THE DEFINITIVE TRUCKING SITE

August 2008

Looking back over the year, Kelly says the cost of fuel increased by 55% in the past six months and the question which everyone wanted to sidestep was: Who would foot the everincreasing bill? 

“At the end of the day, the consumer does but there are time lags between this happening and the operator recovering costs in order to run a profitable transportation business,” he says. 

He points out that operators transport goods and pay for fuel upfront. Bigger operators have the muscle to acquire fuel rebates - which, contrary to belief are only up to a maximum of roughly 50 cents per litre, not a 50% rebate on the full price as believed.

“They also have the ‘luxury’ of contracts over longer periods with clauses allowing for escalation of fuel related costs. However, these are always retrospective and the operator foots the bill upfront and carries these costs, sometimes for up to six months before receiving the revised payments.” He adds that large companies also have to place security deposits with fuel companies for the huge orders they take – and this has increased by the 55% reflected in the fuel price increase. “Suddenly the cash flow structures of operators are affected by having to place larger amounts of cash in deposits for fuel.” 

Smaller operators pay the ‘forecourt’ price for fuel - based on not getting large deliveries to home depots or by the very nature of their business. They also quote on smaller jobs which make them more expensive than larger operators – thus they begin to get squeezed out of business due to market demand for lower transport rates. 

So what is the effect? “Customers search for the cheapest rate; transporters compete with one another more stiffly and undercut each other to stay ‘alive’; the price of fuel creates an interest rate cycle climb which means the vehicles cost more to own and operate which again translates into higher costs; consumers start to feel the pinch and ‘consume’ less which in turn results in lower volumes of cargo being moved and therefore less work for operators. 

“In April,” Kelly says, “the RFA factored fuel costs as 43% of the running costs of an operation. That was closer to 50% in July. If 50% of your daily running costs are increasing by 50%, then operators have to factor in these increases into their rates. Some cannot due to their contacts or business models not allowing this. The result is closure of operations.”

Asked to comment further on business closures experienced over the past six months, Kelly says this information is not available in terms of numbers or percentages of operators. 

“The RFA has, however, experienced a number of members resigning due to closure of operations and many of these have been the micro operators in the one to ten vehicle type operations. However, there have also been some larger operations. These closures have been due to an inability to survive, with the National Credit Act (NCA) as well as the upwards cycle in interest rates adding an extra twist,” he says. 

He adds that some operators now can now no longer finance their exposure due to their loans and acquisitions being done before the change in the economy which has seen an increase in non-profitability and sustainability, and led to bankruptcies.

“The NCA has also retrospectively affected some operators. Lines of credit have been shrunk, some loans have been recalled and the ability to find bridging capital has become very tight. Given all this, we may face more closures of operations and perhaps some larger operations will be among those as well,” he says 
 

Smaller operators pay the ‘forecourt’ price for fuel - based on not getting large deliveries to home depots.

Government 
Kelly says that during the height of the fuel price crisis, the RFA did hold discussions with the Departments of Minerals and Energy (DME) and Trade and Industry (DTI) but to date has not had any firm feed-back as to how the fuel aspect will be tackled. 

“There seems to be a general numbness to the international fuel price and that this is out of the control of the South African economy. The RFA intends to restart these discussions.” 

He adds that the RFA had also been in discussion with STATS SA to determine volumes and the result this has on the economy – which would help with a proposal to SARS and government as a whole in terms of relief for the economy through some subsidy/rebate system. 

“An increase in fuel subsidies is the route the RFA has discussed with some departments and hopefully we will be able to achieve this. However, this will be determined by the final outcome of discussions and action by the relevant departments. There has also been some call for a similar tax rebate system as currently enjoyed by the agricultural sector and some non-road transport operations.” 
 

RFA Prudent management of the use of fuel should now become an entrenched norm in trucking companies. Let’s not wait for the next shock-wave to hit.  Gavin Kelly  Technical and Operations manager  Road Freight Association

Strike Action 
As pointed out elsewhere in this edition, the fuel hikes resulted in strong protest action and strikes by truck drivers and owners all over the world. In countries such as India, Malaysia and Indonesia, such strike and protest actions forced the respective governments to increase fuel subsidies. South African truckers were, on the other hand, remarkably quite. 

Asked if the RFA had, at the worst of the fuel crisis, expected any kind of protest action by local truckers, Kelly says the RFA is, first and foremost, an Association of members, with transport operators being the majority. 

“We have taken note of what has happened in the US, Greece and other countries – but more importantly, what the response has been from those governments. Should our members decide at any time that a protest action is the best way forward, then the RFA would take the necessary action required by its members. However, no protest action is expected from individuals or members.” 

In conclusion, Kelly says the government and all parties involved need to realise the full effect high fuel prices have on the logistical chain in the country. He also urges transporters not to breathe too deep their sighs of relief. 

“Although a drop of around R1.60 a litre for diesel is expected in September, there still exists a lot of global uncertainty around the issue of crude oil pricing with some analysts still holding to their predictions that the $200 a barrel mark will be reached in the future. Prudent management of the use of fuel should now become an entrenched norm in trucking companies. Let’s not wait for the next shock-wave to hit before putting professional practices into place.” 

Sound advice we’d say.