The Motorcoach Industry From The Lender’s Chair

By Phillip Sockolov, Motorcoach Finance Product Specialist, Wells Fargo Equipment Finance

2023 was a watershed year as the motorcoach industry pulled out of the pandemic. Travel demand increased and the supply of coaches available to charter decreased, resulting in an uncommon opportunity to improve margins. As customer demand changes for travel and motorcoaches, we are seeing business models transform. COVID caused a transformation in the industry and this change is likely to continue in the coming years. However, the motorcoach industry has shown it can adapt and prosper even with major disruptions.

Phillip Sockolov

Post-Pandemic Transformation Of The Motorcoach Industry

Most motorcoach companies are showing historically strong financials. Operators are charging higher rates with higher utilization and leaner operations since there are fewer operators and coaches on the road, along with new coach production down since 2020. Additionally, over the past few years, the Paycheck Protection Program, Coronavirus Economic Relief for Transportation Services, and Economic Inquiry Disaster Loan funds have added significant strength to balance sheets.

Many companies have seen record revenues with increased charter demand, even with certain verticals of their business still down and a different customer base from years past. For instance, although inbound tourism is making a rapid comeback, which will help drive revenues and profits, it is still not back to pre-pandemic levels. June 2024 was the 39th consecutive month that total non-U.S. resident international arrivals to the United States increased year-over-year. The U.S. welcomed an estimated 67 million international visitors in 2023, but that’s represented only 84% of the 79 million that visited in 2019, according to the U.S. Travel Association[1].

Since 2020, travel to the U.S. from Asian countries has also been down significantly, but the U.S. saw 7.5 million visitors from Asia and an 83% increase in travel year-over-year from 2022 to 2023, according to the International Trade Administration[2].

There is also a large return to office push that should help with employee transportation and fixed-route services. It is likely that some form of hybrid work is here to stay, but continued return-to-office models should play out over the next couple years. For instance, fewer than 26% of U.S. households still have someone working remotely at least one day a week, a sharp decline from the early-2021 peak of 37%, according to the two latest Census Bureau Household Pulse Surveys.

Also, a whopping 90% of companies plan to implement a return to office policy by the end of 2024, according to a report from Resume Builder[3]. It is likely that the customer base of motorcoach operators will continue changing and it is important to monitor these trends to stay profitable.

Navigating Rising Costs

In the past four years, we have seen rapidly rising prices for new and used coaches. Strong demand with limited supply, combined with higher wage and manufacturing costs, are causing significant price increases. Manufacturing capacity still hasn’t caught up with pre-pandemic levels after extremely limited production in 2020 and 2021.

Compounding that is the fact that operators need to replace aging fleets and there are growth opportunities since many operators have exited the market. Eventually, the supply and demand economics will balance and, usually, used coach values are the first thing affected. It is not likely that there will be a precipitous drop like we saw during COVID, but lenders are cognizant of used coach values, which play a large role in underwriting decisions. To mitigate this high-cost risk today, you may see lenders asking for larger down payments and/or shorter terms. This helps the buyer by building equity faster and helps the lender by reducing their collateral risk if coach values decrease.

As companies are keenly aware, interest rates are considerably higher than anything we’ve seen since 2007. As of April 2024, the federal funds rate was 5.33%. We haven’t seen rates even close to this since 2007 when they peaked at 5.26%. These higher borrowing costs, coupled with rising equipment costs, result in monthly payments that are significantly greater than they were a couple of years ago. Considering it is possible that interest rates remain elevated for a while, operators will have to continue to decide how best to deploy capital by putting money down or keeping it in the business.

Challenges And Opportunities For Motorcoach Operators

Another potential challenge that some coach operators have encountered is inaccurate commercial credit reporting. Finance institutions generally report payment experiences to commercial credit reporting agencies like Paynet and D&B. Many of these financial institutions that were active in the coach industry during COVID inaccurately reported late payments and, in some cases, charge-offs, which was often the result of lenders agreeing to defer payments but not getting those deferrals booked on their systems in a timely manner. The result was contracts showing up as late when it was just a processing error. If you are requesting financing, it is a good practice to review your commercial credit reports with your lender to ensure there are no issues that may undermine your ability to finance. If there are errors, you can usually correct them by contacting the lender who has the errant reporting. This also underscores the importance of working with specialized motorcoach lenders who have supported the industry for years and will continue to do so.

One final hurdle that we have encountered is certain expenses that have increased tremendously over the last couple of years. Operators’ financials are showing increases particularly in areas like driver wages, insurance, repairs, gas, and, in some cases, interest expense. In many ways, COVID taught our industry how to operate efficiently, which was fortunate going into an inflationary environment, but large expense jumps are still an important topic for lenders to understand.

For instance, how are you managing floating rate lines of credit, large wage increases, or rising inflation with multi-year contracts? Furthermore, most operators had low utilization of their coaches from 2020 to 2022, but we are now seeing repairs and maintenance costs grow as fleets are pushed to their limits. With the lack of new coach inventory, we anticipate most operators will need to keep a very good eye on their maintenance and repairs as the average age for most fleets is increasing. In the end, make sure to discuss how you are mitigating any large expense increase when you are presenting financials to lenders.

From the lender’s seat, we see a very vibrant motorcoach industry that has emerged from a historic and challenging period during COVID. Thanks to the hard work of the people we finance, motorcoach lenders have shifted from sitting in wooden chairs to comfortable, fine Italian leather recliners. If you are an operator, please stay on the edge of your chair and continue to pay attention to coach prices, commercial reporting, and expenses.

Opinions and information included in this article are general and not intended to provide specific advice or recommendations for any individual or entity. Contact your banker, attorney, accountant, and/or tax advisor with regard to your individual situation. The author’s opinions do not necessarily reflect those of Wells Fargo Bank N.A. or any other Wells Fargo entity or business.

Wells Fargo & Company (NYSE: WFC) is a leading financial services company that has approximately $1.9 trillion in assets. We provide a diversified set of banking, investment and mortgage products and services, as well as consumer and commercial finance, through our four reportable operating segments: Consumer Banking and Lending, Commercial Banking, Corporate and Investment Banking, and Wealth & Investment Management. Wells Fargo ranked No. 34 on Fortune’s 2024 rankings of America’s largest corporations. In the communities we serve, the company focuses its social impact on building a sustainable, inclusive future for all by supporting housing affordability, small business growth, financial health, and a low-carbon economy. News, insights, and perspectives from Wells Fargo are also available at Wells Fargo Stories. Additional information may be found at www.wellsfargo.com. LinkedIn: https://www.linkedin.com/company/wellsfargo.

1 Dobkin, S. (2024, January 11). Stunning New Research Ranks United States Nearly Dead Last in Competition for Global Travelers. Www.ustravel.org.

² 1301. (n.d.). ADIS/I-94 Visitor Arrivals Monitor (COR). Www.trade.gov. Retrieved June 11, 2024, from https://www.trade.gov/data-visualization/adisi-94-visitor-arrivals-monitor-cor

3 Smith, M. (2024, March 27). Remote workers could earn up to 30% more if they come in to the office 5 days a week, research shows. CNBC. https://www.cnbc.com/2024/03/27/remote-workers-get-up-to-30percent-pay-increase-for-switching-to-in-office-jobs-says-new-research.html#:~:text=A%20whopping%2090%25%20of%20companies