Will the new bus contracting model boost SBS’ and SMRT’s floundering bus profits?

It will greatly affect the firms' operating margins, analysts say.

The new government contracting model for Singapore’s buses may be the solution for better bus rides for the city-state’s commuters, but analysts say it will also turn profitability for bus companies around.

According to a report by RHB Research, SMRT reported a SGD200,000 operating profit for its bus business, implying an operating margin of 0.3%, while SBS Transit reported SGD9.4m in operating profit for its bus business in 2Q16 (+26% YoY), implying an operating margin of 4.6%.

The report noted that both of the companies are expected to earn 7.5% operating margins after the transition to the new model.

Meanwhile, the report added that the operating margins of the two bus operating firms would be sustainable.

“The contract fee payable by the LTA to incumbent operators excludes adjustments for inflation, changes in wage level and fuel cost, service variation, and incentive payments,” RHB noted.

Additionally, while the operators could be penalised for not meeting services standards, likely upwards adjustments for wage inflation and sudden rises in fuel costs does ensure that operating margins remain sustainable over the contract period, the report said.

“We remain optimistic about our operating margin estimates, as the operators will also be allowed to retain the advertising and rental revenue generated from their bus operations,” the report added.