Driving down rates

Making sense of the oil crisis of 2007/8 throws up lessons THAT should be learned and acted upon by all concerned – not least the transport industry and the government

The 50 per cent rise in the cost of diesel in the UK in the 16 months from February 2007, from 72 pence to 108 pence a litre, hit professional road haulage firms hardest. A firm burning a £34,000-worth of diesel a year saw that leap to an annualised £50,000 by spring 2008.
    
The sheer pace of change was the worst impact. In many sectors, rate increases could not keep up with this key cost. Cash flow was strained at a time when banks were reducing borrowing and suppliers reducing credit terms.

Price 'escalators'
Many firms had automatic fuel price ‘escalators’ built in to their rates with at least some of their customers but even so the supplier/client relationship was strained by constantly rising prices. The profitability of manufacturers, never mind the haulier, was threatened in sectors from frozen food to timber as hauliers justified unprecedented rate increases.
    
The Road Haulage Association warned of good firms being driven out of business and that haulage inflation of up to 20 per cent would fuel inflation in the overall economy. This summer, that was clearly seen as the price of food and other essentials increased. Hauliers felt a double-whammy in many sectors, with soaring costs being felt at the same time as a sharp fall in demand, most notably in construction.
    
The RHA, which exists to promote the legitimate interests of professional haulage companies and to provide advice and mutual services, campaigned on two fronts: our membership and their customers; and the government. A ‘broad church’ of 9,500 member companies, ranging from owner-drivers to privately-owned transport firms and a few publicly-owned fleets makes up the membership of the RHA and reflects the make-up of the haulage industry, where operations are tightly-managed profit centres (in contrast to the ‘own-account’ truck operations, run as cost centres).

The paying customer
We urged hauliers to pass on fuel increases in their rates where necessary and we demanded that customers paid justified increases. It was apparent that some customers, in an effort to meet budgetary targets, were refusing even to discuss rate rises with their hauliers while accepting the cost increases for their own trucks. Such a short-sighted policy risked seriously undermining the availability of haulage capacity. Transport companies cannot be expected to take on the whole burden of oil price volatility.
    
The RHA’s weekly fuel price survey has allowed both members and their customers to check what was happening to diesel prices and we have promote the fuel escalator clause that we urged members to adopt when quoting contract prices. We have no doubt that the fuel crisis has led to even more hauliers using escalators in their contract and spot rate quotations.

Taking action
In the interest of transparent pricing, the RHA launched a UK fuel card linked directly to the Platts trading price (widely recognised in the oil industry); in effect, a competitively priced product is similar to a tracker mortgage for fuel – and it is proving popular.  
    
Other actions have been taken by hauliers and their customers. Hauliers in some cases reduced the top speed of their trucks from 56 to, say, 52; but that can only bring benefits on the margins.
    
They have been looking more closely than ever at how the trucks have been driven, making increasing use of the information recorded by truck onboard computers. This facility will be used more and more.
    
Routing and delivery schedules are constantly being improved, through the use of tracking systems and negotiations with customers; there is more and more night running, for example, to avoid congestion and to improve fuel economy.
    
Those companies that have the tightest control and understanding of costs, best manage their customers, have low borrowings and have a degree of good fortune are faring best in a difficult market, where a significant number of companies are expected to go to the wall over the next six months. However, even these companies are in the main looking for a change of tack in the government.

Price politics
The politics of fuel prices is a long-standing battleground in the UK and the crisis of the past 15 months has highlighted the issues. HM Treasury imposes the highest rate of fuel duty in the EU at around double the average for the continent and Ireland. For example, duty on a litre of diesel in Belgium is charged to hauliers at 30.2 eurocents compared with 64 eurocents in the UK (even allowing for a 15 devaluation of the pound against the euro over the past year). This fuel duty penalty of £12-£14,000 per truck per year must be absorbed by UK hauliers or passed on to their customers.
    
The obvious unfairness of this duty gap has been recognised by the UK parliament’s all-party Transport Select Committee as a key finding in its Freight Report (published in July). The government’s response hitherto has relied on claims that a ‘basket of taxes’ equalises costs but there is little evidence to support that argument.
    
Schemes are mooted by the Conservatives and the Liberal Democrats that would rebate fuel duty by around 25 pence a litre. The rebate would go alongside a new mileage-based road charging system. However, there are doubts as to whether such proposals would ever lead a scheme being introduced in the foreseeable future. The Labour government tried with its lorry road user charge and gave up in 2005 after spending £40 million on consultancy fees alone.
    
The government must recognise that fuel duty on haulage amounts to a direct tax on business and that the current high level is damaging UK competitiveness. Hauliers and their customers are constantly innovating to run their trucks more cost-effectively but are looking for movement from the government, too – starting with the abandonment of further increases in hauliers’ diesel duty.