Green shoots of recovery? 06 January 2014

Confidence and growth are terms that have seen sparingly use by economists in recent years, but operators can expect to hear more of them in 2014. John Challen and Brian Tinham provide Transport Engineer's guide to operating costs

Just 12 months ago, Transport Engineer was preparing operators for more tough times ahead but, while the good times have not yet fully returned, there appears to be bright light at the end of the tunnel. Last year's talk of triple-dip recessions has since been replaced with increasing predictions of green shoots of recovery, both from business leaders and economists. Indeed, at time of going to press, the British Chambers of Commerce forecasts that the UK's economy will expand at its fastest rate in seven years during 2014 – a far cry from the anxiety that bedevilled the country just 12 months ago.

Turning to the transport industry, the total number of 'O' licences in 2013 was 80,894 (2012: 84,072), and the number of commercial vehicles recorded was 334,262 (down from 342,473 last year). In the past three years, 'O' licence numbers have fallen by 3,453, 3,675 and 3,178 respectively. And that decline is mirrored in the overall reduction in vehicle numbers from the haulage sector – down 8,211 in the past year alone. Indeed, taken as a whole, the last five years of recession/stagnation have seen nearly 47,000 vehicles stripped from the nationwide fleet, alongside 17,000 'O' licenses. The industry has paid a heavy price.

So where is the positive news? On the one hand, commentators suggest that some of the more recent vehicle number reductions might be attributed to efficiency improvements by operators. On the other, they point to the current boom in the automotive sector, with the SMMT (Society of Motor Manufacturers and Traders) most recently reporting a 17% uplift in cars manufactured during October 2013, compared with 2012. A year-to-date comparison of +5.4% appears to show that UK sales are on the rise and similar movements across European markets indicate encouraging signs of recovery among our nearest neighbours, too.

Looking at commercial vehicles, it's been a similar story – albeit possibly for different reasons. The second half of 2013 saw a steady increase in van and truck registrations, culminating in November's sales increases of 22.7% for the month, according to the SMMT, and a year-to-date improvement of 10.9%. Van sales increased by 19.4% for the month of November, while truck growth was recorded at a massive 39.3% – pushing year-to-date volumes to 44,867 units, 6.5% ahead of 2012.

"With engine technology developments [operators' reluctance to pay for Euro 6] driving up the truck market, plus van owners and operators responding positively to this year's economic recovery, the sector is on course for its best performance in five years," commented new SMMT chief executive Mike Hawes, last month.
What about overall increases in operator costs for 2013? Well these too have been relatively modest, with the Road Haulage Association (RHA) putting the rate at 2.3% across all categories (1.5% excluding fuel). That's a dramatic decline compared to two years ago, when the figure was 7.8% (3.2% excluding fuel). It's also an encouraging reduction against the 2012 number of 2.9% (2.5% excluding fuel).

RHA, in its annual survey of cost movements notes a significant increase in confidence among its members. It's view: "Little unused capacity remains among UK fleets and members should be pushing for rate increases." On the other hand, and adding a note of caution, RHA observes: "Many sectors will find this very difficult to approach – especially members who are owner-drivers and smaller operators, with a few trucks each. The customer is likely to be setting rates for them, which they either have to accept or lose the work. There is no easy answer as there is no mechanism to protect such an operator – apart from to decline to work for low rates."

Economic backdrop
Official economic indicators show that the rate of inflation slowed in October 2013: CPI (consumer prices index) indicated 2.2%; the RPI (retail price index) figure was 2.6%; and RPIJ (the new variant of RPI) came in at 1.9%. A key reason cited for the lower numbers was falling fuel prices – in line with advice to the Treasury by FairFuel UK, following a report commissioned by the RHA in September 2012.

Looking at UK unemployment, after a slight increase to 7.9% in January 2013, figures fell back steadily throughout the rest of the year, reaching 7% in November – the lowest rate the country has seen since
November 2008. Commentators widely agree that the welcome fall has been faster than expected. And they add that it gives hope that the economy will continue to recover faster than expected, too.

That is likely to be helped by the Bank of England, which pledged under new governor Mark Carney to keep the base rate of interest at 0.5% until unemployment falls to 7%, while also indicating that even reaching that target might not trigger any action to increase rates. The 0.5% rate has been with us since 2009 but, while most experts are not expecting a rise until at least 2015, few are completely ruling out the possibility of some movement even in 2014.

Operators are being prepared for tyre prices to continue to rise, but are also advised that the rate of increase is slowing. In 2011, RHA members reported 15% increases across the board for tyres, falling to 10% in 2012. So, just over 5% last year appears modest. That said, while approximately half of the RHA membership believes tyre brand to be of key importance, some of those (just as in 2012) state that when it comes to replacing original fitments they move to cheaper 'value' alternatives. RHA gives the example of Hankook tyres being a typical option, if operators elect to move away from, say, Michelin.

Meanwhile, a study by independent Fusion Research, commissioned by Continental Tyres, suggests that reliability and value for money over the lifecycle are the most important factors for operators purchasing tyres. Indeed its survey suggests that big fleets (those with more than 51 vehicles) have achieved major increases in efficiency during 2013 over 2012 by taking this approach. It also indicates that tyre monitoring is on the up, helping fleets to maximise the performance and efficiency – including in terms of fuel consumption – of their tyres.

Fuel costs
Using its end-of-survey figure of 110.83ppl (ex-VAT), RHA calculates that an average 44-tonne truck travelling 73,000 miles per annum (and achieving 8mpg) typically spends £45,976 a year on fuel. That translates to a fuel charge of 63 pence per mile – in the region of one third of average total operating costs. Ultimately, of course, that figure depends heavily on the vehicle, its duty and, importantly, how it is used and driven.

RHA data reveals that fuel prices fell by 2.8ppl between 2012 and 2013. Average price throughout its survey period came in at 112.77ppl although real figures varied quite widely over the 12-mont
h period. From October 2012 the price was high, reaching nearly 116ppl before a substantial drop in December of that year down to the high 110s.

In the New Year prices recovered so that by 1 March 2013 the average was around 116.99ppl (less than a penny behind the highest figure ever recorded – in March of the previous year), with oil racing up to $118 per barrel. By May 2013, fuel prices had dropped again to the high 108s with oil at one point back under the $100 a barrel mark. Since then, while fuel prices have increased again (more or less in step with oil), the overall picture in recent months has been fairly steady. Predictions remain, however, difficult.

Vehicles and depreciation
January 2014 sees the implementation of the long-awaited Euro 6 European engine emissions legislation. As a result, towards the end of last year, the truck market saw significantly increased sales of Euro 5 vehicles, buoyed by operators keen to avoid the increased expense of new Euro 6 models. Recent figures advise an increase across the commercial vehicle spectrum with around a 30% uplift in sales for 2013.

As for vehicle depreciation, RHA bases its figures on purchased, as opposed to leased, trucks, as few figures were available for the latter and variances were too great. Nevertheless, a 4.1% increase in dep
reciation costs here equates to a 0.5% uptick in the overall typical cost of a 44-tonne vehicle.

Road tax
Once again, vehicle excise duty has remained unchanged, following many years of historical stability. However, there have now been welcome changes to related costs. In the 2002 Budget, the then government announced plans for a distance-based truck road-user charge to "...ensure that lorry operators from overseas pay their fair share towards the cost of using UK roads". This charge was expected in 2005/6, but eight years later the haulage industry finds that road-user charge finally coming in.

The HGV Road User Levy Act 2013 was passed on 28 February 2013 and, as a result, from April 2014, UK transport companies will pay a levy alongside their VED rates. Foreign operators will henceforth have to budget for daily, weekly, monthly or annual charges.

Actual insurance claims experience is the key to whether or not operators can expect to see their policy premiums change, although there is a general trend – not surprisingly, upwards. RHA's report 'Haulage Cost Movement 2013' states: "One insurance broker we spoke to advised that, generally, insurers were looking to achieve 5—10% increases on commercial fleet activity, although it is entirely possible to get a better result."

One reason is the increase in flashing – where fraudulent claims are made by drivers of vehicles who 'let' drivers out of side turns but then crash into them, claiming that the motorist simply pulled out. Forward-facing cameras and truck telematics installations are providing useful counters to that and 'cash for crash' incidents – as well as anecdotally improving driver behaviour – enabling year-on-year reduced premiums.

Repair and maintenance
There remains a clear split among operators over repair and maintenance, with some operators using independent garage services as and when needed or under R&M contract, while others work solely with in-house workshops. Whichever method is used, RHA reminds operators that it is essential to ensure well-maintained vehicles at all times – and equally important to put reliable systems in place to monitor and confirm suppliers' compliance in this area.

"A failed MOT or inspection, be it in the workshop or at the roadside, shows a lack of maintenance and it will cost both time and money to resolve," advises RHA's annual report. "An operator's good repute is essential. Operators who are less compliant will be likely stopped and checked on a more frequent basis, often resulting in further lost time and money," it adds, alluding to the well-known impact of VOSA's (the outgoing Vehicle and Operator Services Agency) OCRS (operator compliance risk score).

Overhead costs
Overheads variance figures are wide, due to their heavy dependence on the operation itself. However, 100% of respondents to RHA's annual survey confirm that they have seen increases in their overall employee and site overheads. Some have managed to keep employee overhead increases to zero, but only one managed to do the same for site-related factors. Most stated that they were seeing steady increase in overhead costs in the range 1—5%.

Driver employment
It is widely accepted that operators have seen very low increases in driver pay over the past five years, and that perception is confirmed by RHA data. During that period, the total average increase recorded is less than 8%, meaning movement of sub 1.5% per year.

2013 saw a slight increase on that to an average of 2%, although 42% of operators still recorded no increase in driver pay at all. Nevertheless, a 2% hike in driver pay translates to a 0.5% increase in truck operating costs.

Driver CPC
With just nine months to go until the end of the first five-year period of the DCPC, it appears that, while a few operators still have to even consider the issue, the vast majority are either ready or currently playing catch-up – fast. Interestingly, some 55% of firms questioned by the RHA reported that they have increased their training budgets. Contrast that with the 2012 finding, which revealed that 63% of operators had not changed their spending on training compared to the previous year.

Outlook for 2014
The economic forecast for GDP growth has recently been revised up from 0.6% to 1.4% for 2013, with a prediction that 2014 will strengthen to 2.4% instead of the previous estimate of 1.8%. Further increases for the following three years are currently estimated at 2.2%, 2.6%, 2.7%.

In his 2013 Autumn Statement, the Chancellor advised that the duty rise expected next September (and estimated at 1.61ppl) has been cancelled and that no further rises will be countenanced for the life of the current parliament. For the transport sector, this combination of a strengthening economic outlook and steady fuel duty is probably about as good as it's likely to get.

That said, with plenty of operators nervous about buying more expensive, slightly heavier and more complex Euro 6 trucks, and the resulting bubble in Euro 5 models' popularity, it is difficult to predict sales volumes for 2014. Overall market leader DAF believes that sales are likely to be down, compared to 2013's high point. Managing director Ray Ashworth is convinced that operators will continue to buy existing derogated Euro 5 trucks while stocks last and hence save their money.

That short- to mid-term expectation is in spite of the now widely acknowledged fuel economy advantages (claimed to be up to 5%) of turning to Euro 6 trucks – very much flying in the face of early predictions for these vehicles. When new truck purchasing does recover, however, most pundits agree that operators will be tempted down the packaged R&M route for Euro 6 vehicles or move to leasing options – potentially signalling a significant shift in current buying habits.

One technology highly likely to continue to increase in popularity, as fleets aim to get even more out of their vehicles and drivers by more closely monitoring fuel usage, miles driven, routing and driver behaviour – using the data to drive evidence-based efficiency improvements. "Monitoring of the man and machine will only increase as the need to maintain a tight control on fleet expenditure becomes increasingly important for the bottom line," concludes the RHA' annual report.

What about other levers for efficiency? Aerodynamics, low rolling resistance tyres and dual-fuel engine conversions are all on the table. And another is LSTs (longer semi-trailers), under the DfT's (Department for Transport) ongoing 10-year trial. Last September, that was given a new lease of life, with the decision to remove the equal split of licences between 14.6m and 15.65m versions – given experience to date which, for obvious reasons, has been very much in favour of the longer vehicles. Expect to see more operators like Acumen Distribution taking advantage of the DfT's change of heart, and increasing their investment in LSTs for high-cube payloads.

John Challen and Brian Tinham

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Related Companies
Freight Transport Association Ltd
Road Haulage Association Ltd
Society of Motor Manufacturers and Traders Ltd

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