---

Past Issues

February 2007

---

Market related owning & operating cost estimates for a variety of popular transport operations

Welcome to the FleetWatch truck operating benchmarks 2007. The schedule covers a variety of typical primary and secondary distribution trucking operations. 

The objective is to provide operators and shippers (consignors) with a reliable independent guide to trucking costs incurred in the transportation of raw materials, semifinished and finished products. 

A thorough understanding of the assumptions and how they are applied in developing the estimates is necessary if the various benchmarks are to be informative, beneficial and helpful. While FleetWatch takes no responsibility for the accuracy of the estimates, considerable time and effort has been expended to ensure the various components are realistic and representative of the hypothetical transport tasks contained in the schedule. Updated estimates are published quarterly. However, the schedule is continuously monitored and updated monthly. 

Assumptions
Many transport tasks are similar but few are ever identical. The benchmarks are based on average operating conditions in terms of demography, roads, annual kilometres, working days, vehicle capability, scheduled maintenance in accordance with manufacturers’ recommendations and competent drivers. Where actual operating conditions differ from these assumptions make the necessary adjustments to the benchmarks so that they remain realistic, market related and applicable to your trucking tasks. 

Vehicle Type
Briefly describes the vehicle configuration contemplated for a specific task (eg – 4x2 rigid freight carrier with volume van body for medium distance secondary distribution of FMCG products). The descriptions attached to articulated vehicles indicate the number of axles (Examples: 1.1.3=means a 4x2 truck-tractor and tridem semi-trailer. 1.2.2= a 6x4 trucktractor and tandem semi-trailer).

Payload (tons)
The assumptions are based on typical optimal legal mass payload that can be achieved on any number of vehicles, bodies and trailers freely available on the local market. In practice the actual payload will depend on the vehicle manufacturers’ specification and the road-ready unladen mass. Lightweight trailing equipment can improve payloads. 

Deck length (metres)
The assumptions are based on typical optimum mass distribution for the assumed vehicle configuration and the contemplated task. In practice there are many wheelbase and axle capacity options to suit specific requirements. 

Pallets 
The assumption contemplates 1000x1200 mm 4-way entry pallets. 

Volume 
Cubic assumptions are based on length, width and height of typical bodies applicable to the various operations. In practice this varies with measurements of specific bodies.

Annual Kilometres
Annual kilometres are based on typical operations. Annual kilometres of vehicles engaged in short and medium distance secondary distribution vary considerably. The schedule includes two examples to illustrate the impact of annual kilometres on standing costs (see the 1.2.2. and 1.2.3 benchmarks). Space limitations prohibit the inclusion of a wider variety of such examples. 

Working Days
A five-day week is assumed for the vehicles most likely to be involved in secondary distribution. Larger rigs often work longer hours to meet the demands of primary distribution.

Shifts
Shifts indicate the average daily working hours of fridge units

Useful Life
Where applicable, the useful life is based on a maximum of 800 000 km. This is in line with vehicle manufacturers’ maintenance contracts for standard operations over 48- or 60-month periods. In terms of depreciating assets, the recently introduced international reporting standards (IRS) require that all entities identify the useful life of vehicles when they are commissioned. The benchmarks assume the useful life to be the number of years required to cover the estimated cumulative kilometres for each task with a maximum of 800 000 km (where applicable). Examples: A 5-axle articulated rig (1.2.2.) covering 100 000 kmpa has an assumed useful life of eight years. See comments under depreciation for more detail. The useful life of the major components is an important element in achieving cost-effective transport when planning fleet size for medium- and long-term contracts. 

Capital Cost
All estimates are based on the cost of new vehicles and trailing equipment. The indicated initial cost of vehicles, trailers, bodies and auxiliary equipment (such as fridge units) is based on the average of published current selling prices of such items less known fleet discounts. 

Standing Costs (also known as fixed costs)
Standing costs are incurred whether the vehicle moves or just stands. When vehicles do not cover significant kilometres or work for long hours, standing costs will be high and difficult to recover. The assumptions are: 

Depreciation 
Depreciation is based on the assumption that all vehicles are new and financed via an instalment sale, financial or operating lease. In the spirit of the IRS, a residual value (RV) of 35% is applied to each vehicle type and trucking task. The RV is based on the collective opinion of new and used truck traders and current banking practice. Vehicle buyers with an outstanding credit rating and operating track record receive more generous terms. Conversely, those with a poor record will meet with tougher conditions. The net amount to depreciate is based on:

Vehicles – 20% a year over five years.
Auxiliaries – 25% a year straight line.
Trailers – 10% a year.

Tyre values are not deducted from the initial price of vehicles and trailers prior to depreciation. It is important to remember that in terms of the IRS the useful life of vehicles and equipment must be assessed at least annually and revised to accommodate any significant changes that may have occurred to lengthen or shorten the useful life or diminish the ultimate residual value. For those interested read accounting codes AC123 and AC128.

Cost of Capital
"There’s no free lunch" as the saying goes. Interest on the cost of vehicles and equipment is calculated at the prime bank overdraft rate (currently 12.5% a year) on the capital cost less an RV of 35%. The calculation indicates the average interest paid per annum on the reducing balance over five years. 

Vehicle Licences
Licence fees for vehicles and trailers are based on the current Western Cape tariff, the most expensive vehicle licence fees in SA. 

Insurance
Insurance cost assumes the operator has a low risk rating. Premiums are set at 6.5 per cent of the purchase price (replacement value) for vehicles, equipment and trailers. 

Wages
Driver and assistant wages vary considerably across the country in terms of vehicle size, primary and secondary distribution tasks, region, different operators and the structure of remuneration packages. All assumptions include an allowance for company contributions but exclude overtime and bonuses. Where applicable an assistant has been included as a casual, daily worker

Variable Costs

Variable costs (also known as running costs) are incurred when the wheels turn. These include: 

Fuel
A major cost item in all transport operations. Where annual kilometres exceed about 120000 km a year, fuel is usually the largest expense. Fuel consumption is calculated according to a formula that assumes the vehicle is always fully loaded, travels at an average speed of approximately 80% of the speed limit in the case of highway operations and 70% of the urban speed limit. The formula takes into account an assumed maximum power demand of between 55% and 60% when expressed as a percentage of maximum available kW/hrs for each task. A similar approach is used in calculating the fuel used by fridge units. The price of fuel is based on the pump price in Gauteng for diesel with 3% or less sulphur content. Bulk rebates are ignored. 

Top-up Oil
Is based on five per cent of the fuel cost.

Repairs & Maintenance
The assumed cost of maintenance is based on current vehicle manufacturer and FML maintenance contract rates, expected economic component life and industry experience. The assumptions take into account the complexity of each task including typical operating conditions such as roads, topography, traffic density etc. Repair and maintenance costs for fridge operations are calculated in hours. 

Tyres
Tyre life is based on typical casing life currently experienced in the various operations. Major tyre supplier tyre management programmes offer excellent data to establish achievable tyre performance. 

Unforeseen 
An amount of R10 000 a year is allowed to cover any number of unexpected and unforeseen expenses 

Exclusions 
The estimates do not include toll fees, vehicle tracking, engine protection or other optional equipment. No allowance is made for administration or overhead expenses. The variation in operator approach to such costs excludes the inclusion of a sensible amount to cover these aspects as a typical benchmark.

Summary
The summary expresses operating benchmarks under numerous headings including tons, ton/km, pallets, pallet/km and metres of deck length. It is important to note that all calculations assume a fully loaded vehicle. 

Ratios
Management ratios provide an excellent insight into the high capital and operating cost of vehicles, especially when not properly managed. However, correctly selected vehicles that are decently driven and timeously maintained offer cost-effective transport to shippers and the prospect of a commercially acceptable return for the operator. 

Note
The FleetWatch truck operating benchmarks offer shippers and operators the opportunity to fine tune these estimates to suit their specific transport operations or needs. Where particular elements differ from your operations, simply make the necessary adjustments.

If, however, you require more information to complete your benchmarks, contact Max Braun at maxbraun@iafrica.com  for some assistance.
 

Comment

Estimating truck operating benchmarks at  the beginning of 2007 proves to be trickier than you would think. This is especially so when comparing CPK numbers on a year-on-year basis. The dramatic drop in the price of crude oil and consequently the fuel price tends to mask the impact of ongoing increases in other important cost elements. This is further emphasised by the weaker rand.  A year-on-year comparison based on a 7-axle rig covering 200 000 km a year provides important information in respect of the relationship between fixed and running costs. After peaking in August last year at 654 cpl the fuel price finished up less than 5% ahead of the price in February 2006. When expressed as a percentage of operating costs, variable expenses rose by nearly 15% while fixed costs, when measured on an operating cost per day basis, went up by 13%. Fluctuating fuel costs tend to be reviewed on a monthly or quarterly basis. However, as all operators know it is much harder to recover fixed costs especially when they are reflected in CPK. Current operating costs reflect steady fixed cost "creep" and should not be ignored by operators or shippers (consignors)  Regular followers of the published operating bench marks in FleetWatch every quarter are advised to study carefully the revised assumptions for 2007 that are used to determine the various items in the production of the benchmarks. A short summary of the fixed and variable elements reveals creeping equipment prices and a 20% hike in interest rates.  Competition among short term insurers is not as robust as it has been for the past two years and vehicle licenses are certain to increase, mainly during the second quarter of 2007. At the time of writing the annual wage bargaining process was subject to the usual heavy union demands versus a lesser offer from the industry. The Union, however, says it is adamant in its demand for an 11% increase and will rather strike than give in this time around. Hopefully, we all will be spared the annual threats and counter threats while we wait for the "last minute" compromise.  For now the fuel price is down by a further 9 cpl to an inland price of 542 cpl. As we all know geo-political events can change this virtually overnight.  Without question replacement parts and labour rates are heading north. Tyre prices increased in October last year and are now fully implemented. The increased price of steel and other materials add cost to vehicles, trailers, bodies and a variety of other relevant costs.  Yet another year of record breaking new truck sales will increase competition for freight movements, so expect freight rates, especially dry freight, to be under pressure. Careful planning to ensure transport efficiency is the best way improve profits and underwrite longterm survival.