. When Low Rates are Justified
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Allegations of Rate-cutting Often Arise Because an Operator is Using an Oil-engined Vehicle and Therefore Has Less Expensive Costs to Cover than the Owner of a Petrol Lorry : The Size of Vehicle is also a Determining Factor in Charges Assessment
RATE-CUTT1NG is selling goods or services at an uneconomic price. As long as a haulier makes a reasonable net profit on any job of carrying goods he is not rate-cutting, even if his rates are less than those of others. .I except, of course, traffics concerning which an agreement on rates exists, and even then associations which are Mainly concerned with the problems of -rate-fixing are likely to be frowned on in the belief that their operators are against public policy.
I get plenty of letters from hauliers alleging rate-cutting but, as a rule, I find that the complaints arc groundless. The complainants overlook, or do not know of, some factor which has an important bearing on'the price to be charged, something which is favourable to the so-called rate-eutter and justifies him in making the charge as low as he does.
Let me take a simple example. . A haulier complains that the charges Made by a competitorare less than his own and therefore he must be rate-cutting. On examination of the facts, I discover that the complainirighaulier is operating petrol-engined rvehicles whereas his competitor relies on oilers, The amount of profit is the same for each but the rates charged by the haulier using the oilers are less than those of the man who has petrol-engined machines. The latter immediately cries "rate-cutter ", and writes to me to tell me all about it, all, that is, save the one item that matters, the fact that the operator of whom he complains is using oilers.
What the haulier should do when assessing his rates when he is using oilers is something of a problem in itself, whether he should pass on the savings by charging less than those who do not run oilers or whether he should charge the same as the petrol-engine competitor, thus taking a little extra profit to which he is entitled if only because he has had the acumen to realize the value of the oiler.
Supply and Demand
Like most of the problems of the haulier, this one is solved by external conditions; the law of supply and demand enters into the matter. In times of plenty, with sufficient traffic to keep everybody fully employed, the-man who uses oilers keeps his rate up to the same level as his competitors. When, however, the number of loads falls to sorfiething less than sufficient to keep on the road all the available vehicles, the man with the oilers looks at his costs, if he has any record of what they are, and decides that he can quote lower rates than those he has hitherto charged and still make a reasonable profit. His competitor realizing that some of his traffic is going to someone else and finding that he is being undercut immediately alleges rate-cutting. He is wrong fo make that charge because his competitor with the oiler is still making as much profit as the petrol-engine user.
As an example, take figures from the current issue of "The Commercial Motor Tables of Operating Costs." Assume the vehicles to be 5-tonners and the weekly mileage 500. The charge per week should be £37 3s. for the petrolengined machine and £34 3s for the oiler. The difference is £3 per week in favour of the oiler. The amount of profit allowed for in the Tables is, for the petrol-engined machine £6 4s. per week, against £5 13s. for the oiler. Both these amounts arc calculated on the basis of 20% added to the totM weekly cost.
n36 In times when there is plenty of traffic, the man with the oiler can charge the same rates as the-fellow who operates on petrol and can earn £8 13s. net profit per week. During slack times he can, if he so wishes, lower his rates to those recommended for the oilers, namely £34 3s., charging the customer £3 per week less than the petrol user yet still making the 20% margin calculated on the basis of his proper costs. To come down to this .rate the petrol _user would ' have to reduce his charge by £3 per week, cutting his profit margin to leave only £3 4s. per week, which is definitely not sufficient.
In the course of my previous article I mentioned the case of an operator who wrote to me complaining of rate-cutting in connection with the haulage of road stone over a lead distance of 52 miles. In his letter he did not state what size of vehicle he used. In that article I got as far as to assume that the vehicle employed was an 8-tonner. I stated that one man only would be employed but I now wish to withdraw that, as on a second reading I find reference that two men are engaged.
Times for Working I calculated the times for loading, unloading and travelling as follows. The total mileage per round trip is 104 and, if, as I think I must, assume that the driver keeps within the law in so far as speed is concerned, the travelling time will be approximately 6 hr. The _material is shovelled in, at the rate of 10 min. per ton. I take the unloading time to be approximately the same, so that I must allow 2hr. 40 mm. for terminal delays. The total time for the complete round journey may be taken as ti hr. 40 min. The total may be taken as 81 hr., which means that, for a six-day week the total hours worked will be 51-52.
The first thing to do is to assess the cost of operation for a vehicle of this size engaged on this class of work. As in my previous article, I make the solution of the problem as simple as possible by taking round figures for the running costs, eliminating decimals. On that basis I estimate that they will be as follows:—Fuel and lubricating oil, 2/d. per mile; tyres, 2d.; maintenance, 2d.; and depreciation, 2/d. The total running costs per mile are thus 91d.
For the standing charges per week we have:—Road Fund tax, £1 8s.; wages (driver and mate) and including insurances and provision for holidays with pay, also overtime payments, £15 15s.; garage rent, 10s.; insurance (vehicle), £1 15s.; interest on capital outlay, £1 12s.; establishment costs, £4.4 The total is £25 per week.
In a week, for six journeys the .distance covered will be 624 miles and that, at 91d. per mile, amounts to £24 14s. Add the fixed costs per week, making e49 14s. That is the net cost of operation including establishment costs. For this kind of work I would suggest that the profit margin should be 20% and that on £49 14s. is practically £10, so that the minimum revenue per week should be £60 to the nearest pound. For that sum 48 tons have been carried and the rate per ton is thus £1 5s. That may or may not be the rate which is regarded as reasonable by my correspondent. Bear in mind that this inquirer has complained of rate-cutting. He uses an 8-tonner and I am inclined to the belief that his competitor is using a larger vehicle, a point which has not been considered by my friend. There is no certainty that rate-cutting is going on, and if I find that the so-called rate-cutter is merely charging a fair rate, out of which he is making a reasonable profit, I shall acquit him.
Let me go to the other end of the scale and see what the rate should be if the vehicle employed were a maximumload eight-wheeler carrying 15 tons. Let us begin by assessing the operating costs of this vehicle. First the fixed expenses: Road Fund tax, £2 8s.; wages, £16; garage rent, 15s.: insurance (vehicle), £2 6s.; interest on capital outlay, 12 10s.:. establishment costs, £7. The total is £30 19s., and it is sufficiently accurate to take that to be £31.
The running costs are: fuel and lubricants, 5d, per mile; tyres. 3d.; maintenance, 21d.; depreciation, 31d. Total, 140. per mile.
During the week, the vehicle completes six journeys of 104 miles each, a total of 624 miles and that, at 144d. per mile is £37 14s. The total cost is £68 14s. On to that must be added a provision for profit, a minimum percentage of 20, which is £13 16s., to the nearest shilling. With this 15-ton vehicle thc operator must earn a minimum revenue of £82 10s. per week. The tonnage carried is 90 and the price per ton is £82 10s. divided by 90, which is 18s. 6d.
There is therefore justification for my view that a larger vehicle can do the work at a lower cost than a smaller one: with the 8-toriner, 25s. per ton is a fair rate, but with a 15-tonner the rate can be as haw as 18s. 6d. and still yield a reasonable profit.
Effect of Speed Limit have not, however, taken into consideration all the aspects of this matter. Hitherto I have dealt with 20-mph. vehicles. To make the investigation complete I should deal with a 30-m.p.h. machint and see how the speed limit is
going to affect the comparison. _
Almost immediately, a newdifficulty arises. A 6-tonner will be loaded in an hour and unloaded in the same time. It will probably average 26 m.p.h. on the road and will do each one-way journey in 2 hr. The total time needed will therefore be 6 hr., and in the absence of any other work it is difficult to see how this loss of 2 hr. per day can be el iminated.
It is no use, for example, to make provision for reloading at the end of the first day's journey, because the procedure necessary to arrange for that will have to be something like this: the vehicle will complete the first journey in 6 hr., load up again in 1 hr. or possibly 1-1 hr., allowing for a certain amount of loss of time at the end of the first run. In that way 71 hr. of the day will be accounted for. There will nevertheless be a loss of 1 hr.
Assuming that the load has been picked up, on the second day the details of the work done will be something like this. The load will be delivered and the time involved will be spent, first in 2 hr. travelling to get to the delivery point, then 1 hr. for unloading, returning to base in another 2 hr. That is 5 hr. in all. It will presumably take another 1: hr. to reload, making 61 hr. in all, and the operator will be no better off.
If this 6-tonner, like the other vehicles, is an oiler, the running costs per mile will be: fuel and lubricants, 21c1.; Lyres, lid.; maintenance, 1/d., depreciation, 21d. The total is 9d. per mile. The weekly mileage is 624 and at 9d. per mile that is £23 8s.
Build-up of Costs
For the standing charges take, for Road Fund tax, 14s.; wages (two men), £9 16s.; garage rent, 7s. 6d.; insurance, 11 10s.; interest on capital outlay, £1 Os. 6d.; overheads or establishment costs, £3. The total is £16 8s.
The total cost, i.e., running costs plus fixed costs, is £39 16s. Adding 18 4s. for profit makes the total charge per week to be £48. That is for the haulage of 36 tons, and the rate per ton on that basis is £1 6s. 8d., more than the best of the larger vehicles and, indeed the most expensive of all.
The extra cost, however, is largely because of that loss of time described above. If it is possible to make use of the vehicle on some other short-haul work in the district, thus enabling it to be profitably used for 9 hr. each day, Monday to Friday, and 5 hr. for one long run on the Saturday, the cost of the main journey may be diminished accordingly.
There will be a slight addition to the fixed charges because the men will be working overtime. The total of fixed costs will now be £17 10s. per week instead of £16 8s. Of this £17 10s.. only a part, 36 hr. out of 50, may be debited to the particular job we are considering. That reduces the amount to £12 12s. The running costs for the 624 miles remain the same at £23 8s., so that the total expenditure on this job is reduced to £36. Add £7 to that for profit and we arrive at a figure of £43 for the weekly revenue to come from the main job, to earn which the operator must charge £1 5s. per ton. That is the same as the rate calculated in connection with the 8-tonner. S.T.R.