Can a German Bus Innovator Potentially Enhance Greyhound's Service Quality?

Greyhound was saved from the edge by Flix, but can its European strategy help this 1-star US icon revive?

Can a German Bus Innovator Potentially Enhance Greyhound's Service Quality?

If you search for Greyhound on Tripadvisor, the adjectives most frequently encountered in the numerous 1-star reviews are "miserable," "WORST," and "stranded." The criticism is harsh and comprehensive, covering everything from rude drivers and smelly buses to delays and abandonments.

"ABSOLUTELY TERRIBLE!!!!! Our bus never reached LA and we were left on the streets for more than seven hours to wait for the morning bus. Later, our luggage got stolen on the bus," reads a recent review. Another frustrated customer wrote, "I guess I should have read the reviews first."

Despite this poor reputation, 12 million passengers traveled on Greyhound buses last year, going to college, a new job, or for a fresh start across the country. It remains the most affordable way to travel between A and B for passengers who primarily earn less than $40,000 a year.

However, its reputation for dirty, delayed, and even dangerous buses has led to increasing numbers of Americans opting for driving or flying on budget airlines like Spirit instead. The pandemic also dealt a severe blow to the 110-year-old American icon, halving its ridership. As a consequence, one of its new competitors — an express bus startup called Flix — purchased the company for $172 million, a price representing a 79% decrease in its former $800 million valuation.

"It was managed like it existed a century ago," Flix's co-founder and CEO André Schwämmlein stated to Our Website. "There was a lot to improve, but we were the best people to do it."

Flix, which over the past 13 years built a near-monopoly over intercity bus routes in Germany and then across Europe with a simple strategy—offering low prices and outsourcing the messy business of driving buses to contractors, while providing small comforts such as leather seats, Wi-Fi, and power sockets for its passengers—believes this strategy can work for Americans.

"The Wall Street investor from New York should consider the bus. He won't choose it all the time, but he should consider it," said Schwämmlein.

Flix has encountered difficulties in making this happen, given the constant stream of one-star reviews for both Greyhound and its own Flix-branded service. The daunting task of turning Greyhound around began in 2021, with a company whose revenues had dropped to $422 million and reported losses of $14 million the previous year. After the sale, revenues rose by 50%, enabling Flix to generate $2.2 billion in revenue and a profit of $114 million. This boosted its valuation to $3.4 billion in 2023.

Now, the US accounts for a third of its business. Despite the negative reviews, Flix is increasingly well-positioned to become a leader in the global bus market, operating in 44 countries after launching in Chile and India in 2023. Schwämmlein has his sights set on South America's intercity network, which generates over $20 billion annually. "Every market from now on is better," said Schwämmlein.

This potential growth attracted Swedish private equity firm EQT to lead a $1 billion investment into Flix in July, valuing the company at $3.4 billion. "They have a playbook to become number one in every market they operate," said EQT's partner Aschenbrenner.

Schwämmlein initially envisioned Flix as an Airbnb or Uber for buses. He and co-founder Jochen Engert launched the company while on sabbatical from their BCG consulting roles. They told their superiors they were working on a doctorate, but instead, they built the startup with Schwämmlein's old college friend Daniel Krauss.

Flix would locate passengers, plan routes, and issue tickets, while small bus operators doing school runs or charters would handle the driving of a Flix-branded and financed bus. "No one else can drive that bus. It's our unique inventory," said Schwämmlein. "We control supply and demand at the center."

After the repeal of a German regulation preventing private bus companies from competing with German's state rail Deutsche Bahn in 2013, the business exploded. Adding a new route merely required winning over a new contractor, while larger rivals had to source drivers, mechanics, and garages from scratch.

Flix secured funding early on from German VCs such as Cherry, HV, and Mercedes-Benz to outpace smaller competitors. It also convinced New York buyout fund General Atlantic to finance the acquisition of a German rival almost twice its size in 2015.

New transportation rules in other European countries also allowed Flix to expand or acquire its way across the continent, controlling 90% of bus journeys in Germany at one point. "This is a market where the winner takes not all but most," said Aschenbrenner of new Flix investor EQT.

Flix's "asset-light" strategy bypassed the difficulties of running a bus fleet and drivers by owning only one bus in Europe, currently parked in Berlin. This single vehicle is used to fulfill legislative obligations. Flix's partner bus companies receive 70 cents for every dollar from ticket sales and could potentially face termination if they fail to control costs, schedules, or vehicle maintenance. Flix sold over 55 million tickets in Europe in 2020, yet faced complaints about unpleasant drivers, lengthy delays, and poorly maintained buses.

This cost-effective approach led Flix to become an uncommon victory for a European consumer startup, but the pandemic nearly resulted in its collapse. Europe's lockdowns severely reduced Flix's income. Customer refunds and bus partners' financial assistance amplified the financial drain. Investors proposed drastic cuts to rescue the company, but Schwämmlein and his co-founders secured emergency financing and reinvested considerable personal funds in anticipation of a swift recovery.

The pandemic also impacted Greyhound, Flix's primary competitor in the U.S., which had already been operating intercity routes in California, New York, the Southwest, and the Gulf Coast since 2018. Then, Flix received a call from Greyhound. The prospect of acquiring a "crazy icon", as Engert described it, at a bargain price was tempting. Eliminating Greyhound, its biggest U.S. competitor (half the size of its business), was irresistible.

"There were two people within a room who had the entire Greyhound schedule memorized. It was insane."

The German startup now controlled a fleet of 1,200 aged buses, numerous unionized drivers, and a pan-American network of routes. "It was a strange blend of a traditional bus company that spanned continents with a dynamic, tech-savvy startup," said Joseph Schwieterman, a public policy professor at DePaul University.

Part of Flix's renewal strategy involved updating Greyhound's ticketing and routing systems to explore new markets and target new demographics, such as college students and campuses. This required updating outdated computer systems from the 1980s. "There were two people within a room who had the entire Greyhound schedule memorized. It was insane," Engert said.

Before Flix purchased it, Greyhound's former owner had sold many of its downtown terminals to Alden Global; now, passengers wait for rides at gas stations and city corners in cities like Philadelphia and Cincinnati. While the Flix approach of curbside pickups works in Europe for short city-to-city routes, it hasn't successfully adapted to America with longer distances, resulting in prolonged wait times at remote gas stations. "You can't transplant an European model in the U.S," said transport consultant Brian Antolin. "You're transporting people for days rather than hours."

Flix has devised remedies. It is moving bus departures to Los Angeles' main railway station and is negotiating with mayors in other cities to replicate the solution. Greyhound drivers now have limited regions for travel instead of nationwide trips, and keeping buses near their mechanics has improved on-time arrivals year after year.

However, ongoing issues persist. Tales of broken-down buses, strandings, and extended delays causing multi-day disruptions continue. Despite improvements in metrics and customer reviews moving in the right direction, Flix acknowledges that its progress is ongoing. "Flix acquired Greyhound three years ago – in October of 2021 – and has experienced significant improvements in its operational performance through substantial investments in technology, fleet, organizational structure, and customer service," said a Flix spokesperson.

The turnaround has been modestly financially successful. Greyhound and Flix's U.S. operations have managed to grow revenues to $670 million in 2023, with routes now spanning 49 states. The combined business now boasts a comparable number of buses on some routes as its competitors combined, yet revenues are still down 20% compared to Greyhound's pre-2020 levels. With bus demand continuing to recover from the pandemic, a significant competitor, Megabus, filed for bankruptcy this summer, said Schwieterman.

Flix's margin for error remains narrow. In 2023, it garnered $114 million in profit on $2.2 billion in revenues. Originally aspiring for a Silicon Valley-sized valuation, transport companies often face low multiples. The prospect of an initial public offering was abandoned following investor reservations about a $4 billion price tag. Even completing the EQT deal resulted in early investors accepting a 20% markdown on the $3.4 billion valuation.

With Greyhound still receiving one-star reviews (e.g., "WORST bus company") three years into the turnaround and Flix's American ratings not improving, Schwämmlein has a considerable task ahead.

He openly confesses to playing the longevity game, asserting that American skepticism towards Greyhound will eventually evolve. According to him, it took around five to ten years to transform attitudes in Europe. Through continual effort, attitudes will change. Currently, there's no stigma associated with Greyhound in Europe.

1. Flix, which has a strong presence in Europe with a strategy of offering low prices and providing comfortable amenities, aims to implement this strategy in the United States with Greyhound.
2. The acquisition of Greyhound by Flix was deemed necessary to eliminate its biggest competitor in the U.S., as stated by co-founder Jochen Engert, who described Greyhound as a "crazy icon".
3. Despite the European success of Flix in the bus market, the company encountered difficulties in adapting its model to the longer distances and unique demands of the U.S., leading to prolonged wait times at remote gas stations.
4. Schwämmlein, the co-founder and CEO of Flix, believes that American skepticism towards Greyhound will eventually evolve, as it took around five to ten years to do so in Europe.
5. Greyhound, still receiving one-star reviews three years into the turnaround, poses a considerable task for Schwämmlein, who aims to change attitudes towards the American bus company through continuous effort.

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