The Rate-cutting Bug Returns O PERATING costs are still rising. Prominent
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among recent increases is, of course, the rise in wages filling the implementation of the new Wages Order, R.H.24. There have been increases in the prices of petrol, lubricating oil and spare parts. The delays in turn-round of vehicles resulting from the introduction of the five-day week in industry, staggering of hours and power cuts have materially reduced the earning powers of hauliers' vehicles. Further, operators are still suffering from delays in obtaining spares and tyres, as the result of which their vehicles are more frequently off the road, losing earning capacity, but still involving the operator in expenditure on standing and establishment charges while they are laid up.
These are facts which none can deny. In acknowledgment of them the Road Haulage Association has recommended its members to increase their charges by not less than five and not more than 10 per cent. Even the Ministry of Transport recognizes the justice of a claim for better rates and has agreed to an increase of 2i per cent. on RH/D/20.
Yet I have indications from most parts of the country that rate-cutting is beginning again.
It appears that in many parts of the country traffic is diminishing. There is not enough work to go round. The operators wlho find themselves so placed are adopting the pre-war practice of going to the customers of other hauliers and offering to do the work at rates below those current.
A Vicious Downward Spiral
That is a most pernicious thing to do. Once the rot sets in it is most difficult, almost impossible, to stop. The tendency spreads. If one operator does it, then others retaliate, and the fall in the standard of rates is rapid: The cut rate of to-day is the standard rate of to-morrow. The standard rate of to-morrow is cut the next day, and so on.
Theoretically, it should be possible to isolate the ratecutter, to leave him alone to pursue his unprofitable way until he reaches the inevitable end in bankruptcy. His capacity to carry traffic and therefore the harm he can do, is limited, and known to all his competitors. If all the other operators stick to their guns and refuse to cut the agreed rates they have little to lose and can, at the very least, correctly assess the diminution in their profits which will result. That is the theory. In practice it does not work out like that. What happens is that the depredations of the rate-cutter are felt, in the first place at any rate, by one fellow-haulier only, the one whose business is lost as the result of rate cutting. It does not affect anyone else, and the community of operators in the area is not immediately stirred to action.
The operator who has lost business is not, however, inclined to be inactive and see his vehicles standing idle. He looks elsewhere for traffic and, if there is none to be had at the agreed rates, he follows the example set by the first man and himself cuts rates in order to take traffic from haulier No. 3. And so it goes on.
Combine to Keep Up Rates
How can this be prevented? In two ways, both difficult of attainment. First, the hauliers in a district or area must band together and rally to the support of the first one to suffer. I do not mean that they should subsidize him by making good his losses—anything rather than that. I mean that they should, between them, provide him with traffic, even at the expense of a slight loss to themselves. They should spread the load.
Given that unity, it will be possible to tide over a slump and still maintain the standard rate until better times come.
The object all the time is to maintain the agreed or standard rate in the face of either sporadic rate-cutting or throughout a slump. Rate-cutting, no matter' what may be its form, does not create traffic. If there be a slump, all lose, hut they lose much more if rate-cutting becomes general than if the rates, by any such means as I have suggested, are maintained at a fair and profitable level.
If, furthermore, that profit be assessed on a basis which provides a margin to cover the lean years, the difficulty of carrying out the plan I have outlined will be greatly diminished.
Secondly, it is still necessary to educate hauliers up to the point at which they can appreciate what is and what is not a profitable rate. For not only is it a fact that only the minority of hauliers keep cost records in such form that they will serve as a basis for assessing rates; it is also a fact that few have any real knowledge of their financial position, as to whether they are making a profit or loss. Everything may seem to be going swimmingly, and then, suddenly, a new vehicle has to be bought, or perhaps two, and a major overhaul of one is required, and bang goes the so-called profit for a couple of years. It should be appreciated that I have in mind the small operator, with two or three, or even rip to five vehicles. The larger operator is, in the normal course of events, buying new vehicles every year, has vehicles in succession undergoing overhaul, is regularly fitting new tyres, and so on. His expenditure is fairly steady and regular, year by year, and there is no need for him to make Special provision for such set-backs, 1 know the method which these small hauliers use for assessing a rate or for deciding whether a particular rate offered to them is likely to be profitable. They have a figure in the back of their minds for the amount per mile the vehicle should earn. If the rate offered returns that amount or over, it is accepted. If it be under, the question of acceptance turns on the -state of the market or even, in poor times, on the extent to which the operator is in need of a load.
Now even if this " back-of-the-mind " figure be correct, the situation is dangerous. If it is incorrect and less than it should be, rate-cutting occurs owing to ignorance. ..
. It ought to be impossible for an operator to have to say that he " believes" he has made a profit. To determine the true state of affairs needs, as a• rule, only a simple calculation.
There is no doubt whatever in my mind or in the minds of most students of road transport economics, that much of the rate-cutting that occurs is due to ignorance of actual operating and establishment costs. In my view, the best safeguard against the further spread of indiscriminate ratecutting by the rank and file is discussion of these problems and dissemination of data showing profitable costs and minimum charges.
Rates, Once Cut, Stay Cut.
Few men will deliberately work at rates which can be demonstrated to be unprofitable. That is, of course, apart from such special occasions as have already been mentioned in this article. They may occasionally cut, in particular circumstances, but will not continue to do so if they can help it. Unfortunately, having once cut, 'there is a difficulty in restoring an original rate.
It is not so long since I worked out in detail the operating cost of a six-ton lorry. Recently, too, I have gone into the details of establishment costs at some length so that in this particular article, at any rate, there is no need for me to do more than give the principal figures.
They are, first fixed costs per week, as follow: Licences, 14s.; wages, £5 16s.; garage rent and rates, 10s.; insurance, £1 4s.; interest (at 24per cent.), 10s.; depreciation, £3 12s.; establishment costs, £3 10s. The total is £15 16s. per week.
For the running costs per mile I have given the following: Petrol, 2.30d.; lubricants, 0.18d.; tyres, 1.20d.; maintenance, 1.82d. The total is 51d. per mile.
It is of interest to check these figures against a typical journey and endeavour to discover what is the correct " back-of-the-mind " figure which a haulier should have in connection with the operation of such a vehicle.
I will take a fairly 'regular haulage route, that from London to Leicester. This is convenient inasmuch as the distance is approximately 100 miles.
Under present-day conditions, with a 44-hour week, it is unlikely that an operator will cover more than three journeys per weck, that is, 600 miles.
Now his minimum -tsrofit should be at the rate of 20 per cent, on his outgoings, so that to the fixed charge of £15 16s. he must add £3 4s. per week, making it £19. To the mileage he should add lid. per mile, making his Mileage charge 7d.
Example of Profitable Working
For 600 miles, therefore, his total charge should be 600 times 7d.,, which is £17 lOs , add £19 for the fixed charge, and we get a total Of 06,10s. as being his minimum earnings. The actual Mileage is '600; so that the 'figure for earnings per mile is Is 3d., as near ai.,:makes no difference. He should earn not less than Is. 3d. per mile run on that kind of traffic' over that route.
In, however; judging as to whether a rate be profitable. it is not wise merely to take that ls. 3d. Be must take contingencies into account. He must, for example, appreciate that there might quite often be weeks when he will not be able to get regular loads; the Vehicle may be laid-up for something or other; there might be such weather' conditions as to preclude him from making more than two journeys per week, and so on. In my view, if he must
have a figure at the back of his mind to apply to traffic over a route, it must not be less than Is. 6d., and in giving this minimum 1 am by no means being generous to the haulier.
Unfortunately his figure not being obtained by making an assessment which covers in detail all the items of cost, is easily under the minimum. His own figures for fixed costs are probably something like the following per week : Licences, 14s.; wages, £5 16s.; garage rent, 10s.; insurance. £1 4s.; establishment costs, £1, so that his total is £94s.
For his running costs he probably takes 12 m.p.g. instead of 10, because nearly everyone, among those who do not keep accurate data, over-estimates the mileage per gallon which he gets out of his vehicle. He will, therefore, put down 2d. per mile for fuel, he may omit lubricants altogether and possibly put down lid. per mile for tyres and maintenance considered as one item. He therefore has 3id. per mile. If he multiplies that by 600 he gets a total of £8 15s., which he adds to his fixed costs of £9 4s., giving him almost £18.
His " back-of-the-mind " figure for costs, on that basis, is lid, per, mile and he goes on his way happily confident that anything he receives' in excess of 7id. per mile is profit. Actually, of course, he is working at less than cost. The fact is that for some years rates have been at a high level, traffic has been plentiful and it has not even been necessary to consider what the vehicle is costing. Now traffic is becoming scarce, buyers of transport are becoming keen in their demands for minimum rates for their traffic and fictitious figures like this 7id. per mile are corning into being again. That is the kind of thing that has to fought and it can be done only by the dissemination of accurate knowledge of what costs of vehicle operation can be, appreciation of the fact that there are such things as establishment charges and that they are not insignificant and finally that the profit, as such, should not only be sufficient to show a return but must cover contingencies. S. T. R.