Last week the UK Government’s plan to restimulate the economy proposed tax cuts and increased borrowing against the advice of most economists, HM Treasury and the International Monetary Fund. This equates to the managing and finance directors of a company deliberately reducing prices and increasing costs without a clear plan to deal with the outcomes.
Over the last few months we have seen prices rise in road vehicle fuel (and then fall slightly as this column has explained); however further challenges are predicted for the transport sector and its users.
Five criteria determine transport costs – interest rates, leasing charges, currency exchange rate fluctuations, fuel prices and government expenditure cuts. And through the supply chain these will affect the prices we pay for our retail purchases.
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The ‘base rate’ set by the Bank of England (the UK central bank) affects all bank lending rates in the UK. This is predicted to rise from below 1.0% (February 2009 – May 2022) to over 5% by the year end. Some predictions suggest 15%; last seen in 1981.
Interest rates affect the investment plans of most companies from local taxi, bus or garage businesses to multi-national operators. Directly or through the supply chain.
Low interest / leasing costs in recent years has encouraged transport investments. TfW / Welsh Government £1.5 bn investment in new trains and valley lines electrification; extensive rolling stock renewals / electrification in Scotland and England and the £50bn HS2 plan – all could face funding cost increases.
A large proportion of transport fleets are not owned by the companies whose brand they bear, but are leased from finance houses. Leasing costs will depend on when the lease was let. Existing leases were based on low rates with some degree of indexation. For new leases current higher rates will apply; unless, that is, leasing companies are delaying funding until the borrowing market settles down.
The pound (£) sterling, while for some time relatively stable, is now losing value in relation to the US dollar, the Euro and the Japanese Yen – the world’s major currencies; and even the Albanian Lek.
All airlines, bus and rail companies can ‘hedge’ the purchase of fuel. This means buying fuel in advance when or where the price is lowest in anticipation of future price increases. They assess the future market price or create a market where their price is accepted. This is often months (but could be only days) earlier and works if prices rise. However, eventually the hedge priced fuel will run out, current prices will appertain and costs will rise. Of course there is a risk future prices will fall; so simply put it is informed gambling.
For the international airline industry leasing charges, aviation fuel, (paid for in US dollars) landing charges and maintenance / operations are major costs (paid in the local currency). Thus, while the contract price remains the same, the payment in sterling will rise and in consequence so will fares and package holiday prices together with spending abroad.
Currency price variations will also impact on vehicle maintenance, spare parts and tyre costs which the supply chain brings from all industrial countries.
For bus companies this could mean cutting services , increasing fares or asking for greater subsidies and increased concessionary fares income.
Rail companies themselves are protected by the UK (for England) Welsh and Scottish governments taking on all the cost and revenue risks and discounted excise duty on diesel (currently £1 per litre; 2021 as low as 50p), though still affected by the pound to dollar exchange rate. Network Rail has seen overhead wires’ electricity prices rise by only 100%; well below the predicted figures elsewhere in the economy.
Essential travel costs for work, school, and health purposes are hard to avoid. Leisure travel by train has increased as we recovered from the pandemic as passengers took advantage of the removal of travel restrictions and avoided the increased car travel costs. But will these financial changes, price rises (and the unreliable service consequent on the strikes) now adversely affect travel.
Finally, as we move into winter travel levels generally fall, and the promised cuts in government expenditure may also affect subsidised bus and rail services
The transport industry faces economic conditions not experienced for many years – a pandemic followed by financial uncertainty not provided for in current financial models. It is too soon to see exactly what transport’s economic future will be – but it will be challenging both for suppliers and buyers. Of that there is no doubt.
Professor Stuart Cole, CBE, is Emeritus Professor of Transport (Economics and Policy), University of South Wales
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