Low profitability may be considered to be the operators’ problem, and of no concern of the authorities. However, an unprofitable operation is unsustainable, and if the alternative is an inferior service, then the matter is one of general concern.
Profitability may be measured by the cost recovery ratio, which is the ratio of revenue over costs . An acceptable ratio will normally lie within the range 1:10 – 1:15. (Learn more about measuring affordability.)
If the low profitability is due to inefficiency on the part of the operator, competition from more efficient operators will benefit users. It may force the inefficient operator to become more efficient or, if this cannot be achieved, put him out of business altogether, with all services provided by the more efficient operators.
Low profitability is primarily a result of excessive operating costs, inadequate revenue, or, in most cases, a combination of both.
Inefficient operating practices, which result in poor vehicle utilization, excessive fleet strength, and overstaffing, are common causes of excessive cost in developing countries.
Inadequate revenue may be due to low fare levels or poor revenue integrity.
The revenue, and hence the profitability, of formal bus operators is often reduced through Competition from the informal sector. In many cases, informal operators do not conform with relevant regulations, including those governing safety standards. As a result of such competition, the formal operator is often forced to increase fares, reduce service levels, or both, so that in the long run the public is forced to pay higher fares for an inferior service.