Making the Formal Choice the Right Choice

In the 1930s, at a time when ground transportation was already well underway in the US, Mexico had little infrastructure even to pave the roads needed for this budding sector. “Back then, the sector was unregulated and it was common to modify vehicles, such as the Ford T, by dismantling the back and placing wooden beams that were used as seats for passengers,” says César Enríquez Morán, Marketing Director of Grupo Estrella Blanca. The company moved with the times, evolving from being a single route operator in 1940 to a group that operates over 10,000 routes and moves over 30 million people per year after 74 years in the Mexican market. At the beginning, the transportation sector was ruled by concessions from the government offering the exclusive use of specific routes to a single company. However, the concession system was terminated in the late 1980s, leaving free competition as the new model to follow in the ground transportation market. “Upon the opening of the market, no rules or regulations were set. No one could have predicted that price wars would take place and that informal companies would enter the market,” comments Enríquez Morán. “We are concerned by these informal companies, since they do not renew their fleets, their operators are untrained, and their old vehicles cause road accidents,” he adds.

In order to stay ahead of the race against informality, Estrella Blanca considers that the regular renewal of vehicles and a formal approach to their business offer real benefits to its passengers, including defined bus stations that establish security protocols and trained operators that undergo regular drug testing to guarantee the safety of its passengers. “We are Mercedes-Benz’s main customers. In 2014 so far, we have bought approximately 250 new units that include individual televisions, internet, and comfortable seating,” says Enríquez Morán. Estrella Blanca works together with Mercedes-Benz, as the latter has offered timely access to spare parts. While the transportation leader has its own workshops, every spare part and component comes from OEMs. The group’s most sought-after components are windows and tires, as these are easily worn down due to the conditions of Mexico’s roads and highways. Another important quality that Estrella Blanca found in Mercedes-Benz was the high technology used in its units, granting it a competitive edge while keeping CO2 emissions at the lowest possible level.

“It has become commonplace that during the fleet renewal process, informal companies would end up with our used units by buying them indirectly. However, this year we sold some units back to Mercedes-Benz while others were recycled and modified to be used in other sectors,” he says.

Despite its penchant for Mercedes-Benz, Enríquez Morán admits that all the OEMs are very competitive and provide excellent quality. This high competitiveness of OEMs has made it challenging for transportation companies to provide a differentiated service. Estrella Blanca finds its differentiation in customer service and amenities, although Enríquez Morán explains that its strategy is focused on a combination of safety, technology, and choosing the right partners. “Cameras and alarm systems are now being incorporated into the buses as has been done in some countries in Europe,” comments Enríquez Morán. “It is now possible to determine if the operator is distracted or tired as well as to measure speed, routes, and fuel consumption in order to increase the performance of our units.” The recent challenges faced by ground transportation companies, such as Mexico’s Fiscal Reform and the constant increase of fuel prices, have incentivized the sector to search for alternatives to increase productivity and profitability. Estrella Blanca has modified its logistics strategy by creating a new service called Futura Mix, where half of the passengers pay premium prices, receiving the benefits of a higher class service, while the other half pay economy prices. This concept has enabled it to increase occupation factors in buses, increasing profitability during low demand seasons. The landscape of the ground transportation market was irrevocably changed by the new Fiscal Reform. In the past, inter-city transportation was exempt from taxes, as it was part of the national ‘small contributors’ scheme, so each part of the group reported its individual earnings. Now these companies must pay 16% VAT and can no longer be denominated as small contributors. As a result, some players have been able to buy up the market presence of smaller ventures. This has led to the traditional image of the owner-operator beginning to slowly disappear from the ground transportation sector, although owner-operators continue to have a big presence in the cargo transportation segment. “Personally, I believe that the government only thought of increasing tax collection, but it did not take into consideration the impact it would have on the ground transportation companies,” states Enríquez Morán. “The increase in ticket prices due to the VAT imposed by the Fiscal Reform has seen Estrella Blanca and other companies lose competitiveness in long routes since air transportation has become a viable alternative for some passengers.”