I think it will translate to increased demand and hence profit, but I am not sure by how much. There are a number of variables that can influence the outcome.
You're correct that there are alternative modes of transport available and that a percentage of people will choose to use those (walking, cycling, car pooling, etc.) over use of PT. However there will always be a percentage of the population that either cannot or will not use those other methods - just as there are those who have similar issues with PT itself.
There also does not appear to be a linear correlation between price and utilisation of PT, in that as price increases PT utilisation does not fall in a equal amount. Studies on patronage have revealed that convenience is one of the primary drivers, so services must be reliable, regular, direct and operate at convenient times.
Given that Auckland's PT patronage rates currently stand around where they were in the mid 1980's, despite a massive increase in population and increased commuting distances due to continued urban sprawl, I believe there is significant room for growth.
As far as Wellington is concerned I would not expect to see too much room for growth there as the PT patronage rates per capita are on average extremely high, and the geography of the city largely precludes urban sprawl.
Most of the cost of the PT sector is in the areas that you've mentioned: vehicles, fuel and admin - perhaps even in that order. What we're seeing is dominance of the sector by either private companies with investment companies backing them or the acquisition of smaller companies by the dominant players such.
Three examples of this phenomenon are
1. Tranzit purchasing companies and/or tendering for urban routes in various centres (the incumbent in New Plymouth has recently sold to Tranzit).
2. The formation of GoBus from the amalgamation of Hamilton City Buses, Simpsons, Blue Worth, etc. in conjunction with Morrison & Co (and subsequently a new Auckland-based investment firm).
3. NZ Bus actively perusing tenders and acquisitions in regions other than Auckland and Wellington.
I too remember ComCom striking out the acquisition Mana Coachlines by NZ Bus, but they have not stopped NZ Bus purchasing companies in other regions. Adams Travelines in Whangarei is the latest example. NZ Bus purchased this company as a vehicle to tender for the Whangarei urban roots. NZ Bus subsequently won the tender in the region, no doubt due to their experience, their ability to provide modern vehicles (via their large capital backing) and the economies of scale they are able to realise over the smaller incumbent.
Overall, the PT business has extremely low margins, requires enormous amounts of capital and is highly susceptible to market conditions. The only way to be successful in this industry is through ensuing that they build economies of scale. NZ Bus has the ability to achieve continue to acquire companies, drive up patronage levels in (particularly) Auckland and to drive economies of scale.
What I would like to reiterate though is that in my opinion I would not say that huge profits can be derived from this business for IFT. It does however create the a great opportunity for cash-flow.
You've made some really good points. Good to see that there are some people putting thought into this.