Solving the Problems of the Carrier
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What Constitutes Rate-cutting?
Further Consideration of the Suggestion that Free Competition in Rates is Desirable: Some More Figures and a Discussion' of the Case of the Owner-driver
0 N reflection, I am willing to admit that I was a little hard on my haulier friend, with whom I had the argument, described in the two previous articles, about free competition between hauliers on the basis of rates as well as service. I probably exaggerated the advantages of the two-vehicle owner, in respect both of his runiling costs and his establishment charges or overheads. Mind you, I have no regrets, and I am offering no apologies. The principles underlying my argument are sound and, to emphasize them, I was justified in making the suppositions I did.
1 do emphatically deny that the mere fact that operator B charges less than operator A, for the same traffic, justifies A in stigmatizing B as a rate-cutter.So long as B is doing aproper job of haulage and satisfYing his customers: that his rates are such as to provide him with a reasonable profit: he treats his drivers properly, paying them correct wages, employing them under fair conditions and not breaking the law, either in spirit or in letter, as regards driving hours: and that he keeps his vehicles in sound and safe mechanical condition, then he is not rate-cutting. He is 'conducting his affairs as a business man should, working on commercial lines, and competing fairly with other operators.
Indeed, it is my opinion that every road transport operator is bound, in honour, not to charge excessive rates, by which I mean rates that show him an exorbitant profit. Hauliers, in my view, have a duty to perform to the community, which is to keep the cost of transport as low as is reasonably possible_ That duty will be much more incu,mbent upon him after the war, and this country will be more dependent than ever on being able to produce and sell goods in competition with other countries. It must be remembered that the cost of transport is an important item in the schedule of total costs of a commodity.
I have always been as much against excessive rates as against cuerates. In the years before the war there was little opportanity to charge excessive rates but of cut rates, there was a plethora.
Two Classes of Rate-cutter
At this juncture, someone is sure to want to ask me what I mean by rate-cutting. I will answer that question in, what I hope, are very plain terms. There are two kinds of rate-cutter.-First, those who quote a rate less than that of a competitor without giving any consideration to the question as to whether the rate will earn a profit, or even enough to cover the total cost of the job.
Often enough, those who cut in this way have no clear, or even approximately accurate ideas as to their costs. Operators of this description are most prevalent amongst those who work for municipalities, Carry beet, or run local services. There are others, but these three come first to mind.
The other types of rate-cutter who operate trunk services and have entered into favourable contracts with customers in their home towns, so that the rates for their outward. traffic are sufficient to cover the costs of the round journeys, out and home. They go for return traffic at low rates, and regard the revenue from the return-load traffic as their profit: They can carry that traffic at rates which are quite out of the question for operators working from the towns where the return-load traffic originates. They are something more than a nuisance to the system of road transport generally. Often enough they are the mainstay of the less reputable types of clearing house. What is worse, they
make money by it. I know of many haulage businesses which have been built up, and made successful by such methods.
Of the two types of rate-cutter the second is by far the worse, first, because of the difficulty of stopping, and secondly, for the reason that their rate-cutting is deliberate and profitable. Those in the first class cut rates through ignorance: they were being taught the error of their ways but the war put an end to the teaching.
Indeed, the Only ju,stification for any attempt to stabilize rates is that it would, at least, tend to-put a curb on these return-loads-at-cut-rates men. Unfortunately, the latest trend in rates stabilization, the adoption of the so-called Leeds schedule, is likely to encourage this kind of ratecutting, for, as I know it, it is actually based on one-way traffic, thus making it more profitable than ever for operators of this class to obtain return loads at a discount.
Another "Small Man" Example Now, to give further consideration to the problems and principles of free competition in rates. Suppose I admit that I made out too favourable a case for the first twovehicle owner and take another one, carrying the same traffic, but operating a little more expensively. Without going into detail, let me assume that this second twovehicle owner, whom we will call Mr. B„ has establishment costs about half as much again as my first example, say £400 per annum instead of 2264. Let us take it that, instead of being able to reduce his running costs by id. per mile, as the result of doing his own maintenance work on Sundays, he saves only id. per mile.
That makes his establishinent charges £4 per week for each of his two 8-tonners which is 10s. per ton of pay-load per week. This figure, as a matter of fact, is a little high for a small operator, although still well below the 15s. per ton which we found applied in the case of the larger operator with 14 vehicles.
Like my first exartiple, whose costs I gave last week, he runs three round journeys from Liverpool to London each week with each vehicle, so that the weekly mileage is 1,200. I His total costs per week per vehicle are comprised of 1,200 miles at 7.38d. per mile, which is £36 18s., plus £4 per week, establishment costs at £2 17s, for driver's subsistence allowance and expenses—a total of E43 15s. 'Now, if he is to make the same weekly profit per week as the owner of 14 vehicles, his revenue must be £51 10s. per . week. As he carries. 37 tons per week he can carry for • 27s. 10d. per ton as against the bigger man's 32s. 6d. per ton. Yet he is definitely not rate-cutting,'
If he charges 32s. 6d. he makes a revenue of £60 2s. 6d., which is a profit of. £16 7s. 6d. per week per vehicle, equivalent to nearly 371 per cent, on outgoings, a return which. few people would like to have to justify.
Even if he decides to cut the big operator's rate by no more. than 2s. 6d. per ton, and so reduce it to 30s., his revenue is £55 10s. and his profit £11 15s. per week per vehicle. Even that is nearly 27 per cent, profit, a figure which most independent jurors would still regard as somewhat excessive.
What it amounts to is that the small operator is bound to cut the rate of the larger one, unless he himself is to lay himself open to charging excessive rates. Let me make another point against this small man., His vehicles are running an average of 1,200 miles per week -against the Other man's 1,000. That means, in all probability, that he has to pay more in overtime than his competitor. If he pays £1 17s, more, that puts his. cost. up
to £45 12s. He can still charge less than 30s. and make more than. £7 I5s per week profit. He can pay £8 per week more in overtime and still cut the original rate of 32s ficl., yet continue to make more than £7 )5s. per week profit.
r have not, as yet, mentioned the owner-driver., Now, he has everyone else well beaten, for he, literally, has no standing charges worthy of the name. The total, for an 8-tonner, ignoring interest on first cost, which he most certainly will do, is £2 10s. per week, comprising tax, 28s., garage rent, 7s., and third-party insurance, 15s. His running costs will not exceed fid. per mile, probably less, so that his total operating costs, for an 800-mile week, will be no more than £22 10s., which is equivalent to qd. per mile.
For establishment charges he will have: 'phone, £12 a. year; audit fee, £1 Is.; 'sundries, £2; fines, £2; printing and stationery, £1; bad debts, £5; postage, £3; goods-intransit insurance, £10, and war damage insurance, £10. The total is £46 Is. per annum, or, say. £50 or El pert week. His total cost is thus £23 105, per week.
Getting at the Gress Rate For that he makes only two round journeys per week, thus be is allowed time to pick up his return loads. He igay Carry as little as 25 tons per week, and if he gets 37E income at the rate of '25s. per ton, net, his profit is £8 per week.
Suppose he has to pay clearing houses an average of 3s. 6d. per ton, and aims at malting £10 per .week for himself, what will his gross rate have to he?
First, there is his own net cost-£23 10s.; next, his expenses on the road, say £1 10s. per week; then his payments to clearing houses, 25 tons at 3s. Gd.-£4 7s. fid.; finally his • profit-£10. His total revenue must he £39 7s. 64. That is equivalent to 315. 6d. per ton, still a cut of Is. per top.
On the other hand, -he is probably dependent ort-;--elearing houses for only his return loads, say 10 ton5 of the total oi 25. That reduces his total weekly cost by £2 12s. fid. to £36 15s. so that he can carry at an average rate of less than 29s. 6d. per ton, a cut Of 3s., and still make his £10 per week profit.
The argument is often put-I have put it myself, many times-that an owner-driver .ought not to ignore the items of driver's wages in making out his costs. Agreed, but this man, making no. more than two round journeys per week, is not on overtime rates, so that his wage, as a driver, nil not be more than £5 per week; he is, therefore, earning £5 per week net profit which, for a man in his circumstances, is fair and reasonable.
The trouble, as my haulier friend sees it, is that he cannot compete with these little fellows on price, and still earn a reasonable profit. His net cost, on the figures as given in the first article, amounts to 27s, 4d. per iton and his profit per ton, at his established rate of 32s. 64., is thus 5s. 2d., something between 20-and 25 per cent., which is fair.
He cannot compete at all with the first two-vehicle operator, whose figures were given in second article. His net cost per ton approximates to 225. 3d. and, if he charges no more per ton than the first man's actual cost be makes a profit of 5s. Id. per ton which, again, is less than 25 per cent.
Taking the third case, with costs rather more in line with the average than in the second, in which, although possible, .they were cut to a minimum. His cost per ton falls just short of 235. 84. If he makes 25 per cent, profit he carries at 29s. 6d. per ton. That leaves the big operator a margin of Is. 24. per ton, which, it is quite obvious, is altogether insufficient..
In the fourth case. in which I made a somewhat belated allowance for overtime payments to the driver, the net cost is no more than 24s. 8d per ton. He can profitably carry at 30s. •64., leaving operator No. I with a margin of only 3s. 2d. per ton, still but little more than 10 per cent., which is not enoueh.
. The owner-driver carries successfully at 29s. 6d., which, again, is too low a rate for the big operator. The latter is obviously, therefore, not likely to look with any favour on my recommendation that there should be free competition in price as well as in service, as it would seem likely to put him on short commons. Instead of earning £7 15s. per week, per vehicle, he is going to be able to make only £3 or £4, which neither he nor r would regard as good enough. What, he will ask, is my solution of the problem?
This is where I turn again to the analogy I drew, in the first 'article, between hauliers, and manufacturers of motorcars. I pointed out that, before the war, there were at least four makers of low-priced small cars who were making every effort, year after year, to produce the lowest-priced machine. The upshot was that the public got better ears at lower prices, yet the manufacturers continued to make . profits. It is possible, of course, to carry the analogyetoo far. and I propose now to show how far the two cases run
Other Considerations Than Price
In the first place, it should be noted that all four makes of car sold in large numbers. It did not happen that everyone bought the cheapest. In other words,, they did not • buy on price alone : other factors determined the choice. I used to buy cars of that type in those days. I bought a new one every year and, although I have since changed my method and bought something better-and much more expensive-I still think that that was the most economical way-for me-to do my motoring.
I chose my machine, out of the four low-priced makes, for one special reason: it was the only one, at the time, which could be obtained as a-drop-head coupe. What were the reasons which decided others who did not buy the lowest-priced car? Often, I-think, price did actually enter into it, because the intending purchaser bought where he could get the best allowance for his old car. Not all decisions, however, turned on that. Many bought on appearance; others because the local dealer was the agent for a particular make, and could, on that' account, be
relied on for service. "
Somewhat similar factors are considered when a merchant is arranging for his transport. Convenience of access, known quality of service, reliability, -and so on, count, in. the long run, more than price.
For good or for ill, the road transport industry is, in effect, a closed one. Before the war, the owner-driver with one vehicle could ,Larry only 25 tons per week; the man with two vehicles only 74 tone' per week, .whereas the operator running with 14 vehicles could carry 900 tons or so. Presumably, the same conditions will apply after the war. When the local merchants have taken full toll of the small people, so that their capacities are fully utilized, they will be forced, into the position when they have to come to the bigger man.
If he has the courage to stick to his fair rates, and refuses to be beaten down by comparison, he will get those rates. He need not fear what he still regards as rate cutting. S.T.R.