Caution: Fuel hike ahead

When European transporter providers came up with the diesel accord, they thought they had held on to their customers. But thanks to spikes in fuel prices, they’re about to lose their businesses. A lesson to providers in this region

Nobody expected fuel prices to rise in such a mercurial manner. One coping mechanism adopted by transport providers with big and small fleets in Europe – the diesel accord – has failed miserably. Gravely affected are the smaller transporters who are stuck between the diesel supplier and their customers. As diesel becomes increasingly expensive, not every costumer is willing to pay the full price for it. The diesel accord works a little bit better for larger companies.

But even the large companies are complaining. Transporters are increasingly forced to pay extra costs in advance for the customer. When the diesel accord was introduced, it seemed like a great solution. Road transporters agreed on a diesel accord with their customers, with a guarantee that they would take care of the worst fluctuations in fuel prices themselves. On prefixed times monthly or quarterly, the fluctuation of the diesel price per litre was reassessed. This amount was added separately to the basic price for transporting cargo. This system was much needed at the time. But since, the price of diesel has increased strongly between 1999 and 2000, from €.55 (US$.82) to almost €.80 (US$1.19) at the beginning of 2001. After that, a few relatively quiet years followed, but during 2003 fuel prices started to hike up again. In the second quarter of this year, the average price had risen to €1.10.

That quarterly average shows exactly where the problem lies – the diesel accord can no longer keep up with rapid price increases. Transporters who had agreed on a new accord every quarter with their commissioners, are now being forced to pay two months of cost increases in advance. Although, it is possible the advances will be recovered, the interest lost will not.

The cost of diesel contributes to a major part of a transport company’s cost. Every increase in the price of diesel makes the fuel cut go up not to mention other regular costs which are also rising. It is a misconception that larger transporters can handle the increasing costs of diesel better having paid for them much in advance. But if the price of diesel keeps on rising, and it looks like it will, an annual profit can be completely wiped away. In the Netherlands, it is widely assumed that a quarter of the companies with one to 10 vehicles will not make it to the end of the year.

Option ´Hedging’, financial protection against major diesel price fluctuations, can be an option for some transporters. For the smallest companies this is not always an option, considering that these entrepreneurs even know of the sort of financial instruments that are available. Eventually the consumer will experience the consequences of the price rise on his bank account, as expensive fuel is a source of inflation.

First published in DVV Media’s Nieuwsblad
Transport and translated by Devi Boerema