Fuel for thought

With operating costs on the up and fuel price playing a large part, this important issue must be addressed as a matter of extreme urgency, says the Road Haulage Association

Last November the Road Haulage Association reported that the cost of running a truck had increased by 4.9 per cent. This information was supplied by members for the annual cost movement report, each year this covers the period October until the following October. However, it was from October that fuel started spiralling upwards due to large gains in the price of oil – in fact over the next six months fuel went up 16.6 per cent using our bulk weekly fuel survey as the marker.

As a result, the RHA undertook a snap survey of its members, looking at all costs associated with truck operations. The results showed that hauliers’ costs have increased by another 7 per cent in that short space of time with 5.2 per cent of that being due to fuel costs. That alone means an increase of £6,890 per year per truck1 but there were also notable increases for vehicle insurance (+5.6 per cent), repairs and maintenance (+6.17 per cent) and tyres (+4.57 per cent). We’ve not seen the end of tyre increases either owing to global natural rubber costs, which doubled in 2010 and continue to rise.
 
The reality
This of course will not be new news to operators; rather a confirmation of cold hard-faced reality where major expenditure is up front with a typically (and increasing) time delay before invoices are settled. Indeed the transport press carries examples of companies failing in the current climate virtually every week. Many examples of this are available, however, a recent one to us shows how a once profitable business can start to decline and then be consumed by events leading all the more often to demise.

The company in question, a small family concern in a specialist sector, had been trading for years and had been quite comfortable. The company set its prices annually with a couple of key customers, but critically, did not have any adjustment mechanism in place for fuel. 2008 saw fuel prices rise dramatically from a turn of the year price of 89.92ppl (ex-vat) increase to the giddy height (at the time) of 108.64ppl then fall back to 82.65ppl by year end.

As there was no fuel mechanism in place the company had to swallow the increased costs of nearly £50k. The following year one of its main customers lost their work, which in effect halved the transport firms business. Vehicles were taken off the road and drivers made redundant in an effort to reduce costs, however, by 2010 with work now picking up again the firm decided it was time to upgrade the fleet meaning better economies and lower maintenance costs.

With the work doing well and the better vehicles saving some costs it looked as if events had been turned around but then the terrible weather towards the end of 2010 took hold. In effect this meant the collected goods could not be delivered due to roads that were impossible to use, this resulted in only 50 per cent of possible working time being actually used.

Cash flow was by now becoming a problem but orders were coming in, due to fewer own trucks work was subbed out. The firm was using invoice factoring and as they now only had one major customer they quickly hit their limit on available cash from invoices. Other customers were also getting slower at paying and eventually they could not meet their overheads and time to call it a day arrived.
 
Ready for change
Is there a moral to the story? It’s more a case of being ever ready to change with the times, use fuel adjustment mechanisms as no company can survive relentless upwards pricing pressures, yet many operators still do not use them. It’s doubtful if the price fuel will go down significantly for the rest of this year.

Where possible, all your eggs should not be in one basket where customers are concerned although this can sometimes be very difficult, problems get worse if they happen to be a late payer too. Was it a good time to invest in new vehicles if it meant no reserves were then available especially if coinciding with later and later incoming payments? If nothing else, it proves the point that hindsight is, indeed, a wonderful thing!

The fuel agenda
Despite the ever increasing levels of legislation and regulation surrounding the UK road freight industry, fuel continues, and will always be top of the agenda – for the economy, for the general public regardless of whether or not they drive and in particular for British hauliers. To that end, the Road Haulage Association has been working flat out to get a fair deal on fuel and to keep the issue at the top of the political as well as the industry agenda. It is encouraging that by collaborating with the Freight Transport Association, the RAC and industry campaigners FairFuelUK.com, we have already made a difference.

The proposed 1 penny per litre fuel duty increase, due to come into effect following this year’s spring budget, quite simply, could not be allowed to happen. The campaign group renewed its efforts to have it abandoned as the surge in inflation meant that the rise would be even worse than anticipated. As the chancellor’s commitment was to a 1ppl rise on top of inflation, it meant that the price at the pumps could easily have risen by a massive 5p per litre; nearly 23p per gallon!

Thankfully, the relentless campaigning paid off and we saw a duty freeze. But there is no room for complacency. Another 3.02ppl rise is due to come into effect on 1 January 2012, bringing fuel duty up to 60.97ppl and in August it will rise yet again by the RPI rate in place at next year’s budget. The current forecast is that RPI will be 3.6 per cent, therefore adding another 2.19ppl and a total duty figure of 63.16ppl.
 
Effect on operating costs
For every penny increase, either on the price of fuel or on fuel duty, adds £424 a year to a truck's operating costs; since October 2010 that has meant an increase of £6,542 per truck per year relating to fuel. In simple weekly terms it means that companies now have to pay £125 a week more than back in October 2010.

Fuel usage in the UK currently amounts to 49 billion litres annually (24bn petrol + 25bn diesel). Her Majesty’s Revenue and Customs estimates this to be £26.9bn (ex VAT) for the 2011-12 tax year rising to £28.5bn for 2012-13.

UK hauliers are walking a financial tightrope at the best of times. In the past 18 months, as a result of duty and oil price rises, the cost of a litre of diesel has risen by 20.6 per cent or 23 per cent at the pump for the ordinary motorist.

Road hauliers have, and will always be regarded as a reliable source of income through direct and immediate tax. This industry provides an essential link in today’s supply chain network yet it seems we are being penalised for operating in a cost effective, economically viable and environmentally friendly manner. Yes, we were encouraged that the fuel duty escalator was scrapped and were equally encouraged at the plans to introduce a fair fuel stabiliser although this has yet to materialise.

This is an industry that needs incentive and encouragement – two things that are desperately needed if the industry upon which UK plc is so totally reliant is to stand any chance of both short and long term survival.

If these issues are not tackled as a matter of extreme urgency, the future prospects for the UK economy and its hauliers, at best, look depressing indeed.

For more information
www.rha.uk.net