By A. Peer Mohamed, Managing Director, AL SAFA Transports Pvt. Ltd.
Against the backdrop of slowing economic growth and escalating inflationary pressure since the second half of the last fiscal, the average consumer spending has dropped significantly during the period.
This fall in consumer spending has also affected freight movement, particularly primary freight movement, consequently hitting the utilisation level of transport operators, as also freight rates.
It has been observed that freight rates have dropped from as high as around Rs. 1.80/BTKM for a 16-tonne payload capacity truck on the Delhi-Chennai route in September 2011 to around Rs. 1.30/BTKM in August last.
Although the Government decision to hike the diesel price was inevitable in order to address the issue of burgeoning under-recoveries plaguing the oil marketing companies (OMCs), this is expected to pose fresh challenges to the already depleting profitability of goods transport operators.
According to Road Transport Industry Research, high freight demand has proved a cushion for diesel price hikes in the past. In the last three fiscals, the diesel price has been raised around 13 times. However, the healthy economic scenario ensured that strong freight movement and subsequently the utilisation level and profitability of goods transport operators were also reasonably good.
Of course, the road freight transport industry has fully passed on the burden to customers. However, considering the current economic scenario, offsetting the 14 per cent hike in diesel price, the highest in a decade, seems extremely difficult. National Research believes that the current hike in diesel prices is expected to hit transport operators on two fronts. They were already struggling to keep a check on their dropping utilisation rates by lowering freight rates. Now the sharp rise in fuel cost.
Studying the operating dynamics on the Mumbai-Chennai route, it has been observed that the recent hike of Rs. 5 per litre in diesel prices has resulted in an additional burden of 14 paisa per km on the operating cost of transporters, squeezing up the gross margins by almost 262-310 bps.
The ensuing festive season might provide some respite to transport operators, although they have raised freight rates by almost 15 per cent immediately after the announcement of the diesel price rise. National Research feels a rise of such magnitude would be momentary in the light of subdued freight demand. However, the festive season will provide them an opportunity to increase freight rates and thus negate the impact of the rise in cost. The increase in average freight rates would be in the range of 8-10 per cent.
All said and done, the macro-economic scenario still remains gloomy due to low consumer demand and subdued growth in agriculture following the below normal rainfall in most regions of the country.
Further, high inflation and interest rates have also been a deterrent to growth in demand for capital goods, leading to slump in industrial activity. The overall impact of economic impediments has led to a substantial fall in freight demand. The Government move to allow 51 per cent FDI in retail will create enormous opportunities for transport operators. However, the goods transport industry strongly feels that freight demand will remain subdued for some time.