electric over time – possibly ahead of private households. So this ought to be a period of recovery and hopefully growth.”
Exactly how this growth will be achieved remains to be seen, however – and investors should be braced for the odd pothole.
