New or Used Which is Cheaper?
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IT is often contended that rates can be kept down by purchasing and employing used vehicles. Some operators claim that lower depreciation and interest costs resulting from the reduced initial outlay more than offset any increase in fuel and maintenance costs which may arise from running old vehicles.
Whilst this subject has been discussed on many occasions, two basic' factors tend to be ignored. When dealing with the cost of operating commercial vehicles it is a reasonable assumption that continuity of the haulage business or transport department is intended, even if it is not eventually achieved. On that basis, the full cost of depreciation must be charged if fleet renewals are to take place at the appropriate time.
Moreover, it must be assumed that vehicles or equipment are bought at reasonable prices-fair to both seller and purchaser. It would be impracticable to include in any table of operating costs intended to represent fair averages for specific types of vehicle any individual purchase made in exceptionally fortuitous circumstances.
Impartial Costing . It is at this point,I suggest, that many claims for the advantages of employing used vehicles fall down. If an impartial costing ofa used vehicle is to be made, the market price must be used as an initial cost in the same way that the manufacturer's price is taken whendealing with new vehicles. Even if a used commercial vehicle has been obtained at a genuine bargain price-an unlikely event in a market governed by supply and demand-the resulting-operating costs would be so exceptional that they could not be accepted as representative of used vehicles as a whole.
• Admittedly, many large and well-established operators entered the haulage business by first employing used vehicles, but the majority eventually replaced them by new vehicles as the occasion arose. Moreover such action would be based on the greater experience in both costing and practical operation which established operators could be expected to have acquired. They would be unlikely to increase initial outlays unnecessarily.
Although there may be some traffics where a new fleet is no more attractive to a customer than used vehicles, the reverse would undoubtedly apply in the majority of cases. In those circumstances, therefore, even if the used vehicle were able to operate at a lower cost, it would be irrelevant, because the higher standard of service which the operator of .the new lorry could offer to his customer would secure the business.
Paramount Importance
As shown in the recent survey carried out by the Traders Road Transport Association, reliability of delivery times is of paramount importance to modern industry. Standards which are demanded from ancillary fleets will obviously be expected when hired transport_ is employed. The operation of used vehicles could, therefore, prove unprofitable to hauliers if the business were eventually lost through failure to deliver on time.
It has always been the policy in this series of articles to resist any demand for an estimate of the likely operating costs of old vehicles, because the unlimited variation in the condition of such vehicles must result in corresponding variations in operating costs. The five items of running costs, in particular, may amount to practically any figure at all. I now propose. however, to compare the known variations in the comparative c30 operating costs of new and used vehicles with the object of showing how little real margin is saved to offset the inevitably higher running costs.
The example I have chosen is a 1-1-ton van with petrol engine, although the underlying principles would apply to most types of vehicle. With an unladen weight of lf tons, the annual licence duty would amount to £22 10s., the equivalent of 9s. per week. Driver's wages will be reckoned at £.9 4s. 3d., including allowances for insurance contributions and holidays with pay. Incidentally, the basic wage rate is that applicable to an adult worker in Grade 1 areas, as defined by the Road Haulage Wages Council. Whilst, admittedly, drivers under 21 years of age may well be employed on this class of vehicle, the adult rate of pay is used here (and in " The Commercial Motor' Tables of Operating Costs ") to provide a more ready and fairer comparison with the operating costs of larger vehicles which adults would normally drive.
Vehicle Insurance'
Rent and rates in respect of garaging the vehicle are reckoned at 8s. 6d. a week, whilst vehicle insurance adds 8s. 10d. The van is assumed to cost £780. and interest charged on this outlay at a nominal rate of 3 per cent. would be equivalent to 9s. 4d. per week. The five items o standing costs would, thus total £10 19s. 11d. per week.
Turning now to running costs, the fuel cost per mile is estimated at 2.91d. This is based originally on a fuel-consumption rate of 17 m.p.g., plus an addition of 10 per cent, to allow for the stop-and-start work which an assumed average weekly mileage of 200 would imply. Lubricants are reckoned to cost 0.19d. per mile and tyres 0.56d., based On a mileage life per set of 30,000. Maintenance is placed at 1.87d. and depreciation at 1.61d. per mile. Depreciation cost is obtained by deducting both the price of the original set of tyres and an estimated residual value from the initial price of the vehicle. A vehicle mileage life of 100,000 is assumed. Total running costs per mile thus amount to 7.14d.
On the assumption that the van averages 209 miles per week, the corresponding running costs per week would then be: Fuel, £2 8s. 6d.; lubricants, 3s.2d.; tyres, 9s. 4d.; maintenance, us. 2d.; depreciation, El 6s. 10d.; total, £5 19s.
Case of the Used Vehicle • I will now take the case of a similar yan purchased in used condition at two-thirds the price when new. Many of , the standing costs will remain the same. -Thus the annual licence duty will still amount to £22 1 Os., or 9s, per week, and the cost of wages and garaging will be the same at £9 4s. 3d. and 8s. 6d. per week respectively.
Although the initial cost of the vehicle is one of the factors which determine' the amount of annual insurance premium, increases incurred by the higher values do not apply in many policies below £1,000. In this example, therefore, the weekly standing costs in respect of insurance remains at 8s. 10d.
Interest on the initial outlay, however, is reduced to two-thirds of the original figure-to 6s. 3d. Total standing costs per week when the van is bought for two-thirds the original price arc, therefore, £10 I6s. 10d., a reduction of a mere 3s. Id.
Taking this example. a stage .further, and assuming that a still older van is purchased at a third of the original price, the first four items of standing costs would still be the same-licences. 9s., wages, £9 4s. :31. rent and rates, 8s. 6d.; and
insurance, 8s. 10d. per week. Interest charges will again be reduced, this time to 3s. Id, per week, giving a total standing cost per week of £10 13s. 8d., or 6s. 3d. per week less than the standing cost applicable to a new vehicle.
With a total running cost per week of £5 19s. for the new vehicle, it will be seen that the saving of 3s. Id. per week when a used vehicle is bought for two-thirds the initial price (or 6s. 3d. at a third of the original price) is a very small percentage of the whole. Whilst it would be extremely arbitrary to attempt any estimate of probable running costs, as distinct from standing costs, of used vehicles, it would seem unlikely that these small savings would cover the probable increased running expenses.
Casting Doubt The daily operation of many thousands of used vehicles would at first sight seem to cast doubt on the accuracy of the figures just quoted. It should not be overlooked, however, that the casual observer has little or no knowledge whether such vehicles are, in fact, being -operated economically—even if the owner has, which may not always be the case.
But where the vehicles are apparently being operated economically, at least on paper. I suggest there are often hidden subsidies which really invalidate the results obtained. Many users of old vehicles are either owner-drivers or small operators who are themselves responsible for maintenance. As a result, many hours of labour which would otherwise be chargeable at the high rates applicable to skilled fitters go unrecorded.
Similarly, the real expense of the additional breakdowns which must be expected to oc'eur when old vehicles are employed is seldom included in the alleged operating costs. In such circumstances, the small operator will often provide his own breakdown service and personally assist in transhipping the loads and manning the spare vehicle.
Earlier I mentioned that some operators claim substantial savings in the cost of depreciation by employing used vehicles.
suggest that this can be a fallacy if it is agreed that the operator intends to remain in business by renewing his fleet as necessary. When a new vehicle is purchased and a depreciation cost per mile is worked out, as in the examples just given (1.61d. per mile), the prudent operator will transfer the recurring weekly amount to a sinking fund. When the time comes to replace the vehicle, and assuming the original estimate of the probable life has been correct, the sum accrued in the sinking fund enables a replacement vehicle of similar type to be obtained. If, however, at the half-way stage, an operator decided to dispose of his vehicle he would, of course, retain the amount then in the sinking fund. Added to the price obtained from the sale of the first vehicle, the total amount should be sufficient to buy a replacement possibly more appropriate to the user's changed needs.
The significant point to note here is that the new owner, having purchased a vehicle half-way through its estimated life, has two choices open to him when dealing with the cost of depreciation. Even if he has no intention of ultimately acquiring a fleet of new vehicles, but is content to continue using vehicles of a similar age to the one he has just obtained, it will still be necessary to allocate to a sinking fund the same amount per mile as the previous owner. Whilst the ultimate replacement cost for the second user will admittedly be lower, the economic life of the vehicle will also be less. Correspondingly, the period over which sufficient funds can be accumulated to provide for further replacements will also be reduced.
If, on the other hand, the second owner is operating used vehicles only as an interim policy until he is in a position to acquire a new fleet, it will he necessary for him to double, rather than decrease, the rate of depreciation allowed by the original owner. He must do this in order to_replace in his own sinking fund an amount similar to that which had already been accrued by the first owner.
Traffic Needs
A further factor which must not he overlooked when making comparisons between the likely operating costs of new and used vehicles is their respective availability for service. This introduces the question of the potential revenue-earning capacity of both vehicles, which can be calculated only by individual operators in accordance with their own traffic needs. Operating costs alone will not show this aspect in its true perspective. 'However efficient and economic the maintenance provided by owner-drivers and small operators may be, the vehicles receiving such attention cannot at the same time be gainfully employed.
The ultimate profitability of a vehicle is of even greater importance than the operating cost. In consequence, the maximum availability for service which can reasonably be expected from either new vehicles, or ones for which the comolete maintenance history is known, can prove a major asset in successful operation. S. B.