Fuel hikes putting the squeeze on freight operators

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JIMMY MOYAHA: For the entire month of April, we have all been grappling with the fuel price increases that took place on the 1st of April, and we are anticipating more of the same come the month of May.

We might not get a fuel price increase – but we might have the relief offered by the temporary reduction in the fuel levy disappear.

So South African consumers are definitely not in an ideal spot when it relates to the cost of fuel. Other consumers in the South African market that are also experiencing these challenges – perhaps more so than the average consumer – are the road logistics companies.

These are the trucks that we know move all of the goods throughout the country and ensure that you and I South Africans have our goods on time when we need them.

Fuel makes up at least 35% of their costs, and this fuel price increase could prove disastrous for this particular sector. We’re going to look at this in a bit more detail with the chief executive of the Road Freight Association, Gavin Kelly, who joins me on the line now.

Gavin, lovely having you on the show. Fuel at 30% for any business is a significant cost. But for some of these logistics companies and particularly those in the road freight sector, things like the cost of diesel could easily be 60% to 70% of operating costs – and that is a serious concern.

GAVIN KELLY: Hi Jimmy, and good afternoon to all your listeners.

Yes, it’s a big concern. I haven’t heard of someone having it at 60% or 70%. I’ve heard 55%, which is a heck of a lot – if you think, 55 cents out of every rand that you spend on operation goes to fuel [and] you still have to pay your driver, you still have to maintain the vehicle, you’ve still got tires, you’ve still got tolls.

So yes, it’s a 47% increase on your base costs – and if it was only a 30%, a 47% increase, you’ve [still] got to find that somewhere.

Otherwise you’re out of business before you can say abracadabra, and you need to go to your customer. [And] I’m sure there are many customers who are in just a tight spot because when the price of fuel goes up, this is going to affect – across various industries, various markets, retail stores – what they pay for rental, what they pay for transport.

So suddenly you’ve got to find 47% – and there are many transporters out there, Jimmy, that just don’t have it.

JIMMY MOYAHA: Gavin, let’s look at the margins in the transport space as they stand, even before the fuel increases, for lot of the road and logistics [entities] that move through the country. Because of how many service providers might be out there, because of some of the distances that need to be travelled, margins are definitely not the same for different operators. I imagine that has an impact on profitability as well. How much more stretched do these margins become when unexpected increases like the fuel increase hit?

GAVIN KELLY: Well, Jimmy, the average return on investment in the transport sector – and I always ask somebody who says they want to get into it, why? – the average return on investment is 3.5%.

Now that’s really just ‘ticking time’ with inflation if you believe that headline inflation is at 3.1%. So you’re just above it. You want at least about a 7-8% return on investment.

So when you now have this [fuel price increase] coming through you’ve got to find that extra cash, and if you haven’t generated a reserve to pull you through tough times like this – and God please that this is only going to be a month, or at a stretch two months – how are you going to get through there?

That’s really the question because you’ll find that most transport operators only get paid on a 60-90 day invoice, so you have to do the work, spend the money on the fuel and continue working and hope like anything that 60 days down the line your customer is going to pay.

Remember, your customer is going to be in a similar sort of financial pinch because all of a sudden all of these suppliers’ costs will have risen.

So it’s really hammering the sort of returns there are out there in the industry.

JIMMY MOYAHA: Gavin, let’s look at the operations from a road freight perspective. We already know that fuel costs impact various aspects of the value chain. And for road freight, it obviously being such a huge component, what potential reliefs, if any, could this particular sector look at?

In the fuel space a lot of these service providers are price-takers. You’re a consumer to a certain extent. There’s no tax relief being offered. What relief measures would an operator in the road space have here?

GAVIN KELLY: Well, a very good question, Jimmy, because some of the relief that you’re going to seek or that you could apply is really long term.

It’s really about changing the types of vehicles that you have, both in size and size of consumption; how much fuel they drink, how you use those vehicles?

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Are your loads full loads, half loads? Do you have half of your routes coming back empty? Can you piggyback onto somebody else to get some of your loads around? Of course, piggybacking isn’t the best option because that’s always a way for somebody else to take [over] your loads.

It’s really going to be day-to-day operations as you look at the routes that you’re driving, and you try and find routes that are not as congested, where your vehicle doesn’t stand idle. So, for example, when you want to load or offload, [ensuring] that you’re not standing for hours in queues that stretch for kilometres – that type of thing.

Can you change the route that you drive so there aren’t huge differences, you know, between steep uphills and downhills. And then I suppose it’s making sure your vehicles are well maintained because a well-maintained vehicle will use less fuel.

Those are short-term implications or amendments or adjustments that you can make. Long term, it’s capital outlay.

You’re going to go and buy other either diesel or very diesel-sparse vehicles or lighter vehicles, or you’re going to go to battery electric vehicles – and they are not cheap. That’s the problem.

JIMMY MOYAHA: Gavin, let’s stick with that for a moment – the battery conversation and the alternatives conversation. Road freight is much like any other freight exercise, as you said, not cheap and very, very capital-intensive.

More often than not smaller players don’t have the luxury of being able to pay for these vehicles upfront in cash, so you’re financing this on a longer-term basis.

Let’s talk sustainability from a business perspective. You’re unable to meet your obligations. You’re forced into closure – or even, for a big logistics company, [you need to] be able to transition an entire fleet into something new.

That kind of capital expenditure takes a while to recover from. At what point do you make that decision and say it might be cheaper in the long term, understanding that if the tensions in the Middle East were to wear off and the price come down, this might not be a [sensible] new expense you’ve incurred.

GAVIN KELLY: Yes. Jimmy, again, a good question and I’ll try and look into the crystal ball – which looks a bit cloudy and cracked.

But you’re quite correct that this is not a cheap exercise.

Battery electric vehicles, depending on which vehicles you buy, could be two to three times the price of a normal internal combustion engine.

Then you need support. If you have a diesel-operated vehicle you can drive anywhere in the country and within 50 to 100km – depending on where you’re driving, obviously – you’ll find a filling station. It might not be the brand you want to use, but you will find a filling station.

When it comes to charging battery electric vehicles there is a little more of a challenge because they aren’t at every single filling station – or even along the major routes there aren’t battery charging facilities. Unfortunately a lot of the OEMs [original equipment manufacturers] haven’t a simple style of battery-charger connection.

If you have a simple nozzle on your fuel tank, you can take fuel from anybody, but electric vehicle batteries have different connections. So there’s that problem.

Then there’s the problem of electricity. If Eskom is not supplying electricity to that area where you need to be charged, you could be stuck in the middle of nowhere – up the creek without a paddle.

It is definitely a far more expensive route to go.

We think that the technology is still not mature, as we would call it. Probably in four to five years’ time you’ll find prices come down as more vehicles are available and the battery technology improves. Another problem is in terms of battery weights and charging times.

So that’s not going to be something I think everyone’s going to jump into right now.

They are going to first sit and have a look at how this technology changes and how interchangeable it is. If you have different sets of normal vehicles, can you co-charge them? Can they all work on the same system? At the moment, irrespective of how big the vehicle is, you can go to the same filling station, put in the same diesel. So that’s going to be a challenge.

JIMMY MOYAHA: Road freight is potentially about to experience one of its biggest challenges to contend with as fuel prices continue to increase and road operators are forced to make different decisions around whether this is a sustainable aspect of their business to continue.

We’ll leave the conversation on that note. Thanks so much to the chief executive at the Road Freight Association, Gavin Kelly, for joining us to look at the impact that fuel-price increases are having on road freight.