OPERATING COSTS OF RESUl
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:ECTED VEHICLES
Solving the Problems of the Carrier The Position Analysed with Special Reference to the Need for Providing for a Sinking Fund for Replacement
ONE effect of the war conditions has been to bring on to the road a considerable number of old vehicles. In one day recently I saw two, both over 2f/ years old, and affording such a contrast in types as could hardly be bettered. One was a model T Ford, of the type which gave yeoman service in the near eastern theatre of the 191448 war. It may even have been a war-disposal vehicle, actually used in that field of warfare. The other was the British Berna, a stout performer in its day. The latter vehicle, although operating solo at the time, was, I noticed, registered to draw a trailer.
The question that naturally arises is what is going to be the effect on operating costs of the use of these veterans of the road? This problem, whilst it came immediately to my mind, may not even have occurred to operators. Their conern, just now, is to obtain vehicles of any kind to carry on their businesses which otherwise, as the result of requisitioning and acquisitioning, would have diminished almost to vanishing point.
So far as operating costs are concerned, any or all of the items of running costs are affected and all of them in an upward direction. There may he, in addition, some increases in the standing charges, not, perhaps, that of interest on 2_apita1 outlay, although that may go up if an extravagant price has been paid for the vehicle. The tax may have increased if the vehicle be one of the old and heavy types and, in some cases, the insurance premium, because quite a number of companies object to insuring vehicles of more than a given age.
Probably the biggest blow, in the way of increases in operating costs, has been felt by those who purchase, or bring out from the back of the garage, petrol vehicles of ancient vintage and put them on the road in the place of oiFengined vehicles of modern construction
In such circumstances, a pre-war fuel cost of about lid. per mile, relating to a vehicle carrying a 7-8-ton load, is replaced by one of about 6d. per mile {say Si m.p.g. with petrol at Is. 9d. to Is. 10d. per gallon) for a vehicle carrying a maximum legal pay load of 6-64 tons.
Of the other items of running costs, that for lubricants will be more than double, say 0.3d. as against 0.14d., tyres at least Id. per mile as against id., and maintenance an unknown quantity, because if any major part on one of these vehicles fails, replacement may he possible only by having a new part made at high cost and after an indefinite delay. I have something to say about depreciation and will do so later.
Even without any allowance for depreciation, increase or decrease, there is a difference of about 6d. per mile, as between a new vehicle and an old one, so that if the prewar running cost per mile was 40., when carrying a 7k-ton load, it is now 104d. for a 6k-ton load.
That is not all. The standing charges may be increased . by the difference in tax by £40 per annum; say 16s, per week. If, therefore, I assume that there is no addition to the insurance premiuin or to the item " interest," the standing charges per week have increased from £7 to £7 16s. Establishment costs too, will now be not less than £5 per week, as against £4. The total of fixed expenditure per week is, thus, £12 16s, instead of Ell.
Under pre-war conditions this vehicle, carrying 7-8-tons, might run 800 miles per week. The total cost would be 800 times 4/c1., plus £11, which is £26. Now, carrying only 6k tons, the total cost is 800 times 100., plus £12 16s.. which is £47 16s.
" Ah, but you have made no provision for the drop in depreciation," I can hear n chorus of voices.
Nor do I propose to do so. It is on the cards that the figure for depreciation will increase. At least, it is more likely to do that than, to fall, There are two sets of circumstances to take into consideration. In the first place, the vehicle which has been substituted may have been in the possession of the operator. having been stowed for years at the back of his premises. to be brought out and renovated, and put in running order for the emergency, thus belatedly and unexpectedly repaying the cost of its storage during so many years.
On the other hand, this vehicle may have been purchased from a second-hand merchant at what, in peace-time, would have been an exhorbitant price. I have known operators to pay £500 for an old vehicle of the 2k-ton nnladen-weight class, to carry 5 tons. I cannot even make a guess at what would have to be paid for, say, that British Berna 6-tonner. There would seem to be room for a vast difference in depreciation cost as between these two types. Actually, the difference is not so great as it seems,
• Mistaken Idea on Depreciation • The most difficult case to argue is that in which the operator has brought an old vehicle out of retirement. It has cost him nothing but the few pounds necessary to put it into running order. According to the, views of most operators, there should be no need to debit anything on account of depreciation. What cost nothing cannot depreciate any further. In these views he will have the support of his accountant and he will certainly have the backing of the Inspector of Inland Revenue, who will not accept any suggestion that provision for depreciation in respect of such a vehicle can be set off against his earnings.
All three, operator, accountant, and Inland Revenue officer are correct; they are also, all three of them, wrong.
They take what I call a backward view of depreciation. I arn looking forward when thinking of that item. They are concerned with what the haulier has spent daring the year just passed. I am anxious about next year's expenditure and revenue and those items for the year following that.
Depreciation, to my mind, is a provision for the future, not a reminder of the past. The real truth is, of course, that the word depreciation is wrong in its application to that item, .considered as part of the running costs of a vehicle. It is more appropriately described as a sinking fund towards the renewal of rolling stock. As such, it is a particularly important item of running costs.
It is, at least, possible to put forward a reasonable argu ment, using figures which I do know to apply. I have in mind the £500 paid for a two-year-old 5-tori 30 m.p,h. vehicle of the low-price class.
. Suppose that a haulier has been able to resurrect an old vehicle of any make or type, which will carry 5 tons and, more or less effectively, do the work which he wants it to do. • This vehicle is not going to last very long. That is certain. When replacement becomes inevitable, the expenditure involved is going to be in the neighbourhood of £500 and for that amount nothing which ,in peace-time would be called value for money is going to he acquired, Where is the money to come from?
If the haulier has made no provision for depreciation in assessing the rates he charges for the work he does, then* is going to be £500 out of pocket when he finds the next substitute machine. If he does try to make provision for that purchase, by means of a sinking fund, then the amount he must put by will be only as little as 2id, per mile, if the vehicle be covering 48,000 miles per annum. If it runs only 24,000 miles per annum, his sinking fund, his " depreciation," is at the rate of 5d, per mile!
So that, in fact, in the case of a vehicle which costs nothing at all, the provision needed for depreciation is much more than it would have been if he had bought a new vehicle and paid an ordinary fair price for it.
• How to Assess Depredation •
The way to assess depreciation is really this. In the case of an operator who has a vehicle and has made no provision for its. replacement, he must assess, for himself, how many miles that vehicle i§ likely to run before he must replace it. If he divides that figure of mileage into what he expects to have to pay for the replacement vehicle, then he will have a figure for the depreciation per mile, for the amount which he must set aside for each mile the vehicle runs, if he is going to have enough money available to be able to buy the new machine.
It is not to be expected, even during'the present abnormal times, that a haulier can make provision, for as much as 5d. per mile for depreciation 'base his rates on the corresponding total operating costs, for lie would undoubtedly be undercut by the majority of his competitors. In fact, there should be a certain .Set-off against that total of £500—from two sources, In the first place, he should have made some provision prior to losing his own vehicle, for depreciation; there should be a sum a,vailable on that account. It will be much or little according to the mileage his vehicle has done before it was acquired by the authorities. In the second place, there is the money he received for his vehicle when it was taken from him. That, again, may be much 'or little, but anyway, it must be set oil against the £500.
The importance, whatever the circumstances, of providing for the replacement of vehicles, is something which cannot be over-emphasized. I have taken a year as being the possible life of the substitute vehicle. Suppose, for the sake of argument, that the war ended at that time, he would then find himself without a vehicle, without money to buy new products and with hi S competitors fully equipped to take whatever traffic was offered, ' Them may, of course, be opportunities to buy War Department disposals vehicles at that time, at prices which will ease the situation for operators in this difficult position. As to that there is no certainty, nor is there any security that the vehicles so purchased will be worth even the low prices at which they may (or may not) be available.
As showing that hauliers do appreciate the truth underlying the foregoing, although they have not converted the data into provision for depreciation, take the general attitude of hauliers towards what is going on all over the country to-day in connection with the acquisition of vehicles for Government use under the Defence Regulations (Compensation) Act, 1939, According to that Act, the price to he paid is limited to the net value of the vehicle, without any provision for appreciation in value due to the emergency. That is to say, In the case of a vehicle which cost £400 two years ago, the operator will probably be offered 4100 for it now.
It will be useless for him to protest, as so many are doing, that he will have to pay £500 or more to replace the vehicle which is being taken from him. There is in this attitude of the haulier, evidence of appreciation of what replacement vehicles will cost, but not necessarily of realization that earnings, in the immediate future, must be enough to provide for such replacement as well as for a reasonable net profit. S. T. R.