Why Albert Cheng may have caught wrong bus

Albert Cheng says wealthy KMB should not go cap in hand to the government to weather a bad patch; it has plenty of options.

SCMP Insight page, July 23

I propose one of these options. It is to appoint Albert Cheng King-hon as managing director of Kowloon Motor Bus and let him try to get it through its 'bad patch'. It's my guess he'd be back inside a week with a different message - 'We need to get bus fares up'.

But let's first summarise his message last week - KMB was given a fare increase in May and the fact that fuel prices have risen is not reason enough to give them another one this year. The company already makes 'huge profits' and should take the bad with the good, like any enterprise in a free market.

KMB, in any case, benefits from a fare mechanism that gives it a reasonable rate of return. If this isn't enough, then it should diversify into other lines of business or perhaps hedge its fuel costs. If this still isn't enough, maybe it should replace senior management.

Go ahead, Albert, try those shoes out for a fit. This may just be your Cinderella moment.

The key to it all is that fare 'mechanism', which I shall accept as a mechanism when someone can explain to me the mechanical principles that determine one of its key provisions - public acceptability and affordability. There is a good deal more such waffle talk in this 'mechanism'.

The only mechanical bit is a formula that takes half of the change in the consumer price index since the last fare rise plus half the change in wages for transport workers. It ignores fuel costs, equipment costs, maintenance, tolls and a good number of other things that go into making up the cost structure of a franchised bus company.

But, okay, I wouldn't know how to formulate such a mechanism either. Pricing structures for monopoly or quasi monopoly operations are a formula only for giving yourself a headache.

The one from which KMB suffers is worse than most, but none is really much good.

This still leaves us with a dilemma, however. The last thing we really want KMB to do is pull buses off the road or no longer clean and maintain them because there is just no money to be had in the bus business any longer.

Inflicting a deteriorating bus service on yourself by making it operate in the red because it is run by evil and nasty capitalists is cutting off your nose to spite your face.

We don't want them to make too much money but we do like to keep them reasonably happy about running a bus service.

And, contrary to what Albert suggests, their profits are not really all that huge, unless we adopt the view that all profits are huge if they are denominated in millions rather than tens of dollars.

But you have to be a pro-democracy legislator to be in quite such a muddle about finances, and Albert isn't one ... any longer. Return on equity on KMB's bus operations runs at about 10 per cent. That's no rip-off.

The company does make some extra money from dabbling in the property business, which is not surprising when the controlling shareholder is a developer. But it's also a separate matter. We're talking bus operations here.

As to Albert's suggestion that the company hedge its fuel costs in the futures market, I invite him to talk to Cathay Pacific Airways about how badly that strategy can go awry from time to time.

The fact is that I don't think anyone can do any better. KMB is the toy of circumstance here and circumstances say that the company may be looking at an extended period of losses if nothing is done, which makes for happy bus passengers as little as it does for happy bus shareholders.

But I have to admit I share Albert's reluctance to grant a fare increase. My reason is that KMB was instrumental in inflicting that abomination, Roadshow, on bus passengers, which I rate an outright crime. Jump on 'em, Albert.