Hassall says owner-drivers cannot cross-subsidise network links like bigger fleets to make profit
Industry economist and academic Kim Hassall looks at aviation industry examples to analyse whether a fixed rate scenario would have worked for the Australian road transport industry.
The Road Safety Remuneration Tribunal (RSRT’s) minimum rates order set about to regulate non-directional driver rates, which could have caused major problems, Hassall says.
Demand and supply across a network calls for a need of spot rates, particularly for the lower demand backhauls.
“In many circumstances, backhauls are essentially repositioning trips to get the truck back to a particular town or city in order to undertake another trip in the next day or so.
“This is particularly true with the aviation industry who will regularly offer massive discounts in order to reposition their planes.
“The trucking industry is not dissimilar. Sometimes backhauls will be undertaken for a fuel-only cost plus a margin and this might be even less than a per hour labour cost.”
He says medium and large fleets have the ability to set directional prices because different links in the freight network can cross-subsidise other network links.
However, this could undercut the rate for the owner-driver sector “especially if it was fixed”.
Hassall says there are times when even the ‘for hire’ road industry cannot compete on backhauls.
He presents three case observations that reflect such efficiencies:
Case one – The fruit grower and the parcel backhauls
“A large national carrier suspended its forward and return leg contract arrangement for taking parcels from Adelaide to a major regional South Australian orchard area.
The owner driver return trip, evening dispatch ex Adelaide and morning return trip from the regional town to Adelaide was discontinued in favour of loading a fruit truck with a backhaul of parcels after it had done its fruit delivery to the Gouger Street markets.
The truck would have otherwise gone back nearly empty. The impact of this arrangement lowered the road transport cost of servicing this regional town by a factor of six.”
Case two – Farmer efficiencies in livestock haulage
“It is not uncommon that livestock breeders will have the capacity to take a proportion of their own stock to sale yards.
In doing so this leaves the producer with the capacity to offer some limited, or even large backhaul capacity, to other livestock growers in adjacent farming areas.
The producer can effectively dump capacity onto the market and undercut contract carriers as well as owner driver operators.
However, it is the customer who wins handsomely in this arrangement. It is called market efficiency.
More than 20 years ago, the first salvos in the ‘operator licensing’ proposals came from vested livestock carrier interests whose rates were being undercut by the occasional livestock farmer doing backhauls.
Potentially, full-blown operator licensing would exclude ancillary operators offering such backhaul efficiencies and deprive customers access to lower rates.
Operator licensing, although often proposed as a safety initiative, could also be interpreted as the ‘for hire’ sector trying to exclude ancillary operator competition from their patch.”
Case three – When your backhaul leg becomes a premium priced leg
“Recently I discovered a small road transport operator that was undertaking agricultural export contracts to Perth.
Unlike most operators, he was able to secure major premium agricultural commodity backhauls to regional Queensland, New South Wales and South Australia.
The commodity was a newly imported product into Australia and his being aware of the emergence of this new product, whilst having the appropriate backhaul capacity, won him this contract.
You can be lucky sometimes. All backhauls need not be at give-away prices, although some are.
A fixed backhaul rate could have cost this operator dearly.”
Hassall recalls what happened when the international aviation tried to fix cargo rates in the 1980s and whether such a system could have worked for the Australian road transport sector.
Within weeks of the International Air Transport Association (IATA) setting mandatory fixed cargo rates for its members, the large customers began demanding rebates from air carriers for paying the ‘full-card’ rates, he says.
Adding, “the bigger the freight forwarder, the bigger the demanded rebate.
“This situation lasted for several years and showed how a fixed-rate regime was nonsense.”
While he concedes that the situation in the Australian road transport industry was not exactly the same “but it certainly would not have been unforeseen that a large customer, paying a fixed owner driver trucking rate, would not have asked for an equivalent to a rebate from the operator for volumes carried.
“In Australia, this happens via a different method, it is called volume discounts and is part of the fabric of road haulage contracts.”
He suggests a volume discount scheme can be a better solution compared to a rebate system.
“Sending 16 pallets a day versus 80 pallets a day will get you a healthy per unit discount.
“This process has significant more transparency than a rebate system.”
This is a section of the second instalment of a two-part article where Hassell examines the arguments around the ‘safe rates’ RSRO.
Full coverage can be found in next month’s ATN. Click here to secure your copy.