A slippery slope

A slippery slope

It’s happened again, the oil price has skyrocketed, and the costs don’t just end at the pumps. As GAVIN MYERS finds out, it’s bad for the man on the street, yes, but the impact on transport operators is particularly huge, especially as all other costs rise too.

One hundred and twenty dollars a barrel! Well, that just about says it all, really. The spike in the price of Brent Crude to that level in early April has been enough to send shivers of dread up the spines of all who will understand the implications.

Since August 2010 the price of Brent Crude oil has been rising sharply. Recent political unrest in North African countries – Libya and, especially, Egypt – has not helped the situation, the price rising to over US$100 a barrel early this year largely because of it.

According to a paper published by the Organisation for Economic Co-operation and Development (OECD) earlier this year, commodity prices have been rising considerably since mid-2010. The report states that Brent oil prices have risen by about 40%, with the bulk of the increase having taken place since December 2010. Demand factors had accounted for most of the price hike until geopolitical tensions erupted in North Africa and the Middle East, causing concern about supply disruption in both production and transport.

Somewhat worryingly, the report states: “It appears that spare capacity in Saudi Arabia would suffice to compensate for production losses in Libya. Statements by Saudi officials that the country would compensate for supply shortfalls in Libya have calmed markets to some extent. However, if spare capacity were to be exhausted, there could be further oil price hikes, and price volatility might increase.”

The probability of that happening is not made mention of, but people are, naturally, worried about how all the hikes will affect the cost of daily living. When the oil price goes up, all prices go up.

Obviously it is the roads that, to use an old cliché, are the veins and arteries of a country’s economy, and road transport is the lifeblood. So, when those costs go up, people begin to panic. But it is not often viewed from the operator’s aspect. What does he panic about?

Whether his business is freight or passenger conveyance, he still needs to cover costs and maintain his bottom line. As you’d imagine then, it takes a lot for the transport operator, whatever his business, to remain buoyant in today’s climate.

Gavin Kelly, technical and operations manager of the Road Freight Association (RFA), says that 28% of a transport operator’s costs are fuel related. “Rising oil prices has direct impact on day-to-day operations through cash reserves and flow when purchasing fuel,” he says. “Margins drop because the cost is not contained and varies without much warning.” A result is that the overall cost of transportation is one that fluctuates on a monthly basis, which changes profits on already agreed contracts and routes, negatively affecting the industry.

The sad thing is, apart from buying huge amounts of fuel ahead of an increase, there is nothing much an operator can do to mitigate the effects. “The fuel price is controlled by government – and this changes,” Kelly says matter-of-factly.

That’s little comfort to the end consumer who bears the brunt of continual increases, but a fact of life nonetheless. “Only by charging rates that could, would or may cushion projected increases, can operators brace themselves in the face of rising costs – but competition is too stiff to allow that option,” Kelly continues. A tough situation indeed.

Professor Jackie Walters, HOD: Department of Transport and Supply Chain Management, University of Johannesburg, and Director: Institute for Transport and Logistics Studies (ITLS) (Africa), says that bus operators are just as similarly hit. As with freight operators, diesel accounts for over 20% of total operating costs. “Any increase is problematic as operators have great difficulty in passing these increases on to users – normally, in the commuter bus industry only one increase is accepted per annum by commuters,” says Walters. “In marginal businesses, especially where there are contracts such as the bus industry that don’t make proper provision for these types of cost increases, it affects the financial viability of companies,” he continues.

Walters is adamant that more fuel efficient vehicles and optimised operations can make a difference, however this is not currently possible as our much maligned low quality fuel prevents the use of technologically advanced engines.

For the merest insight as to how something like rising costs can affect transport industries, one needn’t look further than the recent economic downturn – operators lost work; margins decreased; some contracts were cancelled midway and operators, regardless of size, closed down, Kelly tells me. Similarly, with bus operators, passenger volumes dropped by between 12% and 15% (they are currently just above the lowest level).

For an operator to weather the difficult financial storm requires immense discipline, and the grace of God. Controlling costs (“though this does not mean much given the fact that a number of new levies/taxes are heading for us,” adds Kelly), and operating as efficiently as possible (“this is largely dependent on availability of work and the conditions of contracts,” he adds), are possibly the two best, and only, things one can do. Walters agrees, adding that with increased labour costs, which account for about 40% in the commuter bus industry; electricity; toll fees and other unavoidable administered costs, signs are pointing to a very difficult period ahead.

Furthermore, operators are expressing concern over proposals around a carbon tax, which, based on the worst-case scenario, will have an additional major negative impact on the industry if implemented. Walters is of the opinion that “this could be the proverbal ‘straw that will break the camel’s back’.”

Walters continues: “With the magnitude of the current increases, operators will have little choice but to increase their fares to match the tremendous increases that are currently being experienced and hold thumbs that the commuter – who is equally under financial pressure – will accept it, and doesn’t burn buses, riot, or boycott services.”

May supply meet demand, and peace prevail in North Africa. Either that, or the bicycle and ox-wagon industries might make a sudden, rosy return. A bleak situation indeed.

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