Truck operating costs overall in the UK have risen by between 3.0 and 4.6% in the past year, depending on vehicle type. Though generally above the rate of inflation, these rises are not as steep as had been feared in the wake of the EU referendum of June 2016 and subsequent volatility in the value of sterling.
But truck fleet operators are struggling to keep a lid on mounting cost pressures, many outside their control, and the number of business failures in this sector is rising at an alarming rate.
These are the headline conclusions of the latest painstaking annual costs analysis by Commercial Vehicle Engineer magazine.
One surprise finding in our research this year is that the skilled labour shortages, which worry the Freight Transport Association (FTA), Road Haulage Association (RHA) and many others, have apparently not yet had as serious an effect on pay as expected.
Though several reliable sources in dealer workshop management report technician pay rate increases of as much as 10% over the past year, we can find no hard evidence of transport and logistics sector pay rates more generally, and those of drivers in particular, rising by more than between about 2.5 and 3.0% last year. This is still less than the current rate of inflation as measured by the consumer prices index (CPI).
As a result mainly of that modest driver pay increase and of a fall in the cost of diesel fuel for much of the year (a trend reversed sharply in the final quarter), operating costs overall have risen by less than many had feared.
The overall bottom line operating cost rises over the past 12 months, taking into account all standing and running costs, range between 3.0% and 3.4% for rigid trucks – about the same for most tractive units – and rather more for semi-trailers (between 4.1 and 4.6%), largely as result of steep capital cost increases and higher maintenance and repair costs.
It could be argued that cost rises on this scale, only marginally above the rate of inflation, should not be seen as a serious cause for concern. In a sector where thin profit margins, often less than 3.0%, are the norm, many pundits would disagree.
Insolvency Service statistics also paint a worrying picture. These reveal that the number of road-freight companies filing for insolvency between April and June last year was double the number of the same period one year before, and at the highest level for five years.
More alarming still is one of the latest reports from Creditsafe, a big multinational business information firm specialising in company creditworthiness reports. According to Creditsafe, there were nearly 6,000 more active companies in the transport sector in the UK in the final quarter of last year compared with the same period in 2016.
But in the same period, there was a year-on-year increase of more than 400% in company failures. And this report was compiled before last month’s collapse into liquidation of the huge Carillion group, Britain’s second-biggest construction firm.
Many small and medium-sized road transport operations are already being badly hit by the Carillion crash. How many of these will be forced out of business as a result is anyone’s guess.
Sterling’s value against the US dollar, euro and many other currencies plunged in June 2016 immediately following the UK referendum on European Union membership. That 20% currency devaluation was always bound to have a big impact on the capital costs of everything, certainly including most trucks and trailers, sourced mainly from continental Europe.
The only real questions for truck operators were how long the impact would take to be felt and how serious it would be. This varies from one manufacturer to another and indeed from one model to another.
At this time last year, only eight months or so after the June plunge in sterling’s value, the full effect had still to be seen on truck and trailer prices. Truck capital costs were raised by only 2% in the 2017 Commercial Vehicle Engineer cost tables. It is a different story this year.
Sterling’s value has recovered a little over the past twelve months and indeed hit a 19-month high against the dollar last month. But it is still considerably weaker than in pre-Brexit referendum days. That unquestionably is feeding through into truck and trailer prices. So too is the rising price of raw materials such as steel. A source at one of the UK biggest contract hire and fleet management companies, regularly buying large numbers of trucks from all the leading manufacturers, tells us that capital costs rose by between 5% and 7% in 2017.
In January last year, an average 3.6% price rise was announced by Krone, Europe’s second-biggest trailer-maker. The boss of Germany-based Krone Commercial Vehicles cited “massively rising raw material prices for steel, aluminium, oil and gas” as the main reason for the move.
Eight months later came a similar move from Schmitz Cargobull, Europe’s biggest trailer-maker. Its prices went up, across the board, by “at least 4%” in September.
But there are is another reason, quite apart from currency exchange rates and raw material costs, why capital costs have been increased substantially, by 5%, in this year’s cost tables. We have detected a clear trend towards greater customisation of trucks, trailers and bodywork among a wide range of UK operations over the past twelve months. The rationale invariably is to spend more time and cash initially on getting vehicle specification spot-on, with the aim of greater efficiency and lower overall operating costs in the long run.
The really big numbers under this heading in our costs table come, as always, from depreciation; overheads (comprised mainly of gas and electricity costs, water charges and business rates); and drivers pay.
This year, probably more than ever in the 20-year history of this annual analysis, there is a curious mixture of stability and volatility in this section. Depreciation is stable, so far. But several of the many contributors to our research are concerned that this may not continue for much longer, as an indirect result of continuing uncertainty over the outcome of Brexit negotiations between the UK government and the EU 27. The specific worry is that the 2018 new truck market will be affected by continuing lack of clarity on what deal if any will be agreed, and therefore whether or not there will be tariffs on new trucks imported from continental Europe from April 2019.
Some pundits say the result of this uncertainty could easily be an unexpected spike in demand this year for new trucks as canny fleet operators bring forward acquisition plans to avoid punishing price increases starting next year: pre-buying, in a nutshell. Who knows what effect this could have in a few years time on the used truck market? Hence the worries about residual values and thus depreciation.
Business rates rose sharply for many businesses last April, following the first adjustment in seven years of rateable property values. But then, reacting to an outcry over this move and following a June general election in which the Tories lost their overall majority, chancellor Philip Hammond in his autumn budget announced various government U-turns on business rates designed to ease the pain.
There were similarly spectacular changes of direction in government policy last year on insurance. In March, it announced a new formula for calculating compensation payments for injured people making claims against insurance companies: the “discount rate” in insurance injury jargon. This came at a time when insurance premiums were rising sharply anyway, not least as a result of steep rises in insurance premium tax.
Then in September, the government changed its mind following an outcry from insurance companies. New draft legislation has been published to change the way the discount rate is calculated. When and if this legislation makes its way on to the statute book amid all the Brexit-related parliamentary time-wasting, it will probably mean insurance premiums falling slightly, along with compensation payments to people injured in road accidents.
Truck-related insurance premiums, meanwhile, are certainly on the rise. The cost has been increased by 4.0% in this year’s tables.
The government’s Department for Business, Energy & Industrial Strategy (BEIS) paints a similarly blurred picture on gas and electricity prices for “non-domestic” users. Between the third quarter of 2016 and the third quarter of last year, electricity prices for most businesses increased by between 2.3 and 7.6%, according to BEIS.
Gas prices, on the other hand, are said to have fallen by between 2.1 and 15% for small businesses, whereas businesses classified as “very large” have been hit by a 13% increase in gas prices. Crunching all these numbers has led us to raise overhead costs overall by 5.0% in our cost tables.
Perhaps the biggest surprise of all from our research this year came on driver pay. Twelve months ago, we reckoned it had risen by only 2.5% in 2016. This year, with a driver shortage worsening again and inflation on the rise, we expected to find a large number of employers increasing driver pay at well above the rate of inflation.
The FTA reckons that the UK freight transport and logistics sector overall now has a shortage of no fewer than 35,000 drivers of vans, fork-lift trucks and large goods vehicles. In these circumstances, upward pressure on driver pay surely must be irresistible? Seems not. All our research points to driver pay settlements on average last year being no more than 2.5%.
Volatility is the name of the game again in two of the elements under this heading this year: fuel and AdBlue. Falling global urea prices had driven down AdBlue prices during 2016. For the first two quarters of 2017, that trend was reversed with AdBlue prices in the UK rising by 5.2 and 9.5% respectively, according to the useful price index published by AdBlue supplier Greenchem.
This index also shows that in the third quarter of last year AdBlue prices fell by 7.7%. The cost per litre factored into our tables has risen from 25 pence in 2016 to 26 pence last year.
There were big ups and downs too last year in the cost of diesel, again driven more by global events affecting the price of oil rather than by any domestic developments. There was no change in UK fuel duty last year. But if the government was expecting gratitude from hauliers for another fuel duty freeze it must have been disappointed. This is what RHA chief executive Richard Burnett had to say following the autumn budget:
“At a time of Brexit uncertainty, the chancellor had the golden opportunity to make the production and distribution of UK goods more competitive. Fuel duty makes the UK less competitive. We have the highest fuel duty in Europe – nearly 50% higher than the European average. And despite the seven-year freeze, at 57.95 pence per litre, fuel duty remains grossly excessive.
“It has a negative effect on everything we buy and makes all UK made goods more expensive to transport. We implore the chancellor to amend his budget and introduce a fuel duty rebate scheme for essential users of fuel – a system already adopted by eight EU member states, including our nearest neighbours – the Republic of Ireland, Belgium and France.
“An essential user rebate of 10 pence per litre would enable our hauliers to gain advantage over their European counterparts and would considerably lessen the fiscal drain on our emergency services which are also in a financial stranglehold as a result of the high price of diesel.”
There is no sign of the government heeding RHA advice on fuel duty.
Brent crude oil started the year at around US$55 per barrel, fell to a twelve-month low of $44 in June but had climbed to $68 by year end. The UK average pump price of diesel (including all duties and VAT) started the year at £1.22 per litre, fell to £1.15 in July but was at a twelve month high of £1.24 by the end of the year.
The average bulk diesel price per litre (excluding VAT) in our cost tables for the whole year has been raised from 96.8 pence in 2016 to 98.8 pence for 2017.