The recent overwhelming rise in fuel prices has once again focused everyone's attention on controlling costs.But is the price of fuel itself really the problem?For owner/operators who provide a servic...
The recent overwhelming rise in fuel prices has once again focused everyone’s attention on controlling costs.
But is the price of fuel itself really the problem?
For owner/operators who provide a service, the cost of fuel, at whatever price, has to be factored into the rate and then passed on to the ultimate beneficiary of that service: the carrier’s customer.
There are many other items in the operating cost portfolio, all of which have risen dramatically over the last 25 years without any increase in the rates that Canada’s owner/operators are receiving.
In the 1980s, owner/operators were doing reasonably well at the proverbial ‘dollar-a-mile.’
Costs have changed a lot since then but rates have remained stagnant.
The price of trucks has risen from $75,000 for a tandem sleeper linehaul tractor to almost twice that for a similarly outfitted unit today.
Tires have doubled in price.
Shop labor rates have increased from $45 to over $80 per hour.
The cost of meals for longhaul drivers has also become a major expense even for those who pack a cooler and shop at grocery stores along the way.
The cost of insurance, even before Sept. 11th of 2001, has become more than just an incidental expense.
Even without factoring in the cost of fuel, it is apparent that Canada’s owner/operators have fallen behind in their earning power.
There has been increased pressure from carriers for owner/operators to accept a rate which simply does not cover the true costs of operation.
But the real problem is that owner/operators have allowed themselves to be convinced that the rates that they are being offered are the best available.
Updated figures, current as of the first week of March 2003, show that operating costs have risen to unprecedented levels.
For the typical tandem tractor (pulling a tandem trailer), covering 125,000 miles per year, working over 250 days, with an average fuel consumption of 6.5 miles per US gallon, the figures look like this:
Fuel (US$1.75/gal = CDN$0.72/l): 42 cents per mile
Truck Payment (at $2500/mo): 24
Meals (at $45/day): 9
Plates, permits, administration: 8
Driver’s wage: 40
Insurance (where applicable): 10
The total so far is $1.46 per mile and we still haven’t included WCB (or private disability plans), cell phones, tools, work clothes, truck washes, winter plug-in costs, office equipment or any other items considered crucial to the job.
There are variables
Many operators will argue that their own costs for these items are considerably less.
For example, they had equity in their previous truck that brought down the cost of the new unit (although now you have to account for all of the initial costs associated with that earlier truck).
A solid credit rating using your house as collateral can usually drop the cost of borrowing a few points.
Perhaps you have opted for a less expensive tractor.
Insurance through the carrier may be cheaper if assessed on a gross receipts basis.
Many drivers can do much better than 6.5 miles per gallon and, if they are buying fuel through their carriers, may be paying a rock-bottom price.
You can pack your lunches in a portable cooler and drop your meal costs to well below $45 per day.
If you do your own servicing (grease, oil changes, any work that can be done with hand tools etc.) your booked maintenance costs will decrease but you must still assess your business a reasonable figure to account for your time and effort; you should really be paying it to yourself as part of your wages.
For those of you who are going to argue with these figures, we’ll give back five per cent so that the really efficient operators are taken into account.
Your revised operating costs per mile are now a little over $1.39.
Some will be able to shave this back even more but not by much.
Most owner/operators realize fairly quickly that if sufficient cash flow is to be maintained in this business at the current rates, then they will have to steal from one of two sources: either their own take home pay, or their maintenance/contingency fund.
Either way, they are eventually going to find themselves in trouble.
If they beggar the former then they will come up against quality of life issues, particularly if they have a family to support.
And if they are only giving the truck the absolute minimum in servicing, then the day will come, usually in the third year of ownership, when the inevitable big-ticket item will demand to be dealt with.
Why are owner/operators in such trouble financially?
The volume of work is there and is growing each year.
Their services are constantly in demand.
These days many fleets use exclusively sub-contracted operators.
With such a demand, you’d think that the rates would rise in an effort to attract and retain more owner/operators, but the opposite is the case.
The average mileage rate today is still scarcely better than that ‘dollar-a-mile’ that was the industry standard back in the 80s.
Scan the carriers’ ads and you will see numbers from $1.05 to $1.20.
Carriers will probably argue that they are under ‘intense competitive pressure,’ and that they are ‘paying better than the industry average.’
In other words they are really only paying what the market will accept and therein lies the problem.
Until owner/operators realize that they are providing a necessary service, one that frees the carriers to focus their risk-taking in other areas, then they will constantly be playing a losing game in an attempt to keep up with both inflation and the shareholder-driven downward pressure on rates.
Only when they know their operating costs per mile will owner/operators be able to demonstrate to carriers that they have a legitimate reason for needing higher rates.
Higher mileage rates for owner/operators will ensure that there is a sufficient rate of return on investment to make it profitable for them to stay in the business.
Owner/operators need to be honest with themselves when summarizing operating costs…if it’s a part of the job, then it has to be included.
Only then can you be certain of the rate that you need to cover your costs and – remember, unless you know your operating costs, you run the risk of undervaluing your services.
Don’t expect that the carriers will overvalue them.
It’s your business but pride of ownership will only go so far.
– A long time O/O, Mike Smith is a member of OBAC’s board-of-directors. He can be reached at email@example.com.