Safe Passage for the Public Transportation Industry

By IBISWorld Analyst Lauren Setar

As seen in the ABA Journal

The Public Transportation industry has had a low level of revenue volatility during the five years to 2012. While many industries suffered greatly during the recession, this industry fared well. Firms in this industry move people regionally on regular routes with fixed schedules to work, commerce centers, entertainment venues and elsewhere, making Public Transportation a vital part of the overall economy. Increasing fuel costs and the migration of Americans from rural to urban areas forced many people to switch from using higher-cost automobiles to cheaper public transportation. Ridership rates increased as individuals looked to cut back on driving, particularly because the world price of crude oil increased at an 8.2% annualized rate from 2007 to 2012, causing gasoline prices to skyrocket. However, the ridership rate increases were curbed by a spike in unemployment, since many riders are people who commute to work; this led to lower government funding and therefore slowed revenue growth.  During the five years to 2012, Public Transportation revenue is expected to grow at an average annual rate of 0.3% to $37.9 billion. Overall, due to the industry’s stable revenue, low level of competition and high rate of governmental assistance, the industry is relatively safe, scoring just 3.1 on a 9-point risk scale.

As the American economy suffered from the dual impact of the financial meltdown and housing market collapse starting in 2007, companies in most sectors began scaling back production and laying off workers in anticipation of weaker demand. This decline in workers has diminished the demand for public transit since the majority of riders are people who commute to and from work daily. Although Americans generally prefer driving automobiles, fuel costs affect driving habits; higher oil prices are often associated with increased demand for low-cost public transit systems. At the same time, demand for public transportation is being supported by the move toward sustainable living and US demographic trend changes: Americans are moving away from rural locations in favor of city centers. This migration has increased demand for public transit because most people in densely populated cities rely on public transportation.

The majority of operations are largely subsidized by taxes and grants from federal, state and local governments. The government also provides funding for expansion programs and infrastructure projects that are designed to improve the safety, accessibility and reliability of public transit services. As a result, government funding is an important determinant of industry income and expansion trends. Federal funding for transportation has increased at an average annual rate of 6.1% in the past five years, contributing to the industry’s growth.

Industry Risk Methodology

The Public Transportation industry has a low risk level: 3.1 on a 9-point risk scale. The primary positive factors affecting this industry are high industry assistance via government funding and low competition. The industry’s high and increasing assistance levels remove firms from exposure to fluctuations in consumer demand. In addition, low revenue volatility indicates that firms are unlikely to face severe financial problems from poor cash flow management. Finally, the industry has high barriers to entry since operators, which are commonly public entities, receive federal, state and local government subsidies; this creates a low level of competition. The Public Transportation industry's recent resurgence is expected to support growth over the long-term, but the industry remains in a mature phase of its life cycle; industry services are generally stable and clearly segmented. The expansion of services will increase ridership rates, but other factors, such as gas prices and urban population growth, will remain important determinants of public transportation demand. As a result, industry value added, which measures the industry's contribution to GDP, is forecast to increase at an average annual rate of 1.3% in the 10 years to 2017, while the US economy is expected to grow at a similar rate of 1.9% over the same period.

Low Competition

The Public Transportation industry is characterized by low competition, which adds to its overall low risk score. The low level of competition is primarily due to the industry's high barriers to entry and federal, state and local government subsidies. Additionally, many public transportation systems are allocated to specific routes or coverage areas. However, the industry faces external competition due to the availability of substitutes, including automobiles, taxi services, private bus operators and limousine services.

The industry's main form of competition comes from road transportation and the use of cars. As road networks improve, street congestion decreases and parking becomes more easily available; this poses competition for public transportation. The cities that have the highest use of public transportation in the United States are those with a large high density population such as New York, Los Angeles and Chicago.

Public transportation providers attempt to win customers by improving their service reliability, including frequency, timeliness and availability. Cleanliness, convenience and adequate capacity are also important competitive attributes. Proper capacity is also important for safety purposes as it relates to the supply of sufficient seating and standing room area.

Assistance

The industry’s low competition and, consequently, low risk can also be attributed to its high level of assistance. The Public Transportation industry is highly subsidized by the public sector. During the past five years, federal funding for transportation has increased an average annual rate of 7.5%.

Companies in the industry, on average, incur only one third of the industry’s total operating expenses. Moreover, funding for operators’ capital investments comes almost entirely from public sources. Capital investments include the design and construction of networks and the modernization of existing fixed assets, including fixed guideway systems (e.g. rail tracks), terminals and stations as well as maintenance and administrative facilities. Capital investment expenditures also include the acquisition, renovation and repair of rolling stock (i.e. buses, rail cars, and locomotives and service vehicles).

Taxpayers’ investments, via the financial support of federal, state and local governments, have a positive and high return, according to the American Public Transportation Association. Every $1 that taxpayers invest in public transportation generates economic returns ranging from $4 to $9, the association states. In addition, transit security grants are provided by the Department of Homeland Security Appropriations Act, which is signed into law annually to provide security and preparedness enhancements for transit systems, inter-city passenger and freight rail. The majority of funding goes toward transit security grants.

Outlook

During the five years to 2017, Public Transportation revenue is expected to increase at an average annual rate of 2.4% to $42.6 billion, including a 1.7% jump in 2013. As unemployment falls, the number of commuters will rise, stimulating demand for public transportation systems. Increased ridership from the newly re-employed will drive industry growth, as will continuing urbanization, since people in urban areas generally rely on public transportation. In preparation for the coming increase in demand, all major public transit systems are expanding operations or developing plans to do so in the near future. Overall, low competition combined with high levels of assistance makes this industry a relatively safe investment.

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