Impact of the Removal of RET Fares from Commercial Vehicles on The Western Isles, Coll and Tiree
4 Ferry Fares and the Impact on the Haulage Industry
4.1.1 This chapter considers the impact of the removal of RET for CVs on the haulage industry across the Western Isles, Coll and Tiree and how the changes in fares feed through to changes in pricing behaviour and transport charges for business. The focus here is on companies whose core business activity is the conveyance of goods for third parties, although the chapter does consider some companies that move their own stock as well as that of customers (eg Barratlantic).
4.1.2 The purpose of this chapter is to understand the dynamics of the haulage markets in the Western Isles, Coll and Tiree as this is key to understanding the wider context of RET fares for CVs and its subsequent removal.
4.1.3 It is important to recognise that island hauliers are not a homogenous mass - there are many different business models within the industry and RET had different impacts on each. In addition, while hauliers were generally the first recipient of the RET benefits, the impact of the policy varied across the industry. It is therefore critical to understand the make-up of the industry and the different markets served to fully appreciate the impacts of the removal of RET across the communities.
4.1.4 This chapter therefore discusses the different business models and types of haulier operations before reporting on the findings of the interviews.
4.1.5 As explained in Chapter 3, much of the information supplied by hauliers to support their claims was provided in confidence given the commercial sensitivity of many of the figures. It has therefore not been possible to present all the data in this report, but, wherever possible, more general sources and official data have been included to examine and support many of the points made.
4.2.1 The findings presented in this report are largely based on interviews with the Freight Transport Association, the Road Haulage Association and fifteen haulage firms across the islands and the Scottish mainland. Central themes covered by this chapter include:
- haulier business models;
- volume imbalances and their effect on pricing;
- overall inefficiencies in serving island markets;
- pre-RET discounts;
- passing on savings from RET CV fares;
- the impact of the removal of RET;
- haulier integration into the communities they serve;
- the vulnerable sectors;
- the alternative to RET; and
- recent market disruption.
4.3.1 It is important to recognise that the supply of haulage services to the islands does not consist of a collection of individual companies providing a homogenous service to a common customer base. Within the overall mass of traffic there are a number of discrete business models in operation that are meeting different customer needs with tailored services. It is important to understand the different models as the introduction and subsequent removal of RET fares for CVs had a different effect on each type. Examples of a small number of the different models and the impact of RET are provided below.
4.3.2 Smaller operators, tend to operate two or three dedicated vehicles, typically with one or two regular and long-term customers. These companies do not have the necessary scale to win and deliver major contracts nor the depth of resource to establish either a network infrastructure or technically sophisticated services that might, for example, include onward van deliveries. However, they do differentiate their businesses by offering high levels of customer service and 'going the extra mile' compared to mass market operators. Inevitably, they tend to move much of the periodic, lower value and price sensitive commodities like agricultural products, kit houses, building materials and scrap, and often undertake subcontract work for either island or mainland principals.
4.3.3 These relatively smaller operators don't tend to carry a large business overhead beyond sustaining a living from the business and covering operating costs. While island traffic has traditionally been a core business, all of the firms spoken to have had to refocus in some way on attracting mainland‑only work since RET for CVs was removed in April 2012 as business volume in some sectors declined due to higher costs (removal of RET) and less activity (general economic slowdown). This fall off in traffic reflects the markets they are primarily active in, eg construction and building materials which have witnessed relatively large declines in activity over the last few years, and the fragile nature of these sectors. These operators are more likely to be the vulnerable backbone of the sector at most risk from rising costs, predatory pricing by others, and financial exposure from cash-flow risk.
- Key points:
− Small hauliers play an important role in offering choice and quality in the market and offer competition for the larger and more general hauliers.
− These firms have seen a downturn in business recently, caused both by the removal of RET and the general slowdown in economic activity.
4.3.4 Trader-hauliers are firms that use their own commercial vehicles to move a combination of their own goods and those of others. Perhaps the most well-known example is Barratlantic, which operates a fleet of vehicles that move the company's seafood products to market but also provide general haulage services for island residents and businesses (eg importing furniture or fuel).
4.3.5 As a result of running a transport operation however, these businesses also introduce capacity into the general haulage or contract market. For example, Barratlantic, while transporting its own goods, also has the Co-operative contract to bring goods into Barra, which fits with the export of processed goods from the factory - ie it allows a two-way traffic flow.
4.3.6 Although margin is made on the sale price of the goods rather than directly on the haulage element, several of the businesses are trading commodities that are either low margin, or have volatile input costs themselves. For example, N.J. MacAskill sources and supplies hay and animal feed into the Uists and is the only registered livestock haulier on the islands. Raw material costs of the products he supplies have risen considerably as a result of global commodity price increases. The combined effect of this, and increases in the cost of transport, including the ferry fare, is that the market for his products shrinks as crofters and farmers have a substitutable option to feed livestock on silage. This lower quality feed impacts on the quality of the livestock produced, and therefore affects the prices that can be achieved at auction so it is not something the agricultural community wants to do, but in such a marginal sector, there is often little choice. Increased ferry costs of course also impact on the prices achievable at auction as mainland buyers looking to establish an appropriate auction value of the stock also have to factor in the cost of transportation back to the mainland.
4.3.7 Similarly, Iain A MacKinnon Ltd sources, supplies and delivers bulk building materials and agricultural supplies to Coll and Tiree. The selling price of these goods to islanders includes the transportation, handling and end delivery cost in most cases. Mr MacKinnon noted that it is not unusual that the cost of transportation on a per unit basis, ie per pallet, was in excess of the actual value of the goods themselves. This he believed was a dangerous situation to be in as consumption of these goods, particularly in construction, can be simple 'yes / no' decisions. If it costs twice as much to build something on the island as it does on the mainland, it is easy to see why economic activity like building simply stops. This is exactly what he has witnessed since April 2012, when the cost of basic building materials had to increase directly with the ferry fare. It was suggested that crofting activity, which underpins much of the island economy, is also exposed and Mr MacKinnon has found families ordering smaller quantities and reducing headcount as a result of increasing costs.
- Key points:
− Trader-hauliers have witnessed lower margins on their own account products as a result of the removal of RET for CVs.
− Trader-hauliers such as Barratlantic and MacKinnon are key to the overall functioning of the economies of small islands like Barra, Tiree and Coll.
− A number of trader-hauliers noted that they are now carrying goods where the transportation cost per pallet actually exceeds the value of that pallet, which brings into question the long-term demand for such goods - eg building materials.
4.3.8 Some hauliers operate network services - ie an end-to-end collection and delivery service based on a relatively fixed cost infrastructure of predictable links, transhipment and end delivery or collection. The most obvious mainland comparators are couriers like DHL and FedEx.
4.3.9 These businesses require volume of throughput to maintain their 'system integrity'. Woody's Express Parcels is primarily a business focused on parcels, although has expanded more recently into large consignments up to pallet size, connecting through to a hub in Inverness. Hebrides Haulage is a pallet based groupage service offering a daily connection between Stornoway and Glasgow, connecting into wider national pallet distribution networks.
4.3.10 The service offering of both of these companies is that customers can move smaller consignment volumes at predictable or fixed cost, on a daily basis to or from the islands. The businesses offer a door-to-door service, meaning that the prices charged have to be sufficient to cover not only the primary link between hubs, but a sorting operation and a network of smaller delivery vehicles. Underpinning this, particularly in the parcel sector, is a considerable IT and administrative infrastructure designed to track consignments through the network and speed-up the handling process.
- Key points:
− Network hauliers require high volumes to ensure the sustainability of their businesses. The removal of RET for CVs has necessitated an increase in prices which will in turn expose these firms to volume risk.
− In the short-term, these firms are also exposed to contract risk, where their cost of carriage has unexpectedly gone up and they cannot pass this on to the customer.
Full Service Hauliers
4.3.11 As the name suggest, full service hauliers cover the whole spectrum of haulage operations. They are generally large-scale and offer both general and specialist haulage services eg refrigerated vehicles; tankers; and low loaders.
4.3.12 These businesses rely on scale to bring fleet efficiencies and both support a wide range of equipment suited to many different traffics. The capital cost of this equipment is much higher than a basic flat or curtainsided trailer. For example, one operator provided supporting evidence that the cost for a refrigerated trailer for seafood or chilled supermarket flows is £50,000-£60,000 compared to £20,000-£30,000 for a conventional curtainsided trailer. To operate in these sectors, there is usually a need to have a fleet of this equipment to be able to offer a consistent level of availability and daily capacity. This is likely to be a particular issue in the Western Isles (ie compared to the mainland) because of the logistical difficulties of moving vehicles up and down the island chain as well as to the mainland.
4.3.13 Generally, the size of these operators positions them well to attract contract customers who are looking for scale and depth of resource, such as supermarkets. Although some of this contract work is not hugely profitable, it makes a valuable contribution to getting scale economies for the rest of the business.
4.3.14 The full service operators cross over all other types of business model described previously. In addition, given the scale of goods they were transporting, they were also likely to be in receipt of TRS discounts in the pre-RET era.
4.3.15 This diversity of traffic, the scale of the business and the volume of movements allows the full service haulier to be more flexible on pricing at an individual customer or load level, either per pallet, per full load or otherwise, working within the fullest extent of the acceptable 'market rate'. This may be done for strategic reasons or to accommodate the ability of some customers to pay more than others based on their price sensitivity. Ultimately, the business as a whole has to generate an acceptable return to remain viable.
4.3.16 The effects of the introduction of RET for full service hauliers were somewhat mixed. On the one hand it helped stabilise transport charges, thus helping to maintain volumes. On the other hand, the introduction of RET and therefore lower fares, together, with the removal of volume based discounts, encouraged greater competition and changed the dynamics of the market in a very short space of time.
- Key points:
− Full service haulage firms benefited from the introduction of RET for CVs in terms of reducing costs, thus potentially helping to protect margins and maintain numbers of customers.
− However, RET also removed at a stroke their volume based discounts and thus their relative competitive advantage. A future fares policy that protects the scale economies of such hauliers is probably of greater significance to them than the removal of RET in itself.
4.4.1 A key issue affecting the freight market in the Western Isles, Coll and Tiree is the large imbalance between inbound and outbound traffic. For example, it was explained by hauliers that nine tenths of the total freight volume they carried to and from the Western Isles is inbound. During the interviews with commercial vehicle operators, rates and costs of island deliveries were discussed and it was noticeable that calculations were being based on a round trip basis. In more conventional markets, general haulage operators can usually identify a return load (known as a "backload") to enable both directions to be revenue earning. This is particularly the case where a trip is between two locations which generate a good level of freight movements. In this environment, rates tend to be calculated on a one‑way basis with only a nominal amount factored in for the return leg.
4.4.2 As either end of a journey becomes more detached from the main population centres and freight hubs, the ability to find backloads reduces and the 'market rate' (ie the market price) for haulage is adjusted upwards. All of the islands in the RET group were found to be heavily biased towards imports, with a much smaller proportion of goods moving back to the mainland. The extremity of this situation increases the further away from the main Western Isles freight hub (Stornoway) a business is located due to the lack of scale in the majority of more remote areas, although there are some identifiable outbound traffics such as recyclables and landfill to the mainland.
4.4.3 Other than the small volumes of tweed and certain fish, the bulk of freight traffic to the mainland tends to be low value goods and cannot support high rates. Hauliers looking to attract return loads on the spot market talked about simply trying to cover at least a contribution to the ferry fare or fuel costs. The overall volume of freight and its directional imbalance contributes significantly to the haulage rates to the islands.
4.4.4 What this large traffic imbalance means for hauliers' customers is that they are already paying an above average haulage rate and thus their products are at an immediate competitive disadvantage to similar products in higher volume freight markets, particularly those on the mainland. A number of the businesses interviewed noted that haulage savings as a result of RET had enabled transport charges to remain below what they would otherwise have been and thus allowed them to be relatively more competitive. The removal of RET therefore means that, if increased fares are passed on through higher transport charges, the island firms could face a decline in their competitiveness, and at a time when general economic conditions and lower levels of demand are putting increased pressure on local island businesses.
4.4.5 One haulier highlighted that, while it is possible to mathematically calculate a cost to provide a basic point to point transport link, the actual rates in the market, in addition to volume and imbalance, are a function of many variables including:
- the specifics of the actual requirement in terms of goods handling or loading at depots;
- requirement for collection or onward distribution at a location other than the hauliers own hub;
- use of any special trailer equipment or additional manpower needed to load or unload the trailer; and
- demand on administration or management to ensure a satisfactory delivery.
4.4.6 A combination of these issues, in addition to direct operating costs and the ferry fare ultimately leads to the market establishing what an appropriate level of rate should be (ie a function of supply meeting demand in a commercial environment).
4.4.7 The 'market rate' determined by the factors above, is typically within a small range of acceptability. Rates in excess of the market rate will increasingly be rejected as too expensive and the customer will seek an alternative provider. Rates significantly below the market rate will be attractive but it is generally accepted that a company pricing at this level is probably quoting at a loss to attract business and the rate, ultimately, is not sustainable unless the operator has been able to match a return load to get a two way income. Very low rates may also imply service levels that are unacceptable. The same dynamics are found in both full load rates, and rates on a per pallet basis.
4.4.8 Specific factors that affect where this 'market rate' settles on Western Isles routes include:
- whether the market is being served by operators gaining advantage from the 10% freight vessel discount on the Ullapool - Stornoway overnight sailing;
- whether the route to market allows the cost advantage from moving 'drop' trailers or require the HGV unit and driver with each crossing, adding both additional vehicle length and drivers wages to the sea-leg of the journey;
- whether the operator is able to stack, or 'piggyback', empty trailers on the return leg to the mainland;
- whether the route to market has a high or low level of sailing frequency;
- whether the route to market is frequently disrupted or cancelled due to weather;
- whether there is a high volume of freight and strong competition on the route or not;
- the cost of fixed elements like the ferry fare; and
- the cost of significant variable elements such as fuel prices, wage levels, operational overheads and consumables.
4.4.9 From the above list, it is clear that islands to the south of Lewis and Harris could be exposed to these elements eg less competition and lower frequency and therefore the market rate for freight haulage is higher.
4.4.10 From the discussions with hauliers, in very broad terms, the 'market rates', at the time of the consultations, for general freight loads to the islands were:
- Lewis - Inverness
− £1,000 - £1,250 full load / £45 - £50 per pallet
- Lewis - Central Belt / Aberdeen / Rest of Scotland
− £1,000 - £1,250 full load
- Uists - NE Scotland
- Barra - Central Belt
- Tiree / Coll - Central Belt
− £1,350 - £1,700
4.4.11 On the basis of these figures, applying the fares set out in the previous chapter suggests that the ferry fare can account for between 15% to 35% of the cost of transporting goods to and from the islands. The precise figure will ultimately depend on a number of factors, including the size of vehicle, the load being carried, the opportunity for backload and the route used.
- Key points:
− The large trade imbalance in the RET islands means that haulage costs are generally higher than national averages. This means that island firms have a disadvantage when competing with firms operating in areas with more balanced freight flows. RET for CVs offered a way of absorbing these impacts and an element of protection to such firms.
− The removal of RET for CVs could make these businesses less competitive in the longer-term if haulage rates progress back to their non-RET level.
− This issue is particularly prominent the further south one travels from Lewis and Harris due to the lack of scale of industry and activity in the southern islands.
− The evidence suggests that the commercial vehicle ferry fare can account for between 15% to 35% of the costs of transporting goods to and from the islands.
4.5.1 During the interviews a majority of businesses raised the 'hassle factor' of operating to and from the islands and the huge levels of inefficiency and waste intrinsic in island operations. These hidden costs related to the need to work around a mainland connection that can be infrequent and / or unreliable, in terms of weather, operational related disruptions, and capacity. It was explained that the introduction of RET did not directly address these issues, but it helped to reduce the overall costs of serving the islands and thus, at the margin, helped ensure continuity of service.
4.5.2 The most significant inefficiencies are manifested on Coll, Tiree, Barra and, to a lesser extent, the Uist chain. For these relatively smaller markets, extended sailing time, low service frequency and the inability to use drop trailers was cited as a significant contributor to high freight costs.
4.5.3 Barratlantic indicated that the five hour crossing from Barra to Oban means that in a single round trip, 10 hours of labour cost is absorbed paying the driver to sit on the ferry and is unproductive. For the majority of deliveries, the driver is paid proportionally more to sit on the ferry than to drive. This structural inefficiency has to be built into the overall business cost base and margin. At RET rates the business was viable and thriving, but Barratlantic wanted to be clear that at the proposed rates, it is unlikely it would be cost competitive in its markets. As the biggest employer on Barra and an important player in the local economy, the implications of a long-term loss of competitiveness could have important implications for the local community.
4.5.4 Operators in Lewis tended to be less affected by the inefficiencies but highlighted that compared with the efficiency of mainland businesses, all island hauliers had to absorb a high level of lost productivity in waiting for ferries.
- Key point:
− RET reduced the overall cost of haulage to and from the islands, equivalent to the reduction in ferry fares on a given route, and thus assisted hauliers in offsetting some of the inefficiencies of serving the island markets. Similarly, the increase in fares across the routes due to the removal of RET for CVs has increased costs equal to the fare increase and added further costs to those generated by the inefficiencies of serving island markets.
4.6.1 All interviews included discussion on the change in CV fares between the pre-RET era and the RET pilot. All stakeholders indicated that the pre-RET published fare would have applied only to a very small number of hauliers / operators, who themselves individually would have been carrying a minor market share. In reality, as discussed in Chapter 2, most of the goods being transported would have been carried by hauliers in receipt of a discount under TRS of up to 15%. In essence, the savings from the fare reduction available under RET would have therefore been lower than the difference between the published pre-RET and RET CV ferry fares.
4.6.2 It was emphasised by hauliers in the interviews that their customers will have been aware of the TRS volume discount arrangement. Indeed, one of the largest operators noted that his customers demanded that rates charged reflected the rebate being passed through. In addition, in the case of highly sophisticated supermarket customers, a condition of contract is full 'open book' pricing and they would have been benefitting from the TRS-discounted fare. For the majority of customers therefore, including the supermarkets, it was explained that the difference between the published fare and the RET fare was not actually there to be passed on due to them already receiving lower charges due to TRS.
- n Key point:
− The existence of the TRS discount meant that in the majority of cases the published savings offered by RET were overstated. However, whilst this is the case, there remained substantial savings for all commercial vehicle operators that could be passed on to customers.
4.7.1 Establishing whether RET savings were passed through requires defining what is meant by being 'passed through'. The majority of hauliers accepted that when the RET tariff was introduced, they did not pass on the full savings to a majority of customers in a recalculation of transport charges to their clients, although the larger supermarkets demanding 'open book' pricing did see their charges fall. Most hauliers indicated that in 2008 and for the preceding years, key input costs had been rising rapidly, and in most years since 2008 have continued to rise. Operators highlighted that in some years they experienced double digit annual increases in the costs of factors such as insurance, tyres and labour costs.
4.7.2 The interviews suggest that RET had been used by the majority of hauliers as a means of maintaining stable charges to the market in the face of rising costs, that is, the savings from the RET tariff were passed on in this way. A number of consultees thought that, on reflection, they should have increased charges prior to the introduction of the RET pilot to reflect the increasing input costs, and then actively reduced charges when RET was introduced to demonstrate explicitly that RET did have a positive impact on transport charges to businesses.
4.7.3 It is difficult to be precise about how much transport charges would have declined if the reduction in fares as a result of RET had been passed on in full. The previous section explained that there were a number of factors which make up the 'market rate', including the load being carried, opportunity for backload etc. Nevertheless, using the figures provided by hauliers the ferry fare generally accounts for between 15% and 35% of the cost of transporting goods. The fares data presented in Chapter 2 showed that, depending on the size of vehicle and route, ferry fares for commercial vehicles declined with the introduction of RET, approximately, by between 25% and 50%. This would suggest that total transport charges would have declined by anything between 4% (15% of 25%) or 18% (35% of 50%).
Rising input costs prior to the introduction of RET
4.7.4 In order to establish whether hauliers used RET to maintain stable charges it is useful to examine the extent to which their costs rose over the same period.
4.7.5 Total haulage costs are primarily made up of the following elements: vehicle and depreciation; road tax; insurance; driver employment costs; repair and maintenance; tyres; overhead costs; and fuel. While the figures for each of the elements changes each year, data from the UK Road Haulage Association 2008 annual survey shows the percentage of total haulage costs allocated to each category. The figures are set out in Table 4.1.
|Cost category||% of total|
|Vehicle and Depreciation||11.7|
|Driver Employment Costs||27.2|
|Repairs and Maintenance||11.0|
4.7.6 The figures in Table 4.1 show that the highest cost item was fuel at marginally under 30%. This was followed by driver employment costs at just over 27%. Vehicle and depreciation, repairs and maintenance and overhead costs were the next highest cost items at around 11 - 12%.
4.7.7 It should be noted that these figures are for the UK as a whole and do not relate to the Western Isles, Coll and Tiree alone. Figures broken down for haulage companies in these islands separately are not available. The key difference between haulage companies based on islands and those for the UK more generally will be the cost of the ferry fare. Nevertheless, while there may be some differences in the precise breakdown of hauliers on the islands being considered in this study and those of hauliers in the UK as a whole, the figures in Table 4.1 provide a useful indication of the breakdown of costs for hauliers in the Western Isles, Coll and Tiree.
4.7.8 Data from the Road Haulage Association annual survey in 2008 also provides details of the changes in these cost items for UK hauliers between 30 September 2007 and 30 September 2008 ie immediately prior to RET being introduced. These cost changes are set out in Table 4.2.
|Cost category||% change|
|Vehicle and Depreciation||4.9|
|Driver Employment Costs||4.0|
|Repairs and Maintenance||4.1|
4.7.9 Table 4.2 shows that overall costs rose by 8.9% between September 2007 and September 2008. This compares with an increase in general inflation of 4.9%. Indeed only two items ie tyres and fuel increased by more than general inflation over that period. However, the increase in fuel was over 20% and is consistent with the responses from hauliers who explained that they had been experiencing significant increases in fuel costs at the same time as RET was introduced for commercial vehicles in October 2008. It also supports the claim that transport charges would have gone up in the absence of RET due to upward pressure on running costs.
4.7.10 Using the data above would suggest that road haulage costs in general increased by around 9% in the year to September 2008, while the introduction of RET in October 2008 would have reduced the cost of transporting a load from an estimated figure of between 4% and 18%. These figures do support many of the claims made by hauliers and suggest that in October 2008, the reduction in CV ferry fares allowed hauliers to absorb the increase in haulage costs which had been increasing at a rate higher than that of general inflation.
4.7.11 The haulier survey also found that the vast majority of customers are mainland companies supplying goods into the islands. The setting of island prices is therefore generally one step removed from the haulier and in most cases there was no means of establishing if savings passed through to a supplier had been passed through to an island customer or simply absorbed by the mainland supplier or other part of the wider supply chain.
4.7.12 What was evident through the consultation was that transport charges for moving goods to and from the islands have broadly remained at a constant level since the introduction of RET in 2008. Across the market, it was indicated there had been very little, if any, rises in haulage rates between 2008 and April 2012. This was through a period where there is evidence that haulage costs, in some years, had risen significantly. Hauliers interviewed provided invoice evidence that, on like‑for‑like jobs, there had been no rise in rates between 2007 and April 2012. However, in April 2012, companies had increased rates following the removal of RET for commercial vehicles.
4.7.13 Evidence from the Road Haulage Association surveys shows the annual change in costs for each element. Table 4.3 below sets out the annual change in UK costs between September 2008 and September 2012 for each item of haulage costs. It also includes, for comparison purposes, the change in inflation, as measured by the Consumer Price Index, in the twelve months to September of the same year.
4.7.14 The figures in Table 4.3 reveal that, other than in the 12 months to September 2009, costs rose in each of the five years covered. Fuel costs in particular saw significant increases in 2008, 2010 and 2011. While a number of costs saw increases less than inflation, the high percentage of total costs made up of fuel meant that overall cost increases were higher than inflation when fuel costs experienced relatively large rises. These relatively large increases in fuel prices are supported by official data from the Department of Energy and Climate Change set out in Table 4.4. The figures in the table present the change in fuel prices in quarter 3 ie July to September, compared to the same period in the previous year. The figures are similar to the annual cost increases outlined in the Road Haulage Association survey results.
4.7.15 The evidence shows that between September 2008 and September 2012 hauliers' costs rose by over 16%. This covered much of the period where a number of hauliers didn't increase their rates, with the feedback from the haulier interviews suggesting the main driver for this was reduced CV fares brought about by the introduction of RET. The evidence suggests therefore that transport charges remained constant during a period when haulage costs rose by 16%. Indeed, with general inflation also rising in this period by around 12%, businesses actually saw a real terms reduction in transport charges between 2008 and 2012.
|Year to Sept 2008||Year to Sept 2009||Year to Sept 2010||Year to Sept 2011||Year to Sept 2012|
|Vehicle and Depreciation||4.9||4.8||3.7||7.2||5.9|
|Driver Employment Costs||4.0||2.2||1.5||2.1||1.5|
|Repairs and Maintenance||4.1||5.2||3.7||6.1||4.0|
|Change in Consumer Price Index (CPI)||5.2||1.1||3.0||5.2||2.2|
|2007 Q3 to 2008 Q3||2008 Q3 to 2009 Q3||2009 Q3 to 2010 Q3||2010 Q3 to 2011 Q3||2011 Q3 to 2012 Q3|
|Change in fuel price||+22.6||-11.3||+11.9||+16.5||0|
- Key points:
− The evidence from the interviews suggests that haulage firms used the cost reductions brought about by RET to offset potential rate rises being driven by increases in haulage costs, particularly fuel.
− The evidence suggests that haulage costs increased by around 9% in 2008, while the reduction in commercial vehicle ferry fares due to RET meant that the costs of transporting goods declined by between 4% and 18%.
− Hauliers' costs increased over the period 2008 to 2012 at a higher rate than general inflation but transport charges for many businesses remained stable.
− While the introduction of RET did not lead to a reduction in transport charges to businesses, it enabled hauliers to maintain rates at their 2008 level, meaning businesses saw a real terms reduction in their transport charges over the period of RET.
− It was also noted that the introduction of RET helped to grow volumes and create a positive environment for business investment.
4.8.1 From discussions with hauliers, it was suggested the further south in the islands one travels, the greater the issues - ie higher costs; greater inefficiencies through lower volume / demand; and fewer infrastructure benefits, like the ability to use drop trailers, all have an impact.
4.8.2 Vulnerable sectors are likely to be those at most risk and operating at low margins eg agriculture; crofting; basic building materials; shellfish; and seafood exports. Given the relatively low scale of industry on the islands, it was explained by those interviewed that income for many islanders appears to be generated by having more than one job and entrepreneurial interests. It was also explained that typically, these include a dependency on one or more of these marginal sectors.
4.8.3 It was claimed that relatively higher island prices and the generally poor macro-economic environment are leading to end customers changing buying patterns. In sectors including fuel supply, building materials, animal feed etc hauliers noted consignments of smaller quantities being ordered at one time, for example, half a pallet rather than a full pallet of materials. To hauliers with already low volumes, it was suggested this is accelerating the loss of scale efficiencies, increasing the cost of distribution, which in turn is further affecting business performance and reducing the efficiency derived by frequency of delivery.
4.8.4 Hauliers noted that for some of the most sensitive traffics, the cost of transportation is greater than the actual product cost - ie basic items can be double that charged on the mainland. It was explained that this is increasingly leading to substitution for lower quality inputs in the case of agriculture, and abandonment of discretionary activities like building.
- Key point:
− It was claimed that the removal of RET for CVs, combined with rising costs for businesses across the board, is leading to a lower demand for haulage, hence lower volumes, lower scale economies and higher costs. This is a vicious circle which is by those interviewed creating inefficiencies and bringing into question the long-term future of local staple industries.
4.9.1 A majority of hauliers accepted that, in the current climate of depressed economic activity and government budget constraints, if affordability was an issue there may be a case that RET levels were unsustainable and the tariff needed to rise. However, real concern was raised about the timing and level of increase proposed by Transport Scotland, which was considered to be of a magnitude to have significant adverse impacts on many of the sensitive sectors of the island communities (an issue consistently raised in the business interviews, see below). In addition, there were also concerns about what the alternative arrangements to RET may be.
4.9.2 Further key concerns raised by hauliers are the risks and practical challenges that are emerging as a result of the speed of change in the fares. Each of the larger hauliers has a proportion of its customer base in a contractual relationship. These contracts are over multi‑year periods with many working on rates agreed prior to the announcement of RET being removed for commercial vehicles fares.
4.9.3 It was explained that the Co-operative stores had accepted the rise, enabling contract holders to pass on the cost, but there were a number of other examples where contract customers had refused to accept increases. These customers tended to be national organisations who are themselves locked into contractual arrangements with an ultimate customer. For example, the retailer Next was found to be a company with a seven year contract with a national carrier, who in turn is in a three year contract with an island operator. Each of these contracts was fixed on agreed rates that had been determined by each party making cost assumptions in future years. Although some fluctuating costs, such as those for fuel, are usually covered with clauses like fuel duty escalators or surcharges, the unexpected and large increase in the ferry fare was not factored in. This cannot now be renegotiated until the next contract period.
4.9.4 Where costs cannot be passed on to a proportion of the customer base, it was claimed that other customers will have to make up the difference and as the 'power' of the customer in terms of size and volume diminishes the more likely it is that they will be the ones who are left facing the largest increases in transport charges.
4.9.5 Several hauliers also expressed concern about the cash flow implications of the recent and proposed rises. CalMac operates strict payment terms of 30 days, but hauliers' customers rarely pay this promptly. It was explained that the standard supermarket payment terms are 90 days, and some sectors can be even longer. Agriculture, for example, is a sector identified as having a relatively poor record at paying promptly because of its own lumpy cash flow situation being tied to Common Agricultural Policy payments and seasonal livestock sales.
4.9.6 Hauliers interviewed saw the April 2012 rises as giving them particular difficulties as they believe that they will end up carrying the financial exposure of the whole supply chain. The smaller hauliers in particular find this extremely difficult, relying on overdrafts and other financial products like invoice factoring to bridge the gap. Both these means of financing contribute to increasing their overall business overhead and risk exposure, which again has to be recovered by trying to generate further margin within the business.
4.9.7 The issue of discounts came up in almost every discussion, with strong views on their advantages and disadvantages. A view was formed that this was more of a concern, certainly in Lewis, rather than the absolute level of tariff.
4.9.8 The freight vessel discount of 10% was used by the majority of operators to and from Lewis. Those choosing to use the alternative MV Isle of Lewis service did so willingly because of wider business and customer service benefits, including more convenient sailing times. It was found that the ability to substitute routes across the islands was relatively small, with origins and destinations typically determining a clear route preference based on journey time and extended costs of fuel and ferry. No operator suggested that they were using the overnight Ullapool - Stornoway sailing in preference to other routes because of the savings the freight vessel discount offered.
4.9.9 Opinions on volume related discounts were more polarised. With the exception of the two largest hauliers no operator thought that discounts related to volume carried should return. This view was even shared by some of those who had previously benefitted from TRS.
4.9.10 The overwhelming reason citied was that it distorted the market and gave some operators a fundamental operating cost advantage over others. It was believed that this prevented companies from competing for traffic on a genuine like for like basis. One operator who previously benefitted from a higher level of TRS commented that, to be a healthy market, every operator must be able to compete on his own merits and if he is not efficient or competitive enough then so be it. The view was that it should not be for CalMac, which is subsidised by the Scottish Government, to determine which operator has the cost advantage.
4.9.11 One of the main strengths and benefits of RET expressed by those against volume discounts was that it had an inherent fairness to it. Several citied the arrangements on Northern Isles routes as a good example of how the ferry tariff is applied and that it appeared to be open, simple, equal and transparent to all. A significant criticism was that the tariff and discount arrangements, formulae and mechanisms on the Clyde and Hebrides Ferry network have never been truly transparent, which has led to suspicion that 'official' levels of maximum discount were being exceeded or otherwise enhanced by other means. There was however no firm evidence presented to back up this claim.
4.9.12 Operators serving the lower volume markets to the south of the island group noted that the volume of business was so low that it was not possible to achieve higher levels of discount under the TRS formula, which was common across all routes.
4.9.13 The counter argument for volume related discounts was that, in most commercial arrangements, there is a benefit for committing volume or buying in bulk so why should the ferry be any different? It was seen as an incentive to grow the business and carry higher volumes and therefore achieve greater levels of discount. It should be noted that while the majority of those interviewed did not want to see a return to volume-based discounts, the haulier on the islands with the majority of the volume of goods being transported was a strong supporter of a volume-based discount scheme similar to TRS.
4.9.14 Overall there was an appetite for a discount mechanism that offered all island businesses some level of compensation for the disadvantage of operating on the islands and having to incur more costs travelling by ferry than driving a similar distance. It was also acknowledged however that, depending on the structure of the discount mechanism, this would raise State Aid issues.
- Key points:
− The relatively sudden move away from the RET fare system for CVs is seen by local hauliers as detrimental (even with the transitional arrangements) as a number of haulage firms and island customers are tied into medium to long‑term contracts and will have to absorb the cost of these rises.
− This issue is said to be compounded by the cash flow risks of hauliers, who are in many cases bearing the financial exposure of their whole supply chain.
− There is significant debate over the potential return to volume based pricing. A majority of haulage firms wish to avoid going back to volume based discounts as RET helped to level the playing field and introduced competition, allowing all businesses to compete equally in terms of the ferry fare. The limited size of the market meant that not all hauliers had the opportunity to benefit from scale. However, the full-service operators point out that volume based discounts are a common business practice and noted that they are necessary to ensure that their high value traffics are not cherry-picked by 'low cost' firms.
− There was however common agreement amongst the commercial vehicle operators consulted that island haulage firms should benefit from some form of discount to protect against the 'white van man' cherry-picking high value cargoes and leaving hauliers with a rump of low margin products. Any mechanism would have to be designed to comply with State Aid rules.
4.10.1 This chapter has explored at length the issues and impacts, around removing RET for commercial vehicles on haulage firms on routes to the Western Isles, Coll and Tiree. The evidence suggests that due to the complex nature of the haulage industry and the different business models, the effects are not necessarily consistent across the sector due to the different nature of the business types / models. In addition, a combination of the short six‑month period since the removal of RET, together with other influencing factors such as the changing market structure, means there are a number of other factors influencing the ongoing performance of the industry and the operational behaviour of individual businesses. Isolating these from the effects of removing RET ferry fares for commercial vehicles is not straightforward. Nevertheless, a number of important findings can be drawn from the interviews with hauliers and the evidence supplied by hauliers and from other sources.
4.10.2 A key question that this study seeks to answer is the extent to which the savings offered by RET were passed on by hauliers to island businesses. An important point about the extent of RET savings was the existence of the TRS discount in the pre-RET era. This meant that the published savings for CVs offered by RET were overstated. However, whilst this is the case, there remained substantial savings that could be passed on to customers. The evidence from the interviews suggests that haulage firms did not directly pass these savings on to all of their customers in the form of lower charges, although a number would have seen a consequential reduction in transport charges through, for example, the use of 'open book' pricing.
4.10.3 In most cases, hauliers used the cost reductions brought about by RET to offset potential rises in transport charges being driven by other operating costs, particularly the significant increase in fuel witnessed in the 12 months to September 2008, just ahead of the introduction of RET. While fare reductions, after TRS discount, of up to 50% could have resulted in lower transport charges of between 4% and 18%, general haulage costs for firms in the UK had risen by just under 9% in the year to the introduction of RET in 2008.
4.10.4 In addition, the evidence suggests that hauliers maintained transport charges at their 2008 level throughout the RET pilot in the face of total costs increasing at above-inflation rates. Therefore, the evidence does suggest that RET resulted in stable charges which would have increased in its absence. In this sense transport charges to businesses declined in real terms between 2008 and when RET was removed in 2012. It was also noted that the RET real-term cost reductions helped to grow volumes and create a positive environment for business investment.
4.10.5 One of the main policy justifications for introducing RET for CVs was the impact the cost of transporting goods by ferry was having on the relative competitiveness of businesses in the pilot area. In addition, trade imbalance in these islands means that haulage costs have typically been above national averages. Island firms therefore had a disadvantage when competing with firms operating in areas with more balanced trade flows. RET for CVs offered a degree of support to such firms and also helped mitigate other inefficiencies caused by operating on the islands, such as limited scale of industry and opportunity for transporting backloads.
4.10.6 The evidence gathered from the interviews with hauliers suggests the removal of RET ferry fares for CVs has:
- had a negative effect on the volumes and margins of some small hauliers, who play an important role in offering choice in the market;
- squeezed the margin of some trader-hauliers who are key to the economies of small islands like Coll, Tiree and Barra;
- Network hauliers require high volumes to ensure the sustainability of their businesses. The removal of RET for CVs has in some cases necessitated an increase in prices which will in turn expose these firms to volume risk; and
- reduced the volume and economies of scale of some full-service hauliers, thus potentially increasing the long-run market rate for haulage.
4.10.7 It was also explained that any additional increases in fares to non-RET levels will have further negative impacts on the industry due to limited opportunity to absorb higher costs. It is feared that higher fares will be passed on in increases in transport charges, leading to decreases in customers and volumes and further losses in efficiencies and economies of scale.
4.10.8 While there was a majority view RET was beneficial to hauliers as it led to higher volumes, it was also claimed the removal of volume-based discounts has had a negative effect on some of the larger hauliers who have a majority of the market and provide important services to a significant number of businesses. RET exposed them to competition and potential cherry picking of their more profitable markets, which could have long-term implications for the operation of the sector.
4.10.9 There was a general agreement amongst those consulted that there was a need for a discount for island hauliers to protect them from cherry picking from the white van trade. However, there was significant divergence of views on the form of this discount, with the larger full‑service operators preferring volume based discounts and the smaller hauliers opposed to this and supportive of a system that is more equitable and transparent.