Road to recovery07 January 2011

After the Annus horribilis of 2009, some of the transport sector enjoyed better times in 2010. However, most concede they are not out of the woods yet. John Challen reads the runes for fleet operators

According to the Road Haulage Association (RHA), "To have survived the past year, a transport business will have been doing many things well, holding down costs wherever possible and always looking for improvements in order to satisfy customers and ensure the security of their business."

Certainly, the drive to improve efficiency and cut operator costs is clear, with a number of technological advances being launched throughout the past 12 months to help fleet managers make the books balance. More haulage fleets have invested in 'teardrop' trailer designs; other aerodynamic aids have become increasingly popular; and fleet management by telematics has become an almost essential business procedure.

The statistics show that the UK exited entered recovery in late 2009, but Freight Trade Association chief executive Theo de Pencier admitted, just a few months ago, that 2010 was more like "year two of the recession". There may be hangovers from the financial turmoil of 2009 in the transport sector, but look a little closer and you will find plenty of evidence of progress, and even grounds for some optimism.

After witnessing the worst sales figures in a generation in 2009, van and truck dealers have seen customers return, many taking advantage of favourable finance deals that limit the initial outlay in new stock – giving them more chance of survival and ultimately also growth.

The latest figures from the Society of Motor Manufacturers and Traders (SMMT) are encouraging. Combined van and truck registrations for the month of November show the biggest rise of the year, at 22,834, which is 32.5% up on 2009, to 253,244 for the rolling year. Vans were up 26.1% for the month, compared with November 2009, to 19,128 and up 16.5% overall to 219,866 for the rolling year.

Meanwhile, trucks registrations rose nearly 80% year-on-year to 3,706 during November, though the rolling year total remains down 8.8%, against the previous year, at 33,378. "Van registrations have grown since February, while trucks surged recently, led by three-axle tractor demand, typically for rental and contract hire work," explains SMMT boss Paul Everitt. He admits that next year will be challenging, with some growth predicted but numbers still "well down" on pre-recession levels.

Vehicle costings

Cost movements related to vehicle acquisition have varied greatly depending on the method used to obtain trucks over the past 12 months. Operators committing to purchasing new vehicles have had to swallow an average price hike of 3.11%. Where leasing has been adopted, it has been chosen in the main by larger fleets, attracted by the prospect of fixed term costs. Smaller firms have preferred to purchase their assets – if they chose to acquire at all.

At the beginning of the year, pricing faced the conflicting pressures of poor demand but a reduced value of sterling against the euro – under which so many trucks and vans are valued. The net result: the price increases witenssed.

Economic backdrop

Despite the recession hitting businesses hard throughout 2009, unemployment has stayed relatively stable throughout the last 12 months. After starting the year at 7.8% the proportion of unemployed rose to 8% in February and March, before steadily declining to reach 7.7%, or 2.45 million, in September 2010.

As for inflation, after starting the year at 3.5%, the rate hit a high of 3.7% in April, before dropping back over the summer months to reach 3.1% in July. There it remained until a small increase back up to 3.2% in October.

Meanwhile, interest rates have remained steady. Following the trend for much of 2009, the Bank of England base rate held firm at 0.5%. At the bank's December meeting the rate was held for the 21st time in a row, and the general consensus of economists and markets is that the first rise will not come until late in the second half of 2011.

Others warn that interest rates are a moving target, so a token rise before that period is also a possibility. In December, a poll of economists indicated that the first rise will be in October 2011, but rates will only reach 0.75% by the end of the year.

One variable that has already risen is VAT, which was reset at 20% on 4 January. Some operators took advantage of the tax's lower rate when investing in new vehicles, or equipment for their operation. However, the expectation is that the new tariff will squeeze investment and contribute to further reduce spending in the coming months.

Finally, looking at the gross economic figures, there was a surprise increase of 0.8% in GDP (gross domestic product) in Q3 2010. That was on top of the previous quarter, which had witnessed a 1.2% jump. Overall, the past four reported quarterly figures have recorded growth, showing recovery still in progress, albeit slowly.

Fuel

The biggest factor in rising operating costs in the past 12 months has, predictably, been diesel prices. The past year has seen the cost of fuel increase by 10.6%, which includes a 1p per litre (ppl) increase in fuel duty and the introduction of the Road Transport Fuels Obligation (RTFO) on biodiesel, which forced operators to pay an extra 0.7ppl, when filling up.

According to official figures released by the RHA, diesel accounts for nearly 32% of the running costs associated with a 44-tonne tractor and trailer combination. Taking that figure into account, over the past year, fuel price rises mean that the cost of keeping the wheels turning has increased by around 3.2%.

What the RHA survey does not take into account, however, is the impact on engine performance of the increased biodiesel percentage (in some cases, as much as 7%). According to some fleet managers, this rise in biofuel content has meant an increase in fuel consumption by up to 5%.

Driver costs

Many companies cut their driving staff during the first year of recession and froze, or even reduced wage rates. Other cost-reduction measures adopted included minimising overtime, thereby further controlling staff costs.

The past year has now started to show modest wage rises, with an average increase across the industry of 1.49%. Meanwhile, the cost of using agency drivers rose on average by 1.13% although it is clear that relatively few fleet managers used agency drivers last year.

Driver CPC

Arriving in September 2009, the Driver CPC represented another cost to be borne by operators throughout 2010. Although it is not essential to have accounted for the certificate this year, an RHA survey reveals that 74% of drivers have already started their training – most incurring the direct and indirect costs of completing at least one seven-hour module.

Any firm that postpones DCPC training may face increased pressure when the deadline for completion of the modules looms in the autumn of 2014, in terms of loaded costs, time off and ensuring that DSA-approved training can even be accessed. If demand increases sharply in the 12 months to the autumn 2014 deadline, as many are predicting, it is a fair assumption that costs will too. So it is advisable to get in early.

Tyres

Tyre costs rose modestly, averaging at 2.9% overall for the year. The increase was attributable more to a rise in the cost of repairs than a hike in the base costs of the tyres themselves. Despite a tough 12 months, in terms of overall truck tyre sales in 2010, premium brand manufacturers, such as Continental, are reporting improved growth over the previous calendar year.

Continental's latest figures, to the end of October, show that the replacement tyre market comprised 913,000 units, compared with 871,300 for the first 10 months of 2009, representing an increase of 4.8%.

Premium tyre lines have enjoyed particular growth in 2010, despite competition from budget brands. Continental and others have been warning that investment in budget tyres may look attractive, but is actually a false economy. Although the upfront costs are less, they don't take into account whole life costs and the benefits that premium tyres bring in terms of helping to reduce fuel consumption and extend operating life.

Insurance

Premiums for haulage vehicles increased slightly over the year on average – in stark contrast to the price hikes experienced in the private car market. An overall rise of 2.84% meant that insurance accounted for 4.3% of running costs during 2010. However, there was plenty of variation, with one operator reporting a reduction in premiums of close to 15%.

Incidentally, one of the most important tools for cutting costs, according to many companies, is increased health and safety training in the workplace.

Haulage costs

According to the October update of the Manager's Guide to Distribution Costs 2010, nearly three quarters of all operators have seen their haulage rates remain the same (68.24%) or fall (5.29%) during 2010. At the other end of the scale, 4.12% of those surveyed reported an increase of 10% or more since the beginning of the year, with most others indicating an increase in costs of between 2 and 4% (13.53%).

As for minimising haulage fleets' fuel costs, the RHA advises that one method of consistently buying diesel at the best price is to actively monitor pricing, using the association's weekly bulk fuel survey. RHA also advises putting more emphasis on driver training and investing in technology to plan efficient routes for delivery rounds. Additionally, the association suggests monitor individual driver performance as a method that feeds through into cost reductions.

Overheads

Overhead costs were reduced by some fleets last year, but RHA members have, on average, reported an increase of 2.03%. The impact of slightly higher overheads on overall costs is estimated at a 0.2% increase.

Items falling under the overheads column include renegotiation of mobile phone contracts, with, for example, longer terms and cash-back offers. Business rates and water rates have proved more difficult to keep low or reduce but, in at least one instance, a reduction of 20% has been reported.

Outlook for 2011

Just as in 2009, experts are finding it difficult to predict likely changes to operator costs during 2011. However, cost increases in a number of areas are likely. The most obvious price rise will probably be for diesel, which, although notoriously difficult to forecast, is expected to climb by an extra 2ppl, on top of the increases in fuel duty – 0.76ppl in January and inflation plus 1ppl in April. Together, these factors look set to increase fuel costs by around 5—6% over the course of the year.

Costs of testing vehicles are also expected to increase, alongside the expansion of the ATF (Authorised Testing Facility) network. VOSA has also declared its intention to enforce the Road Transport Directive more rigorously. And additionally, a new power to impose fixed penalties for historic drivers hours' offences is expected to be introduced during the year.

As for the insurance industry view, best estimates are that premiums will rise by between 5 and 10%, through 2011. However, the emergence of pay-as-you-drive contracts, such as Azudrive from Towergate Insurance, may be appealing and actually save costs to those that run low mileage vehicles.

Author
John Challen

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