Understanding transport costs

In Industry Update, August 20226 MinutesBy Nick LeggettSeptember 25, 2022

Operators within the transport sector often struggle with financial and operational issues and are looking for ways to improve efficiency, reduce costs and build a strategic, long-term view of purchase planning.

The Transporting New Zealand/ Grant Thornton Transport Cost Index provides current and historical transport cost data and forecasts and is designed to help New Zealand transport operators manage the costs of running their business.

The index is a quarterly report on the typical components contributing to the respective cost movements of transport rates.

“Operators need to be empowered to have conversations with their clients on managing costs,” says Dom Kalasih, general manager of industry at Ia Ara Aotearoa Transporting New Zealand.

“The index provides a transparent and independent reference source on the respective cost movements of the typical components and is highly valued and gives critical support for those conversations,” he says.

For example, the components include (but are not limited to) fuel, wages, tyres, repair and maintenance. As an additional reference, the index also allocates the respective cost components as proportions of the total cost as seen as an average across the industry. That said, Kalasih says it is important to appreciate that those proportions may vary by company and activity type.

“The index is not a price index, and it does not tell businesses how much they should charge. It is more valuable than that because the granularity of the information allows operators to apply that information to their respective business activity.”

The data is underpinned by Waikato University’s representative survey of transport businesses, which is taken every five years to ensure the data reflects market conditions and quarterly data analysis and reporting by international business advisory experts Grant Thornton.

The index is exclusively the property of Ia Ara Aoteaora Transporting New Zealand.

“Rising costs are impacting road transport operators throughout the country. New Zealand, like the rest of the world, is facing inflationary pressures. The transport industry is particularly vulnerable and at risk because we are a service industry,” says Nick Leggett, CEO, Ia Ara Aotearoa Transporting New Zealand.

“We estimate the cost of fuel as a proportion of a transport business has gone up from about 15% to 20% to about 30% to 35% – a massive jump. Wages and other costs are also increasing.

“My big message for operators is to know your costs,” he says. “Transporting New Zealand is in a unique position to help members by giving them access to the index. We provide the index to all members each quarter and are happy to provide advice on how members can use and apply it to their business.”

A recent Transporting New Zealand survey asked road transport operators to break down their main costs. More than 400 businesses took part.

Almost nine in 10 operators reported that cost increases had had a major negative impact on their business.

Fuel accounted for the biggest cost increase. A year ago, only 20% of the industry had fuel making up more than a quarter of business costs. Today, 64% say fuel represents more than a quarter of costs, and 45% say it is in excess of 30%. A year ago, it was 8%.

“To put those numbers into context, take the case of a typical operator with a truck and trailer combination doing 100,000km a year with a burn rate of 1.8km/l. A year ago, they’d be paying in the order of $1.30 a litre for fuel. Now they’re paying $2.70 a litre – an increase of $77,778,” says Kalasih.

“Another useful way to demonstrate the significance of this is if fuel were 20% of operator input costs and it went up 50%. All other things being equal, that equates to a 10% increase in total input costs.

“If an operator’s profit was 10% of total costs and they couldn’t recover any of that increase from their clients, then all their profit has gone to paying for the increased fuel cost.

“Now, when you consider that the price of diesel has actually gone up over the past year in the order of 100%, if an operator cannot recover those increases, then their business is simply not financially sustainable,” he explains.

Kalasih says the biggest risk for road transport operators is not passing costs on to customers. “Nearly one in five businesses surveyed reported they were unable to pass on increased costs, and only half felt that their customers appreciated the need to increase rates,” he says.

“We’re further concerned that some large players give a flat ‘no’ when operators tell them they need to increase costs. That’s frankly unacceptable.”