On the buses with Kelsian and its inflationary contracts with governments

As we know, according to the Reserve Bank, Treasury, big business and its media cheerleaders, there’s no link between firms lifting profits and inflation — it’s all down to those rotten workers (especially the lowest-paid, most precarious workers in the gig economy, the target of big business’ hysterical campaign against Tony Burke’s proposed industrial relations reforms).

Which makes yesterday’s results from bus operator Kelsian Group somewhat puzzling. In its 2022-23 profit release to the ASX, the company reported an inflation-beating 9.2% rise in revenue (6% was the rise in the Consumer Price Index in the year to June).

How? Over to Kelsian: “Contract indexation mechanisms effectively hedge inflation for the majority of urban bus businesses” and “cost base pressures are temporary and either well hedged or can be passed on to end customers.”

Customers being people who use the company’s transport services and who are usually those who can’t afford private cars and are forced to pay more. Or, as Kelsian says, “the growth in revenue reflects the essential nature of transport operations.”

That is, Kelsian’s “customers” have no other option than to use Kelsian’s services. But the real villains here are state governments (usually ALP) that allow indexed contracts that automatically push up prices, thus maintaining the company’s profits.

The standard response from economists is that if demand is strong enough for companies to pass on cost increases like this, that shows that the problem is households have too much money and need interest rate rises to smash their willingness to buy. But if you’re stuck in an outer suburb without a car and there’s no alternative to catching a Kelsian bus to work, all the rate rises in the world won’t make a difference. And Kelsian will happily maintain its profits.

In fact, across the year the company didn’t merely maintain its profits: it increased its underlying EBIT and underlying net profit by 5.5% and 4.3% respectively. And Kelsian is going to make a bundle in Sydney, according to the earnings release. It said on Wednesday that it is “set to become Sydney’s largest metropolitan public bus operator, with signing of two new 7+ year contracts (total new contracted value of ~$1.3bn over 7 years).”

Lucky profits aren’t driving inflation — think how bad things would be if they were…