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Doghouse On Wheels
Greyhound Lines, once upon a time a backbone of rural transportation, is barely worth saving.British Missionary and Minister Keith Smith decided to explore the U.S. on Greyhound. At the Denver bus depot he encountered rudeness from several ticket agents who insisted Smith's friend leave the terminal for being "abusive." When she refused, she was handcuffed by security guards and taken to a back room. (She was released after Smith called the police.) Once on his way, Smith endured repeated bus breakdowns, a driver who threatened to leave a mother and baby at an isolated gas station because the infant was crying and a security guard who pulled a gun on a man trying to reboard and claim his seat before new riders were herded on. Then Greyhound lost Smith's luggage.
"This was one of the scariest trips I have ever made," says the cleric, who spent 13 years living in the terror-torn Basque region of northern Spain. Greyhound sent him an apology for the Denver incident, but professed ignorance about the rest of the trip. Smith is one of 66,000 disgruntled riders--0.3% of total ridership--who bothered to file complaints last year.
If only bad service were the extent of Greyhound's troubles. In the first nine months of 2004 it lost $23 million on $725 million in revenue. The onerous financial cargo: Greyhound owes $140 million to its pension fund, $200 million to holders of long-term debt and $230 million in the form of leases. As of September it had shareholders' equity of -$44 million, earning it a junk rating by Standard & Poor's. In a bizarre twist, Greyhound has a $15 million garnishment judgment against it because it is party to the debts of a former consultant who is being sued in an unrelated case. The judge's action, on appeal, could be construed as putting Greyhound in technical default on a credit line.
Greyhound Lines can't look for much of a tow from its parent, Laidlaw International. The Naperville, Ill. provider of school bus and public transit services is still recovering from its own wreck. In 2001 it filed for Chapter 11, crushed by $3.2 billion in debt as well as by a $1 billion writedown from billing problems in its ambulance and emergency-room services units, and another $670 million impairment charge after Safety-Kleen (then 44% owned by Laidlaw) reported accounting irregularities. It emerged two years later, but creditors, concerned about Greyhound, limited the amount Laidlaw could invest in the bus line to $15 million over six years and wouldn't let the parent back Greyhound's debt.
Laidlaw, climbing out of its mess, earned $62 million on $4.6 billion in revenue for the fiscal year ended Aug. 31. Now Greyhound is trying to right itself. Unfortunately the cure--a severe contraction of its operations--looks as bad as the disease. In the past two years the company has cut 1,200 employees, 10% of its work force, for an estimated savings of some $50 million a year. It slashed new bus orders, leaving itself with an aging fleet (and a 5% jump in maintenance expenses). It eliminated free companion tickets and raised prices on trips of 1,000 miles or more an average 5%. Last summer it slashed Chicago-Seattle service, cutting stops in hundreds of small towns. The result was a 2% savings in its operating costs--and a slew of bad press larded with the stories of elderly people who could no longer get around or get to their doctors. Greyhound's response: We're not running a social service.
Travelers shouldn't expect to be pampered. Greyhound's strategy going out two years is to eliminate up to 75% of its 3,400 stops, many of which don't produce ticket sales and slow down riders. (Only 50 of 1,700 sales locations produced half of all ticket revenue in 2003.) Instead, it will concentrate on trips shorter than 450 miles and trips between big cities.
It isn't just discount airlines that are damaging this business. Greyhound is also feeling the heat from the dozens of dirt-cheap buses running between East Coast Chinatowns, forcing the company to offer New York-Boston fares as low as $15. Today most Greyhound buses run half empty. The bus line would like to draw in more people by offering such amenities as laptop plug-ins and wireless Internet connections--all of which take money it doesn't have. It would also like to boost the top line by filling empty spaces in the belly of each bus with parcels. But a shipper who hears tales about lost luggage may be inclined to patronize FedEx instead.
A glimmer of good news: Greyhound's operating income (earnings before interest, taxes, depreciation and amortization) for the first three quarters of calendar 2004 rose 7% to $39 million from the same period a year earlier. Nice, but still not enough to cover debt service and (minimal) capital expenditures. "The nightmare you wake up with," says Kevin Benson, who became Laidlaw's chief executive in 2002, "is that before you fully understand a company, it runs out of money."
Meantime Benson has other businesses to worry about. Laidlaw Education Services, which transports 2 million school kids with its 40,000 buses and drivers, is the largest such outsourced operation in North America and netted $287 million on $1.5 billion in sales in fiscal 2004. But it faces cutbacks from school districts, and it lost a five-year contract with the City of Boston worth $50 million a year. Laidlaw Transit Services, a $300-million-a-year business that operates vehicles mainly for the disabled and manages bus systems in 25 states, is barely breaking even.
A December sale of Laidlaw's two languishing health care units put $775 million into the till. It will use most of the money to pay off a $579 million term loan, refinance credit and buy 3.8 million Laidlaw shares in a trust for the Greyhound pension plan. That leaves $215 million to plow elsewhere. It could retire Greyhound's senior notes--$150 million at 11.5% interest. Or look for a buyer. Oppenheimer analyst Ian Zaffino figures Greyhound is worth $2 per Laidlaw share, giving it an enterprise value (market capitalization plus net debt) of $550 million. Laidlaw's director of investor relations, Sarah Lewensohn, claims there are no plans to sell--yet. "I'm not sure anybody else sees value in Greyhound," she says. "But we do."