"It's the survival of the fittest," says a rueful Vanessa Perry, managing director of Pauline Edwards Transport. The comment came on the day in April that around 100 hauliers descended on London to deliver a coffin signalling the possible death of road haulage as diesel prices continue to climb ever higher. And at a time when hauliers of all sizes closed their doors and called in the administrators. Some operators are comparing the current crisis to the recession of the early 1990s, but others
say it is far worse.
So what can firms involved in road transport do to trim costs and boost profit in the face of spiralling diesel prices and the wider credit crunch? TDG chief executive David Garman recently addressed the issue of costs in a statement to accompany the company's financial results. He was confident about cutting costs this year: "At the same time, we will continue to counter ongoing margin pressure through effective account management and aggressive cost management to enhance efficiencies," he said.
However, smaller operators say they have explored all their options to cut costs - but the effect of higher fuel costs is simply wiping them out. Phil Gilmore, director at Bolton-based Chiltern Transport, stresses that there is a limited amount hauliers can do to achieve cost savings. The company slapped a fuel surcharge on its rates from 1 May, but is not confident that all its customers will accept it. "As far as operating
costs are concerned, we need a certain number of drivers, we need vehicles and we need fuel," says Gilmore.
"Costs such as wages, fuel and replacement tyres won't go away unfortunately." Gilmore believes that increased costs are eroding hauliers' already very small margins. "We're being very careful and cutting our coat according to our cloth, but it's very tough out there, probably worse than the recession of the early 90s," adds Gilmore. "The business just isn't there. If haulage really is the barometer of how the economy is performing, then it isn't doing very well!"
JS Cook and Sons, based in Spalding, Lincs, was involved in the London fuel protests. The company is taking a long, hard look at its business to work out whether to diversify, downsize or even concentrate just on warehousing, instead of haulage. Director Tim Pharo says: "We have tightened our belts - for example, we haven't replaced some of our drivers and our trucks are being used 24/7, but we can't really cut back any more. Like everyone else we have to keep our vehicles maintained, and we have to keep VOSA happy."
Pharo says that even with a fuel escalator, diesel prices are outpacing any benefit his company receives. "We are seriously considering our fleet size and what type of work we are doing," says Pharo. "Would it be better to diversify and do something on a smaller scale, or even concentrate just on warehousing?" It is now getting to the stage where it is cheaper to park a truck up rather than send it out, says Pharo. The company's fuel bill is a painful £20,000 a week.
Pauline Edwards Transport's Perry agrees that hauliers have a limited amount of options when it comes to controlling running and operating costs. "We've cut back as much as we can, but we've still got to pay our drivers a decent wage and fuel really is the killer," she says. "We replaced our vehicles last year, so although we had the cost of that, we should be saving on maintenance as they are new." By diversifying into warehousing and unusual loads, Pauline Edwards has managed to avoid a reliance on general haulage, adds Perry.
Margaret Edmunds, Yorkshire area manager for the RHA, says that part of the pain being felt by hauliers is due to the fact that customers refuse to pay the increased fuel cost immediately. "Lots of companies negotiate three-month contracts and then the customers say they can't come back and renegotiate when the price of fuel goes up," she adds.
Simon Chapman, chief economist at the FTA, echoes her cry. "This is pretty much uncharted territory for the industry. A few years ago, when oil prices went up, they did so gradually with six month or so price fluctuations. But oil prices have gone up so quickly that by the time operators come to renegotiate, they have already had to bear a 5p/litre or 6p/litre increase."
To keep costs under control, Chapman says operators should be doing the obvious, such as maximising loads and improving driver training to ensure fuel economy, as well as revisiting vehicle specifications and whether they have the right equip-ment for the job. "But these are things that operators need to be doing anyway," says Chapman. "The thing that is new is that hauliers should be moving to open-book accounting so that they can pass on these higher costs in a smoother way than used to happen."
The credit crunch and resultant higher borrowing costs could also be affecting leasing and contract hire, says Chapman. "The cost of borrowing for banks is going up so they will try to pass that on to the clients." Yet another problem being experienced by operators buying vehicles is that sterling is struggling to hold its own against the euro and so the cost of an Italian, German or Dutch truck and associated parts will cost more in real terms than a year ago. "There is no easy answer," warns Chapman.
The RHA, which recently announced a three-point plan for haulage industry survival, urges buyers to discuss rate increases and urges hauliers to become more assertive when dealing with customers about fuel prices. "It is vital that hauliers pass on the increases in their costs to their customers," says RHA chief executive Roger King.
And it can be done: on a road haulage 'business for sale' site, a company states that it has managed to offset the recent rising costs of diesel with arrangements in place whereby some customers pick up their own fuel bills. And A Rhodes Haulage, based at Stockton-on-the-Forest, North Yorks, is removing the three-month clause from its contracts and reviewing quotations weekly just to keep pace with the weekly fuel cost increase.
A recent survey from business expert Baker Tilly found that bosses in road transport are not the only ones feeling gloomy about the current economic situation. The survey found that UK businesses are waking up to the reality of the credit crunch after months of uncertainty they are becoming more focused on cutting costs in the light of an expected drop in earnings. Baker Tilly's survey revealed that the number of companies considering cutting their costs nearly doubled during March - rising from 26% to 45% by the beginning of April.
The biggest area for potential cost savings was seen in head count - 25% of companies were looking at limiting recruitment 15% were pondering redundancies, while 10% of those surveyed were looking at changing their remuneration policies. By the beginning of April, 64% were implementing risk management controls compared to 22% a month earlier. This largely consisted of implementing tougher credit controls and assessing customer and supplier risk.
Laurence Longe, Baker Tilly's national managing partner, says: "A cross-section of UK businesses began to feel the widening effects of the credit crunch during March. Most are considering belt-tightening and are proposing increased vigilance to deal with the tough market conditions. "We are in a period of uncertainty and companies are focusing more attention towards internal controls and assessing external risks."
You have been warned.
Consider merging to form larger firms that together have greater strength to resist the pressure of clients and creditors. Consider forming local/regional associations (not cartels) to avoid firms being played off against each other. Link with similar associations elsewhere to maximise journey synergies. Renegotiate banking arrangements and leases. It is of little use to the bank or leasing company if their client files for bankruptcy. They would prefer to have a client that paid under the terms of the existing contract, but if that is unlikely they would rather renegotiate than take a complete loss. However, they will be unlikely to extend their exposure.
Ensure that your customers pay by invoicing correctly and promptly, chase up payment the week before it's due to confirm that the invoice has been cleared for payment by the due date. If part of the invoice is queried, then resubmit the invoice in two parts one that is ok and the other representing the queried sum so that the entire amount is not delayed as a result of some issue on a fraction. Redesign contracts and products to reflect the new market realities rather than trying to trade in a turbulent market in the same way you would in a more stable climate.
The main costs for most road haulage firms are people, fuel, leasing payments and debt servicing. If you're trying to maintain capacity, you cannot reduce the headcount or the fuel costs. If you are running at a level well below capacity, then you will need to shrink the business and reduce your fixed costs by renegotiating the big fixed outflows such as leases. This will be tough but may be possible to some extent. It is always best to do this early rather than wait until it is urgent and desperate. Above all remember that now, more than ever, cash is king.
Compiled by business turnaround expert Anthony Holmes.
Reed Business Information Limited.©2008
