The unit economics of road transport in India
In this article, we see that the potential earning of a single truck owner can range anywhere from ₹8000 for 5 trips/month to ₹100000 for 10 trips/ month. How a single additional trip can make significant difference in the earning of the truck owner. The importance of safe driving and the advantage of middle-men in this technology absent industry.
Background
The road transport industry in India is highly fragmented. This can be segregated into full truck load (FTL) and part truck load (PTL).
The majority of the market is full truck load and it is estimated that a large chunk of the service providers are small fleet owners (less than 5 trucks per owner) that are highly dependent on external financing
The industry lacks transparency in terms of real time supply and demand and heavily depends on regional middle men. This results in rigidity in pricing and lower efficiency in the system
Bottom up cost calculation
Let us evaluate the unit economics of a standard trip for a small fleet owner using the bottom up approach. Further, we will try to understand the challenges faced in the industry and potential solutions for the same.
Potential trips and distance in a month
Considering an average speed of 35km/h with typical distance of 1200 km per trip, the trip would take 34 hours. Further, the typical loading and unloading time at the warehouse are 24 hours each. We are considering a wait time of 12 hours post unloading for the truck to get the next truckload. This would mean the total trip time of 94 hours in the base scenario.
In the base scenario, this would translate to a total of 7 trips or ~8400 km per month covered by a truck. Please note that this distance will be used for calculating the per km cost for fixed costs such as driver salary, regulatory, insurance, asset cost, and so on.
Considering the variation in wait for load, time taken to unload or load the truck; 4 potential scenarios are listed in the table below for the truck to complete the number of trips and cover the total distance in a month
Asset cost
Cost of a standard 32 ft multiple axle truck: ₹25 lakh + taxes +body cost + modifications = ₹35 lakh. Assuming this to be finances with 10% interest cost for 15 years (life of asset), the monthly EMI will be ₹37,611/-. For the base scenario ~8400 km this translates to ₹4.48/km
Further, the regulatory and insurance cost is estimated to be ~₹50,000 / year. For the base scenario of 8400*12 = 1,00,800 km per year this would translate to ₹0.5/km.
Maintenance and tyre cost
A standard 32 ft mxl truck will have 10 tyres each costing a ₹20,000/- with a life span of 1,50,000 kms. This makes the tyre cost around ₹1.33/km. Over this the engine and other maintenance cost of the truck are estimated at half of this, thereby the maintenance and tyre cost is around ₹2/km
Driver cost
A standard truck will have 2 drivers each with a salary of ₹25000 per month. This means ₹50000/- per month for the base scenario of ~8400 km, this would mean ₹6/km
Fuel cost
Undoubtedly, the maximum contributor in the expense is the fuel cost, which has been on a rise since the last few years. The typical mileage of a truck is 4.5 km/ltr. With the diesel price of ₹90/ltr, this translates to the expense of ₹20/km.
Toll tax
Another important part of the trip expense is the toll tax. While for a normal car journey this cost would be upto ₹2/km, for a 32 ft multi axle truck with 14.5 ton weight, the toll cost average PAN India as on date is ~₹5/km. One may check on major routes Delhi-Mumbai, Delhi-Kolkata, Delhi-Chennai, Mumbai-Kolkata, Mumbai-Chennai, Chennai-Kolkata on http://tollguru.com
Miscellaneous expense
Miscellaneous charges include cost of Parking, cost of Tarpaulin for protection from rain, cost of amount paid to warehouse labour, cost of traffic violation challans, cost of weigh-bridge, etc. These are estimated to be ₹600–₹1000 per trip and a avg cost of ₹0.5/km is taken for calculation. Please note that it is essential for the truck owner to factor in these costs
Unit economics of the trip
As on date, the average cost to the shipper is ~₹44/km. This is inline with the cost breakup we discussed above and detailed in Table 2 below. The prevailing market prices as on date (Aug 2021) are as
The trip unit economics for the base scenario discussed above is as shown in the chart below. Details of each scenario, mentioned in Table 1, is given in Table 2 below
The higher the utilization of the truck, the higher the revenue. Table 2 indicates that the earning potential of a single fleet owner is anywhere between ₹30,000/- (6 trips per month) to ₹1,00,000/- (10 trips per month).
Please note that this does not include the middle men commission. Also, for owners of large fleet, the above amount does not include the additional management human resource fixed cost.
From the base scenario of 7 trip (94 hours trip length), a difference of 12 hours per trip (consider difference in warehouse loading + unloading + wait time for next trip) results in impact of ± potential revenue of ₹20,000/- (~3k per trip). This is precisely the reason fleet owners do not mind giving an extra commission to the middle men for faster loading, unloading or identification of next truck load.
The single objective for a truck owner should be to increase the truck utilization by
a) Ensuring lower wait for next load
Fleet owner should target fixed routes and ideally have fixed clients with predictable load patterns
b) Reducing warehouse loading and unloading time
While middle men currently play a crucial role, the fleet owner can enable transparency in arrival time and location of the truck by enabling GPS. Advance intimation to the warehouse helps in timely loading and unloading of the truck as the warehouse is well informed and prepared.
One of the important and missed out factor while drafting agreement is inclusion of penalty for delayed loading or unloading. Delay in loading/unloading has a severe impact on the truck owners revenue due to impact on truck utilisation and the same impact must be passed on to the client in case of delays at their end
c) Safe driving & Accident free trips
We saw that the single most important factor is the number of trips per month. If the truck meets with an accident, while the insurance cost might cover the expense, the loss of businesses opportunity during the repair days is immense. It could take more than 20 days for repair of minor accident damage. Therefore it is worth evaluating rewards for safe driving and encourage driving within speed limit. Installing speed limiters, sleep detection camera to alert the driver should be considered as a wise investment and not as an expense
d) Reducing fuel cost by
While the focus remains on increasing the number of trips; fuel cost is a whooping >50% cost; improvement in mileage will reduce the operating expense and directly add to the owners margin. Few methods to increase the mileage are
i. Use of fuel additives
ii. Pressure monitoring devices in truck
Fuel additives and proper pressure ensure 10–15% better mileage and increase tyre life thereby reducing the fuel and maintenance cost.
This can translate to ~₹1.5/km addition in margin
Life is easy for a balanced network with equal supply and demand between nodes. In the next article we will see the impact of network imbalance on pricing and the challenge faced by many in the logistics sector. Until then….
