Extreme diesel prices are causing problems for transport companies. Rapidly rising diesel prices could be disastrous for profitability.
Unknown scenarios lie ahead for transport companies in Europe now that the supply of diesel from the Middle East is stalling. Diesel production is no longer taking place in Europe but in the Middle East, and we are dependent on the free passage of ships for this fuel. Europe has a strategic stockpile for ninety days, but what if the war lasts longer? A scenario we cannot prepare for.
Diesel prices have already risen by around twenty percent, and the end is not yet in sight. The German transport sector fears a wave of bankruptcies and has called on the government to freeze diesel prices. In the Netherlands, the TLN interest group is urging its members to pass the higher costs on to customers and to shorten the duration of diesel surcharges from monthly to weekly. According to TLN, eighty percent of transporters operate under contracts with a diesel surcharge.
Transport and Logistics Netherlands estimates that fuel costs account for 25% of a transport company’s total costs. The rapid increase in diesel prices can quickly put these companies at risk. With an operating return of 10%, the 20% increase in diesel prices roughly halves profitability. *) If the operating return is lower, the transport company could end up in the red.
Tessa de Jong, spokesperson for TLN: “We are continuously monitoring the situation for our members. Other than urgently advising them to pass the higher fuel costs on to the shipper, we are not taking any further action at this time.”
*) Calculation example 1. Transport company X makes a profit of €100,000 in one month on a turnover of €1,000,000. The profit is therefore 10% of the turnover. Of the €900,000 costs, 25% are fuel costs (€225,000) and 75% are other costs (€675,000). Suppose fuel becomes 19 percent more expensive: 267.75k instead of 225k. The profit is now only 57.25k, so it has dropped from 10% to 5.7%, almost halved.
Calculation example 2. Transport company Y makes a profit of 50k in one month with a turnover of 1000k. The profit is therefore 5% of the turnover. Of the 950k costs, 25% is fuel costs (237.5k) and 75% is other costs (712.5k). Suppose fuel becomes 19 percent more expensive: 282.625k instead of 237.5k. The profit is now only 4.88k, so it has dropped from 5% to 0.5% of the turnover.
Calculation example 3. Transport company Z makes a profit of 30k in one month with a turnover of 1000k. Profit is therefore 3% of revenue. Of the €970,000 in costs, 25% is fuel costs (€242.5k) and 75% is other costs (€727.5k). Suppose fuel increases nineteen percent: €288,575 instead of €242.5k. Profit is now minus €16.1k, so it has dropped from 3% to -1.6% of revenue. The company is operating at a loss.
These examples illustrate how a company can run into problems when key expense items rise.
