Gearing up for growth? 06 January 2015

If 2013 marked the start of economic recovery for commercial vehicle operators, 2014 was about working to make growth sustainable. John Challen and Brian Tinham cast an eye over the last 12 months, focusing on operating cost data and trends, with help from the RHA, FTA and SMMT

After a period of fledgling recovery through 2013, pundits predicted good times would return to the UK during 2014. There were forecasts of: economic expansion at its fastest rate for seven years; a continued decline in unemployment; and respite for those who suffered through the long, harsh recession.

In fact, while growth slowed slightly during the third quarter of 2014 (Q2 and Q3 upticks were 0.9% and 0.7% respectively), the UK came in at the fastest growing of the G7 economies. Indeed, the International Monetary Fund estimated a rise in GDP (gross domestic product) of 3.2% – the next highest being the US, at 2.2%.

Positive signs, then, but what about the transport sector? The 2013/14 annual report from the Office of the Traffic Commissioner brought mixed news. The number of commercial vehicles on the road increased by 3,308, bringing the total national CV parc to 337,570 units. However, 'O' licence numbers declined by 3,162, following the 2012/13 fall of 3,178 and continuing a four-year trend. The reported figure for 'O' licences in July stood at 77,732.

That said, CV registrations saw strong growth throughout 2014 – as we go to press, latest figures from the SMMT (Society of Motor Manufactures and Traders) show a rise of 4.2% overall for November 2014, compared with the same month in 2013, and a year-to-date increase of 13.1%. However, over that 12 months, vans have led growth, with new truck demand languishing in the wake of the surge in demand for Euro 5 models ahead of the Euro 6 deadline last January. And despite the SMMT predicting a return to normal truck registration numbers by mid year, sales remained disappointing.

This two-speed van versus truck trend was exacerbated in November: while the van sector climbed 17.1% to 26,516 units, trucks (above 3.5 tonnes) declined 49.6% to 2,729 units, which SMMT puts down to "the aftermath of new Type Approval legislation". Comparing this November with last, registrations of rigids declined 63.9%, with those over 6.0 tonnes bearing the brunt (79% slump for 6.0—16 tonnes and 76.4% for over 16 tonnes). Meanwhile, tractor units fell 33.4%, with two-axle tractors taking the biggest hit at 62.2%.

"Many dealers and truck operators brought their truck registrations forward in a bid to [beat] the requirement for EU type approval," reported the National Franchised Dealers Association. In total, year-to-date registrations for trucks in November were 38,751, down 14% on the 2013 figures.

Meanwhile, fuel prices fell substantially for the period to 30 September, providing welcome help for operators. In its latest annual survey of cost movements, the RHA (Road Haulage Association) reports a decrease in overall operator costs of 0.18%, but an increase of 2% excluding fuel. Sadly, while RHA expects fuel prices to stabilise in the coming months, it observes that, given most operators (71% of respondents) use of fuel mechanisms, the apparent fall in costs should be treated with caution.

Beyond that, RHA also observes that more operators are seeking to reduce costs, using several proactive means. These include: driver training; employing in-house trainers; fitting aerodynamic packages; implementing fuel bonuses; and adding speed limiters. Telematics is now widely installed and used for monitoring driver and vehicle performance, covering braking, speed, idling and fuel economy.

What's in store for 2015? SMMT expects the market to stabilise, particularly in the van sector. That said, Mike Hawes, chief executive of the SMMT adds a caveat: "The economy is forecast to grow strongly next year, but consumer confidence is a factor, as are retail patterns. If consumer confidence does decline, due to cutbacks in public spending, for example, it could impact on spending."

Economic backdrop
Overall inflation in the UK increased slightly in November, with data released for the month showing a rise to 1.3%. However, this is from a five-year low, driven primarily by falling fuel and food prices. The Bank of England continues its five-year fix on base rates at 0.5%, with little immediate sign of movement. That said, transport costs contributed to the small percentage increase – despite the falling price of Brent Crude and fuel prices reaching a four-year low.

GDP (gross domestic product – the main indicator of output growth in the UK) was 3% higher in Q3 2014, compared to the same quarter in 2013. The greatest contribution was from the services sector which includes transport. Meanwhile, the construction industry was estimated to have grown 0.8% in Q3,compared with Q2, while the annual estimate to Q3 2014 shows a rise of 2.9% overall.

The summer months saw UK unemployment fall below 2 million for the first time since late 2008 – the start of the financial crisis. The jobless rate fell to 6% in the three months to August, from 6.2% in the quarter to July, while employment rose to 73%, a level not seen since spring 2008 and tantalisingly close to the all-time high of 73.2%.

Tyres
After substantial price rises in previous years – 15% in 2011 and 10% in 2012 – tyres have been reined in, with 2.3% the figure for2014. Accordingly, many operators report growth in brand reliance, driven by favourable long-term contracts and services, with Michelin the most quoted of the elite premium brands. Some 20% of the RHA's survey respondents are now on mileage contracts, and many comment on the importance of tyres in drivers daily checks, not only for safety, but also to bear down on emergency downtime.

Fuel

Bulk diesel prices were 109—111ppl (ex-VAT) in the closing months of 2013 but, with American shale gas expansion, oil prices have reduced markedly throughout most of the year. Compared with RHA's closing price of 110.83ppl in 2013, the association gives the figure for September 2014 as 103.64ppl.

Using 104ppl and taking a typical 44-tonne truck travelling 73,000 miles a year at 8mpg, the RHA estimates fuel costs for the year at £43,142. It also notes that improving fuel economy to 8.3mpg (3.75%) would save £1,510 per truck. Naturally, such figures depend on several factors, including the type of work, the load, road terrain, the vehicle and the driver.

Last November, news emerged that the Milford Haven refinery, in Wales, is to close, leaving the UK with six remaining refineries and an expectation of further closures. UK and European refineries are struggling to compete with the super refineries coming on stream in the Middle East, leading observers to conclude that, longer term, the UK may move to little more than strategic fuel storage facilities.

The next issue may well concern fuel security – although the growing interest in lower-cost LNG/CNG (liquefied/compressed natural gas) truck conversions could yet present a path to mitigation.

Vehicle acquisition and depreciation
RHA's latest survey concludes that most commercial vehicles are still purchased outright (64%), but also observes the increasingly popular combination of buying and leasing vehicles across fleets. More operators than ever are now considering their options, it notes, although contract hire and leasing accounted for just 19% and 17% respectively in 2014.

The arrival of Euro 6 legislation at the beginning of the year saw truck sales collapse in the early months of 2014, following high demand at the end of 2013 for lower capex Euro 5 vehicles. Many operators and contract hire firms also took options on the remaining Euro 5 stock. And the latest technology comes at a price. While the average increase in truck prices for 2014 came in at 5%, many survey participants reported double-digit premiums for some Euro 6 vehicles.

Road tax
Annual tax for operating a truck remained largely unchanged over the year. However, the UK adopted a lower VED (vehicle excise duty) to render the new Road User Levy cost neutral for UK operators running at 12 tonnes gvw or more.

While the scheme got off to a good start – generating £23.4 million in the first six months – some argue that foreign hauliers are now simply passing this tax burden on to UK importers and manufacturers.

Insurance
In subtle contrast to last year's Transport Engineer operator costs report – where there was an upward trend in insurance premiums – one broker is advising that rates in the CV market have remained broadly static throughout 2014. The pressure to increase premiums eased partly because many insurers have cleansed their books of 'high-risk' trades, such as self-drive hire and taxi fleets, which had dragged down their performance in recent years.

On the flip side, poor performing risks are still facing insurance increases, says the RHA. For fair to well-performing risks, reductions of 4—8% have been common. Meanwhile, the car transporter market is facing insurance issues, partly because QBE has withdrawn from the market (following its similar action with the waste industry), while several other players are now viewing both sectors with more concern.

Repair and maintenance
When it comes to R&M responsibilities, there's no longer much to choose between those operators selecting contracts (46.5% of the RHA survey) and others using their own services or third parties on an 'as and when' basis (53.5%).

However, as truck technology continues to advance, the case for full R&M packages is becoming increasingly compelling, given the perceived alternative of specialist technician training and equipment to cover diagnostics and servicing. One emerging option is for operators to retain base aspects of maintenance in-house, while using specialist services from main dealers when they reach technical and/or equipment limits.

What of R&M costs associated with the UK's increasingly ageing vehicle parc? SMMT reports slightly higher costs, but suggests that they remain fairly stable. "We aren't seeing increased labour rates or price index, which is good for business," comments Hawes.

Overhead costs
Overheads seeing escalation during 2014 included business rates, and water, electricity (one three-year renewal stipulated a 24% hike), cleaning and parking bills. The details vary greatly between companies, according also to employee and site costs. RHA is advising operators to apportion overheads equally between vehicles, if all one size, or to consider per-tonne carried apportioning where vehicle combinations vary.

How will costs impact operators in 2015? SMMT says they should remain "reasonable". Hawes: "Current low inflation is heavily influenced by low oil prices, which have dropped by 20% – a reduction that has translated to the pumps. The fuel duty freeze is also good, although we have to be prepared for the rise next September."

Driver employment costs
There have been moderate increases in drivers' wages this year. Elsewhere, however, RHA reports very real concerns – now and for the immediate future – in terms of driver shortages, which are highly likely to influence drivers' pay as the supply and demand equation unravels.

Transport secretary Patrick McLoughlin last month advised shoppers to start buying early for Christmas to avoid problems with parcel deliveries, if the haulage industry driver shortages stopped goods getting to the retail outlets. Nearly prophetic, as it turns out.

Driver CPC
As expected, there was a rush for training last September, the deadline for the first five-year period of DCPC. Since then, numbers of drivers attending courses is thought have declined. Meanwhile, a recent pay survey revealed that a high proportion of RHA members has now moved to annual training. Such a stance is, according to the association, one sign of a good transport company.

Overall, the industry has also seen growth in demand for 'train the trainer' courses. These enable operators with a large enough infrastructure to tailor courses to suit the business requirements.

The future
The UK road haulage industry is facing a massive shortage of drivers – an issue the RHA has voiced in the national press. "As an association, we are pressing the treasury to make funding available so that would-be truck drivers can take the vocational driving and related tests to pass and qualify for driving HGVs," explains the organisation.

Elsewhere, the welcome upturn in the UK economy is likely to drive transport cost increases over and above the generally low figures reported for last year.

The RHA is not predicting similar low levels in 2015. In his Autumn Statement, chancellor George Osborne confirmed his intention to freeze fuel duty increase until after the General Election in May 2015. Whether an increase follows will depend on several factors, not least the identity of the governing party.

Meanwhile, analysts are currently forecasting low oil prices to continue at least for the first few months of 2015, due to the ongoing worldwide glut. Will that translate to further falls in fuel prices? Possibly even a fuel duty cut? Few are predicting any movement ahead of the May election, despite the fact that a litre of fuel in the UK is still significantly more costly than in continental Europe, because taxes still account for around 61% of the forecourt price.

That said, and as reported earlier, operators are increasingly embracing new technology in a bid to cut fuel costs in use – with telematics and improved vehicle systems and fitments more widely accepted as making measurable differences. This trend is set to continue. Equally, the welcome relief noted during 2014, when the new raft of Euro 6 vehicles displayed better fuel economy figures than their Euro 5 forebears, is likely to stimulate some return to new truck purchasing.

No one is expecting new truck registrations to approach levels seen back in 2008. Nevertheless, any boost in confidence in new vehicles' ability to cut running costs is likely to drive a growth trend, despite the truck capex hike. And as dual-fuel LNG/CNG conversions gain Euro 6 accreditation, 2015 might also see the start of their move to move to the mainstream.

Author
John Challen & Brian Tinham

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