Rate-cutting in School Transport Contracts
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An Interesting Case of Under-cutting by a Large Company in Tendering for the Transport of Schoolchildren, and its Repercussions on a Small Operator, who was Forced to Work at a Loss
IHAVE found an example of rate-cutting by a passengervehicle operator which is at least the equal of anything I have ever experienced in my dealings with hauliers. It was an unpleasant case of a big operator turning the screw on a small one, and of the small man adopting the only procedure which seemed open to him to hold his traffic. That he did so, and won in the end, Was not so much because of his awn exertions as those of the secretary of the local branch of his association, together with the cessation of the competition, because of the elimination of the big operator.
This case arose in connection with a contract for the carriage of schoolchildren. There is seldom much profit in these contracts, as is well known, but they do at least help to carry the overheads and fill in the idle periods in a passenger operator's year. This applies especially to those who are little concerned with road services, but confine themsehts almost exclusively to private hire, together with a certain number of tours and excursions.
The story, as to its general outlines, is not unusual. It is because, in its development, it proceeds to such lengths that deal with it in detail.
28 Miles a Day The contract was for the conveyance of 58 children for a distance of 22 miles per day. I gather that the work involved four journeys over a lead of 5i miles for 200 days per annum. The gross daily mileage covered by the vehicles which this operator used for the contract totalled 28, because there was a run of I miles from the starting point of the journey to his garage. He did not take that into consideration in quoting his price, however. It was understood that he was to assess the capacity of his vehicles on the basis of three children being equivalent to two adults. For this purpose he used two coaches, one having a capacity for 20 adults and the other for 14.
I propose to begin to deal with this case by making an estimate in the way I recommend to anyone faced with the same problem. I do that, of COU1Se, by assessing the cost of operation.
The fixed costs per week for the 14-seater comprise:Taxation, 10s.; driver's wages, £4 10s.; garage rent and rates, 5s.; insurance, 15s.; interest on capital outlay, 15s.; overheads, £1 5s.; total, £8.
The operator's headquarters were in a country district, hence the comparatively moderate estimate of expenditure on garage rent and overheads. On the basis of a 48-hour week, £8 equals 3s. 4d, per hour for actual cost. There is no provision for profit in that figure. Now for the running costs. His mileage per gallon will probably be in the region of II}, and, with petrol at Is. 11d. per gallon, the fuel cost is equivalent to 2d. per mile. I shall assume that the expenditure on lubricating oil averages 0.1d. per mile. Tyres I take at the Moderate figure of 0.9d.; maintenance, Id.; depreciation, Id.; total, 5d. per mile. Again, there is no provision for profit.
For the 20-seater, the corresponding figures for fixed charges per week are:-Tax, 15s.; wages, £5; garage rent and rates, 5s.; insurance, £1; interest, £1; overhead/s, LI 10s.; making a total of £9 10s. per week, which is equivalent to 4s, per hour.
For running costs I take first of all petrol at 10 m.p.g.. 2.3d.; lubricants, 0.1d.-; tyres, 1.1d.; maintenance, 1.2d.; deprcelation, 1.3d.; total, 6d. per mile.
The estimate of the charge must naturally be based on the gross mileage of 28 per day. I am told that each round journey of 14 miles takes an hour, so that, the total vehicle time per day is two hours.
For the 14-seater, therefore, the costs are:-For two hours at 3s. 4d., 6s. 8d.; and for 28 miles at 5d., Hs, 8d.; total, 18s. 4d. per day.
Costs for a 20,!-seater.
For the 20-seater, we have, again, two hours, but this time at 4s. per hour, making 8s., plus 28 miles at 6d. per mile; a further 14s., making a sum of 22s. per day. The total daily expenditure is thus £2 Os. 4d., and for 200 days it amounts to £403 6s. 6d.
That total is the *mai cost to the operator, and he must add profit. In my opinion, the minimum percentage of profit for a job of that kind 'should be 20, which is equivalent to approximately £81 13s. 6d., giving us a round figure of £485, which is what I should recommend the operator to charge.
To return to the story of the small operator, up to and including the years 1943 and 1944, he was subjected to crushing competition by a big company. The object was dear. The big company wanted to get him off the road, so that it would then be able to monppoliv., the business and quote its own termsras being the only concern which could undertake the job.
Year by year this big company had reduced its tender to the education committee, and year by year the small operator did likewise, because be feared that if he did not meet the education committee by equalling this large operator's figure, he would lose the work. He knew that he was working at a loss, but his chief concern was to remain on the road at any price. It may be difficult for anyone viewing this matter from the outside to appreciate why a man should be willing, year after year, to go on working at a loss. It would seem that he would be better off if he were to keep his vehicles off the road, rather than run them under such conditions. However, he may possibly have foreseen what actually did happen —that in the long run he would win—and if that were his view, he was extremely fortunate to have been able to withstand the loss consistently.
In the year 1943-44 this small operator tendered again for the work, and a further cut was put into effect by. the big competitor, who actually quoted £200, which was much less than the bid by the small operator. The education committee, however, being apparently satisfied with the service rendered by the small man and not wishing to abandon him without giving him a chance, advised him that the big company's tender was £200, and offered him the work at that price. He accepted, for the reasons already given.
Facing the Inevitable
Now, it appears that the secretary of the local association had been in contact with this small man, and advised him that he was losing money on the job, but the operator, whilst appreciating the efforts of the secretary, nevertheless felt that he must proceed in resisting the competition and that he would have to go on working at a loss until some change in the conditions occurred.
During 1944, however, the competing large company was taken over by a still larger company, and this concern, learning of the state of affairs in respect of this particular contract, immediately wrote and stated that it was not prepared to undertake the work for less than 2s. 3d. per mile.
It so happened that, earlier, the local secretary, at the request of the small operator, had asked me to suggest a fair figure for this contract. Working on the basis of the figures given earlier in this article, I recommended him to quote £485, which the operator did. The education authority thereupon immediately refused to accept this tender of £485, although, as I had been given to understand, it was probably the only one, and the committee imirediately advertised again for new tenders.
Of course, the committee was not to be blamed. A sudden increase in the rate, taking the price from .noo to £485, must have been rather a shock, and it would not have been doing its duty if it had not taken steps to discover whether a lower tender could be obtained. Fortunately for this small operator, the secretary of the local association was an active man, and communicated with the education committee and advised it of the true state of affairs.
Crushing Competition
First of all he reminded the committee that this operator had for many years carried out the work, but that during the whole of that period, up to the previous year, had been subjected to crushing competition by the rival company. He pointed out that the latter was obviously endeavouring to get the small man out of business, so that it would be able to make its own terms to the education committee. The obvious inference was drawn that this state of affairs would hardly react to the benefit of the education committee.
The secretary then went through the figures of quotations for several years, pointing out how the quotation had been reduced year by year, and reminding the edueation committee that it received a quotation lower than that of the previous year from the big company, and then communicated with the small man, offering him the job at the cut price, which he accepted. It was admitted that it was not the concern of the education committee as to whether the price quoted was a fair one or not, and that it possibly was not in a position to judge as to whether the operator was making
However, the secretary confirmed that the work had been done by the member of his association at an unremunerative figure, and that his chief concern was to remain on the road at any price. The secretary then referred in precise terms to the procedure in 1943-44, disclosing the figures as given. • He then advised the committee that the big rate-cutting concern had now gone out of business, having been taken over by a larger company, and that this larger company was not particularly interested in the business. Moreover. it had already expressed its intention of working to a minimum rate of 2s. 3d. per mile for work of this kind.
The secretary told the education committee that he had communicated with me as an independent authority and showed my figures. He said that if his member were to continue to carry the children at a loss, he must inevitably become bankrupt,
Losing £200 a Year
On the basis of the figures which I submitted it was clear that the net loss to the operator as the result of doing the work for £200 was slightly over £200 per annum. The secretary then laid before the committee some figures which he had relating to other smaller contracts for the carriage of children, which were being undertaken by other operators in the district. These are as follow:—.
No. 1. From A to C, price £310. It related to the carriage of 35 children, involving a total net mileage of 12 per day. That, it was pointed out, was equivalent to £8 10s. 3d. per child, or 2s. 7d, per mile.
No. 2. From B to C, price £300, This was for the conveyance of 25 children per day, the net daily mileage being 16. The cost was £12 per child, or Is. 101d, per mile run.
No. 3. From E to F, price £150. This was a contract for the conveyance of 15 children, with a mileage of 10 per day, costing £10 per child and Is. 6d. per mile run.
No. 4. This is the tender under consideration, and was at the rate of £485 for the conveyance of 58 children over a net mileage of 22 per day. This is equivalent to £8 7s. Id. per child, or 2s. 2d, per mile.
The comparison shows that the actual cost per child in this case is less than in all the other similar contracts, although the price per mile is higher than some.
Dead Mileage
In discussing this matter the association secretary pointed out that whilst the net mileage run on behalf of the committee was admittedly 22 per day, in fact the mileage was 28. This was because the operator had to run six dead miles per day in order to execute the contract, and these miles were not taken into consideration in the calculation of the rate.
Whilst accepting the arguments put forward as being reasonable, the committee was not willing to accept the tender of £485, and after some negotiations it accepted an offer of £450. This gives the operator rather less than £47 per annum profit on the operatioh of two vehicles, and, were it all the work that he could do in the year, would be inadequate. As, however, it is usually possible to fulfil other work, especially during the 100 days of the year when the vehicles are not required for the conveyance of the schoolchildren, it is, perhaps, not an unacceptable price for the operator to receive. S.T.R.