How scarce train seats are making bus travel a surprise startup bet

Not many consumer-focused startups in India can brag about their economics right now. Food delivery, cab aggregators, e-commerce, quick commerce, and other such sectors are rife with large players spending years and shovelling cash to dominate their sectors, a gruelling process with no guarantee that price-sensitive Indians will go out of their way to pay their fair share in the end. But one sector seems to offer a less-than-obvious opportunity to hit the ground running.

IntrCity, which operates 45 bus routes between Indian cities, announced on Tuesday that it had attained operational profitability, and was looking to earn $100 million in annualised revenue, a significant part of what it says is a $25 billion market for long-distance bus transport.

The firm makes Rs 30 crore in revenue per month from its routes, Kapil Raizada, a co-founder of IntrCity, said in an interview with Entrackr. One distinguishing feature of the space, Raizada said, was that “even at this stage the business can generate operating profits.” Raizada told PTI in another interview that the firm was looking to raise $20–30 million this year.

There is a natural market for road transport in India. Rail, which was the default mode of transportation for most Indians until recently, suffers from a perennial lack of capacity. The government says as much too:  the “demand supply gap [for rail travel] has widened over the years despite capacity augmentation by Indian Railways,” the government said in an admission tucked into an announcement that railway police had captured ticket scalpers who were reselling scarce seats on trains to desperate travellers.

Bus travel is a decades-old spillover of the excess demand that rail travel simply cannot cater to. “Five years from now, the single largest carrier of intercity travel will be roads [...] We have not made highways just for people to drive personal cars,” Raizada told us.

The economics makes sense too, Raizada said, as the only alternative is travelling by car or flight, both of which cost thousands of rupees for a route as small as Bengaluru to Chennai. Meanwhile, air-conditioned buses are available across carriers for less than Rs 1000.

So how is it possible to compete in a crowded space where private and public operators have already crowded the market? “People are willing to pay a premium for longer distance travel,'' Raizada explained. “If it's a 45 minute bus drive, you don't mind standing; but if it’s a 7 hour trip, you want some comfort.” Raizada said IntrCity was able to lure riders with waiting lounges, bus tracking, and private cabins aboard overnight buses.

Raizada said that demand forecasting has not been a standard industry practice, leading to full buses on heavy periods of demand like the weekend, and buses running empty on other days. Being able to automate some of this forecasting lets IntrCity adjust pricing to compete on so-called “low days,” where demand for travel is low, but price competition is high.

So while prices have been a bit higher than for other operators, Raizada said the company was able to use dynamic pricing and added passenger perks to reach operational profits, in spite of only entering the space in 2019. “A product market fit is only proven when a good product sells at a price where people are recovering their costs. Otherwise there's no product market,” Raizada said, referring to subsidised cab prices on large aggregator platforms like Uber and Ola.

Some challenges remain, though. Raizada said state governments across the country had not invested sufficiently in infrastructure to promote bus travel.

“The government has been spending a disproportionate amount of resources on building large airports which carry a fraction of travellers [in India] but if you look at the investment the government is doing in building bus ports, private bus terminals, bus interchanges, bus parking facilities… it doesn't seem to be in the priority list of the government,” Raizada lamented. Many private bus pickup points are in narrow and crowded roads, he pointed out, a far cry from the space and comfort afforded to travellers in airports and even railway stations.

On competing with government-run intercity buses that run on losses, Raizada said, “I don't think the government should be in the business of running buses, and I believe this is a view that is largely being accepted even by the government policy makers themselves. This is an operations business that requires a bit of hospitality on top of it. I think that the private sector can do a far better job,” Raizada argued, adding that government investments could go to building busport infrastructure instead.

There’s also the environmental problem: buses emit far more greenhouse gases and contribute more acutely to global warming than trains do, according to a report by the US Department of Transportation. If the intercity bus transportation industry grows faster than the railways, that could undermine efforts to curb emissions from travel.

Raizada argued that the emissions from buses were far lesser than private cars and that complying with stricter emission standards alleviated the issue. “Buses are the most eco-friendly option that people have a choice on,” he said, referring to low ticket availability on trains.

IntrCity’s parent is RailYatri, which has for years been in the train ticketing business, acting as a vendor for IRCTC. While the third party train ticketing business is inherently limited (for reasons we outlined in this post), Raizada said that RailYatri data helped the company understand travel trends and spending patterns, key indicators on which routes to prioritise and what pricing strategy to employ.

IntrCity “grew 1.8x in the first half of 2022, with revenues nearing $45 million annualised run rate,” the company said in a statement. The company currently operates 45 routes in Uttar Pradesh, Karnataka, Tamil Nadu, Delhi, Gujarat, Kerala, Haryana, and other states. Raizada said that the company’s presence was, for the moment, limited in East India and in Kerala, but said that it would explore these “greenfield” territories soon. For more, though, he said the focus would be on growing existing routes.

Raizada makes valid points, and is not alone in building to capitalise on them. However, as IntrCity and other such firms seek profitability with higher prices, they will know that the ultimate validation will be customers abandoning cars for a bus ride. That is when the market will truly open up for the next level of growth. Disruptions also lie ahead, be it in the pressure to shift to electric buses that will keep going up each year, or a much more well funded competitor. But this is a market that governments, both central and state, should develop, including with relatively easy policy moves like lower highway tolls for buses.

Finally, almost all the state owned corps ferrying passengers by bus have struggled to grow fleets to meet increasing demand, pointing to one area where completion will reduce.