MBA (FULL TIME)

2021-2023

ECONOMIC ANALYSIS FOR BUSINESS DECISION

GROUP ASSIGNMENT-2
CASE STUDY ANALYSIS
AHMEDABAD MUNICIPAL TRANSPORT SERVICE
GROUP: 8

SUBMITTED TO: SUBMITTED BY:

PROF. SHAMIK SHOME ABHISHEK DABKARA (211082)

AISHWARYA PATERIA (211085)
ANISHA PATNI (211091)
GAURAV TRIPATHI (211101)
SHREYANSHEE GATTANI (211140)

SECTION: B

DATE OF SUBMISSION: AUGUST 29, 2021

 CASE ANALYSIS

AMTS (AHMEDABAD MUNICIPAL TRANSPORT SERVICE)

SITUATION ANALYSIS:

AMTS is a public transportation corporation that operates under the supervision of the Gujarat
Government and Municipal Corporation. AMTS began operations in 1947, and when
Ahmedabad was designated as the state capital of Gujarat in 1960, the textile city experienced
a surge in population. To support such a large population, AMTS considered an expansion plan
in which they increased their bus fleet by sevenfold. During this period, AMTS was unable to
work on its cost structure and could only increase fare prices indirectly to comply with
Government rules, resulting in an imbalance in the cost structure.
AMTS was also burdened by a few additional unanticipated expenses, including a tax rise, an
increase in diesel prices, an increase in spare parts prices, and an increase in wages, all of which
contributed to a cost structure that overshadowed the government-allowed fare increase.

As a result of the aforementioned factors, the company began suffering losses in 1961 and
faced a massive loss in 1964 of ₹13,60,000.
The Board was concerned due to 2 reasons:

▪ The primary Reason - AMTS shared a bone of contention with Municipal Councillors
due to lack of control over the cost structure.

▪ The Secondary Reason - The Government had granted permission to increase the fare
by 15% in 1963 and still the company incurred losses.

PROBLEM STATEMENT:

The company was incurring financial losses due to ineffectual cost management, inefficient
operational strategy, and lack of control over fare price deciding mechanism. AMTS and
municipal councillors appeared to have a strained relationship.

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CAUSES:

1. INTRODUCTION OF SUBSTAGES CONCEPT:

▪ The notion of substages provided passengers with additional freedom by allowing them
to exit at an earlier stop for a modest fee. This neutralized the increase in fare rates,
which did not contribute significantly to revenue.

▪ Substage concept - A' stage' in transportation parlance refers to a fare change point. The
distance between the two stages in Ahmedabad is 1.4 kilometres. The AMTS, on the
other hand, recognizes the 'sub-stage as a fair change point. A substage is a fare change
point located in the middle of two stages. For example, in the diagram below, S1 S2
depicts the distance between two stages. For five paisa, a person can go from S1 to S2.
He will be charged 10 paise if he goes beyond S2.

<--------------- 0.7 -------------> 1.4 <-------------- 2.1 --------------> 2.8

S1___________ ___________S2___________ ____________S3
s1 s2

For example, if a person enters between s1 and S2, but exits before s2, he will pay only five
paise. This would have been impossible under a staging system. However, because substages
(s1, s2, s3, etc.) are also recognized as fare-altering locations, the passenger has significantly
more options. The proximity of fare-changing sites results in some revenue loss for the
undertaking.

The substage concept was established to indirectly increase the cost of tickets; later, customers
used this facility to get down at a point near a fare changing station, so they paid the same old
amount for the distance they originally travelled.

2. INCREASE IN RATES AND TAXES:

The total increase in Rates and Taxes over the years: -

₹ (000)
YEARS 1957-58 1958-59 1959-60 1960-61 1961-62 1962-63 1963-64

AMOUNT 404.73 450.34 505.02 654.76 777.62 885.95 1517.40

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According to the data above, taxes have increased by 71 % (approx.) from 196-63 to 1963-64,
and taxes are a critical component of the cost structure, which further increased the variable
cost incurred in bus transportation, but the government only increased the fare charge in 1963,
which was a mere 15 % increase.

3. FUEL AND LUBRICANT CHARGES:

The total increase in Fuel and Lubricant charges over the years: -

₹ (000)
YEARS 1957-58 1958-59 1959-60 1960-61 1961-62 1962-63 1963-64

AMOUNT 1177.22 1297.73 1884.63 2488.02 2775.98 3120.17 3826.32

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The graph above depicts the increase in total diesel charges for the respective years which is
approx. 72% from 1962-63 to 1963-64. The whole fleet of AMTS buses ran only on diesel, and
as the number of buses climbed from 60 to 420, so did consumption, res ulting in a rise in
expenses.

4. SALARIES:

The total increase in salaries given to workers over the years: -

₹ (000)
YEARS 1957-58 1958-59 1959-60 1960-61 1961-62 1962-63 1963-64

AMOUNT 3259.75 3741.38 4320.28 4629.11 5500.76 6263.36 6302.01

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The number of wages paid to employees was also determined by various other factors such as:

▪ If wages were increased in some other industry, they had to be increased by AMTS
too otherwise the employees would protest against the organization.
▪ For political reasons, the new wages were to be paid immediately in effect which
also increased the per bus mile cost.

5. PASSENGERS:

Total no. of passengers carried during the year: -

YEARS 1957-58 1958-59 1959-60 1960-61 1961-62 1962-63 1963-64

NUMBERS 89981 94848 106770 121861 138008 148593 145481

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The graph above depicts the number of passengers who travelled during the specified years,
and it reveals that there was a decline in the number of passengers in 1963-64, which was also
the year when the fare was increased by 15%. This decline in passenger numbers can be linked
to the following factors:
▪ Passengers were dissatisfied with the services provided during peak hours.
▪ Passengers had to wait for an extended period.

6. SERVICE-ORIENTED APPROACH:

Another point to bring into consideration is:

AMTS gave special concessions to the following class of passengers:
▪ Free pass scheme for the blind.
▪ Special concession rate for children and students.
▪ Concessional pass for professional and medical postgraduate students.
Though these concessions were granted for the benefit of society, they did not create any
revenue and also occupied bus seats that could have been used by passengers during peak hours,
generating more revenue and resulting in less dissatisfaction among the people.

Though these concessions were provided for the welfare of society, these concessions did not
contribute to the revenue significantly. Also, those occupied bus seats could be utilized by the
people during the peak hours and more revenue could have been generated and this would have
resulted in less dissatisfaction among the people.

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 ▪ Night and morning bus service for textile workers- AMTS provided service to
textile workers during the day and night which would have resulted in increased
vehicle utilization and further increased the wear and tear of the buses which
would have increased the maintenance cost of buses.

7. UNECONOMIC ROUTES:

Due to the expansion of city limits, AMTS had to run buses on many unprofitable routes, which
were decided by the government because being a public transport they had to keep in mind the
welfare of every citizen and provide their services at every nook and corner of the city which
led to decrease in the availability of several buses on economic route and the unnecessary
increase in diesel consumption and other factors. The revenue generated from these routes was
not enough to cover the daily expenses of AMTS.

SOLUTIONS:

1. Increasing the distance between substages:

Substages were introduced as a way to apply the fare increase in an indirect manner but
in the lieu of paying the increased price passengers used these fare changing stations to
pay the same amount for a lesser distance
.
As an alternative, we can increase the distance between the substations which should
not be in the proximity of the next stage, so that passengers don't have the luxury of
choice to get off at an earlier substation.

2. Abandon the substage system altogether:

AMTS can have a staging system instead of sub-stages where a person can only buy
tickets for traveling from point A to point B where the prices and distance between two
stages, would be pre-determined and the passengers would have no choice to get down
at an earlier point of distance between A to B.
As per the economic concepts, a person will try to derive the maximum utility for the
service he/she has paid so the passenger will not get off at an earlier point

3. Regulating the hours on Uneconomic Routes:

Regulating the hours in which the buses moved in the uneconomic routes could be
altered a bit, initiating this method on fewer routes, in the beginning, could have given
an idea if this method is reliable.

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 For instance, instead of buses arriving at stages every 10 minutes, they could pick
passengers up every 30 minutes. This would lower the underutilization of vehicles and
extra buses could be made available during peak hours. As a result, the public would
have been more satisfied with the overall services of AMTS when compared to the price
they were paying.

4. Renting or Leasing Buses:

As a method of cost-saving, AMTS could have leased or rented buses from privately-
owned companies which would have reduced the total cost spent on buses, their
maintenance, and spare part issues. The leasing company could provide extra services
namely, covering miscellaneous charges and other charges including replacement of
damaged parts and discounts.

PLAN OF ACTION:

1. First, AMTS should convince the government- that they should provide the company
better control over pricing policy
2. Persuade Municipal councillors to further increase the fare price since the 15% fare
increase resulted in an 8% increase in revenue which did not substantiate the costs
incurred during the expansion program.
3. Discontinue the substage concept- The substage concept neutralized the fare increase
imposed by the government and provided the passengers the freedom to get an early
point.
4. The transparency between the Municipal Councillors and the AMTS should be
increased to a level where the decision-making is a collaborative effort between both
parties.

CONTINGENCY PLAN:

It is an understood fact that there are times when the government has its hands tied and some
situations can’t always be handled in a prescribed manner due to several factors including
public objection, opposition political party, and uncontrollable environments.
In any case, if the given solution does not prevail, the government can allow private players to
operate buses in the city in collaboration with AMTS that can help in dividing the crowd and
reduce the burden on AMTS, it will also be beneficial for the passengers as they will be having
the option to exercise their choice.

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INDIVIDUAL CONTRIBUTION:

Everyone in this group equally took part and tried to improve this report. Our ideas and
thoughts on this case were discussed in general and based on that discussion we decided to
proceed with what we learned. After a good discussion, we divided the tasks properly between
us. The personal contribution of everyone, however, is:

1) ABHISHEK DABKARA: My personal contribution to the task was to briefly analyse

the situation and add all the highlights to the discussion. I've also helped to make line
graphs to showcase different scenarios.

2) AISHWARYA PATERIA: My own contribution to the task was to determine the

problem statement and the different causes that led to such a major deficit in AMTS
in the years 1963-1964.

3) ANISHA PATNI: My contribution to the assignment was to identify all the probable
solutions to the question and to give a detailed assessment of each option in order to
select the best solution. I've also helped make the various charts and tables.

4) GAURAV TRIPATHI: My own contribution to the task was to select the solutions to
the problem that was raised in the case and justify. I also assisted in identifying an
appropriate plan of action.

5) SHREYANSHEE GATTANI: I personally contributed to the task of identifying the

causes and writing the contingency plan. Also, the report was formatted and edited
by me to make it more attractive and visually refined.

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