KordaMentha Research Unit
Sector: Road Freight
Service Line: Corporate Recovery Services
• Over the previous five years, the road freight transport industry has
experienced limited growth in operating margins and a decline in
asset utilisation. These reflect both the sustained competition and an
increased investment in logistics infrastructure within the road
transport industry over this period.
• The road freight transport industry is facing increasing competition
from the expansion of existing market participants into substitute
services such as rail and sea freight transport services. Examples of
such investment include the investment in Pacific National Pty Ltd
(rail/sea freight) by Toll Holdings Ltd and Patrick Corporation Ltd
and the potential investment in FCL Transport Pty Ltd (rail/sea
freight) by Patrick Corporations Ltd.
• The performance of the road freight industry is heavily influenced by
the performance of ‘up-stream’ industries, specifically:
− Wholesale and retail trade;
− Agriculture; and
• The industry experienced a real revenue growth rate of
approximately 4% in the 12 months to June 2004 due predominantly
to the absence of significant downturns in ‘upstream’ industries.
However manufacturing, wholesale and retail trade, and construction
have all slowed over the last 6 to 12 months, prompting concerns that
the road freight transport industry faces negative real growth in the
• Due to low barriers to entry and a large number of generic suppliers,
price competition is fierce. Increasing crude oil prices have also
increased pressure on margins across the industry as service
providers have absorbed some or all of these cost increases in the
face of price competition.
Source: AAA Petrol Price Monitor
• Facing industry maturation, some market participants have exploited
growth opportunities through the investment in, and provision of
‘value-added’ services of integrated logistics and warehousing.
However, this has resulted in an increased risk of the service
providers’ reliance on a small number of customers.
Profit and Loss Analysis Revenue
• Secure contracted revenue at profitable margins is critical to
underpinning ongoing viability.
• Due to the high level of price competition, and in the absence of
contracted revenue streams, small to medium size operators are
generally price takers, and consequently absorb any increase in
direct costs, specifically fuel costs, resulting in an unsustainable
erosion of margin.
INDICATIVE COST STRUCTURE • In the absence of a secure contracted revenue base, the indicative
cost structure analysis demonstrates the importance of scale on
profitability, in light of relatively small profit margins. Furthermore,
Vehicle running expenses 27.2% it indicates the requirements of service provision to be correctly and
Rent 7.7% accurately costed in order to protect margins.
Capital expenditure 5.7%
Depreciation 5.0% • The majority of costs are represented by wages and fuel, i.e.
Purchases 1.7% direct variable costs. With an increase in crude oil prices of
Profit 3.0% approximately 60% over the prior 24 months and in the absence of
Source: the supplier recovering increasing fuel costs via an index-based levy,
IBISWorld - Road Freight Transport in Australia,
16 February 2005.
the proportion of costs represented by vehicle running expenses has
• Depreciation and maintenance expenses should be considered
within the context of the service provided. Assets employed in an
agricultural context (livestock transport in difficult terrain) will have
shorter useful lives than specialised assets used in long haul
• Wages and subcontractor expenses should also be considered
within the context of service provided. The workforce of those
operators providing services subject to seasonal/sporadic
fluctuations, i.e. livestock transport, tend to be comprised a greater
proportion of subcontract labour.
• Whilst the industry is predominantly labour intensive, capital costs
can become substantial. Compliance and safety expenditure in
respect of the transport of hazardous materials, and OH&S
legislation, such as ‘working at heights’ obligations, may require
significant capital outlays.
• The cost of tyres typically represents around 3%, depending on the
desire of the service provider to use ‘recaps’.
• The ability of a business to sustain non-recurring, extraordinary
losses such as major vehicle repairs, environmental reparation or
even expenses relating to freight theft can weigh heavily on the
ability to operate as a going concern.
Balance sheet issues Fleet Management
• Small to medium size operators using debt or lease facilities to
finance fleet and equipment generally require very high utilisation
rates/load factors to generate positive cash flows. Operators using
equity to finance fleet and equipment can survive on lower utilisation
t rates/load factors but instead forego a return on capital employed.
Lease term • Our experience indicates that the importance of sourcing or
Asset useful life
matching appropriate assets to forecast revenues is often
overlooked by management, i.e. inappropriate assets for job
requirements. Furthermore, when financing fleet or equipment, a
mismatch can exist between the finance term and useful life of the
relevant asset, resulting in unsustainable cash flows.
• Insurance premiums can be reduced with an increase in aggregate
Lease term excess, a potentially costly method of self insurance. Consider the
Asset useful life
area of freight specialisation i.e. livestock transport vehicles operate
Source: KordaMentha internal analysis in rough terrain, long haul general bulk confined to highways.
Cash flow issues
• In the absence of an Electronic Data Interface system (“E.D.I.
system”), incorrect allocation of cash receipts from high turnover
debtors can arise, diminishing the entity’s collection capacity,
particularly in the event of a formal appointment. Debtor
reconciliation can be a long and costly process. EDI essentially is an
on-line invoicing facility between customer and service provider.
Management and Systems KPI’s
• The ability to capture relevant utilisation, earnings and costing
rates is of crucial importance. Relevant basic controls, on an hourly
or per kilometre basis depending on billing arrangements, are:
− Revenue per kilometre/per hour;
− Revenue by customer;
− Capacity measures such an average tonnes/litres/head per
kilometre by customer;
− The appropriateness of practices such as back loading and
mass management to improve performance;
− Tyre/maintenance cost/per kilometre; and
− Daily kilometres travelled/hours travelled.
• Our experience indicates this approach is crucial both to substantiate
increases in cartage rates or close unprofitable routes to stabilise a
• Management skill is crucial to the success of small to medium
operators, particularly the ability to interpret relevant information.
Our experience indicates that the decision as to the provision of
service can often be based on poor job costing methods. The ability
to monitor costs to protect thin margins is of paramount importance.
• Generally management have been in and around transport companies
for most of their life and have not worked in other industries. In
many cases, management style and thinking is significantly
influenced by ‘old style operators’ and practices.
• Many small to medium sized operators in the industry have lacked
the funding to invest in management training and development
and have been unable or unwilling to pay market rates for good
middle to senior management. This often contributes to poor
• Pressure on management will increase as customers with highly
skilled supply chain people, particularly retailers, continue to out
negotiate operators into agreeing to uncommercial contract terms.
Exit strategy considerations
• In circumstances of financial distress, our experience indicates that
directors’ valuations of fleet and assets are often optimistic.
• In the event of a ‘trade-on’ scenario, valuation and existence
verification of fleet and assets can be a costly and time consuming
matter, particularly if the entity operates in remote locations.
• Environmental cost can diminish the realisable value of land assets.
These costs arise principally from the storage of hazardous chemicals
such a fuel, oil and vehicle cleaning chemicals. Furthermore, lack of
containment around vehicle cleaning bays can create significant
• On appointment, the provision of, or access to, tyres, spare parts and
fuel may be hampered by retention of title claims by various
creditors. In particular, entities with a broad geographic coverage
usually rely on fuel cards for access to fuel. The support of creditors
suppling fuel can therefore be critical.
• As vehicular condition represents a large risk in the context of a
‘trade-on’ scenario (in addition to a diminution in realisable asset
value), the ability of the entity to provide an accurate assessment as
to fleet condition is of great importance. Our experience indicates
that vehicular condition declines in the event of financial distress, but
the employment of a robust maintenance program can mitigate this
• The risk of responsibility for goods in transit should be mitigated
as best as possible. Whilst some customers may require the service
provider to bear this risk, some entities choose to implicitly adopt
this risk and self insure against such a risk.
• On appointment, assets in the possession of external repairers with
an unsecured claim can give rise to possessory liens being exercised,
hampering the facilitation of a trade-on strategy.
$ Average Sales to Fixed Assets
• Road freight is the dominant mode of freight transportation in
3.00 Australia with around 65% of domestic freight being transported by
road. The share of road freight on the major Australian freight
corridors compared with other transport modes is as follows:
1.00 − Melbourne to Sydney 89%
0.00 − Melbourne to Brisbane 79%
2000 2001 2002 2003 2004
Average Sales Trend line − East coast to West coast 23%
Source: KordaMentha Bloomberg analysis
• The majority of industry revenue is derived from short distance
haulage (56%), compared with intrastate long distance haulage
(23%) and interstate long distance haulage (21%).
• The concentration of turnover is low, with K & S, Linfox, Toll and
Heggies Bulkhaul accounting for approximately 18% of market
turnover. Consolidation is anticipated to increase following the
2000 2001 2002 2003 2004
current expansion of these participants into other modes of freight
Indus try revenue Real grow th
transportation, and the consequent offering of integrated intermodal
Source: KordaMentha Bloomberg analysis logistics solutions. The development of rail infrastructure,
predominantly resulting from these expansions, is considered the
main source of competition to the road freight industry in the
medium to long term. This process will be hastened with the Federal
Government’s Auslink investment program.
• The Auslink funding package announced by the Federal
Government in June 2004 aims to improve national, interregional
and international logistics. Despite the program’s direct investment
in both rail and road based projects, the aim is to make rail rates
more competitive with those offered by road transport operators. It
is envisaged that the market for long distance bulk and general
freight i.e. freight that is less time sensitive, will experience further
competitive pressures as a result of the Auslink program.
• Given the reliance of the road freight industry on ‘up-stream
industries’ and the competition posed by increased investment in
rail transport, growth in road freight industry revenues is
anticipated to be limited.
• Road freight operators have been subject to increasing diesel fuel
prices on the back of ever increasing oil prices, with no offsetting
appreciation in the $AUD to offset the rising price of oil. Our
experience indicates that the purchasers of freight services are
hesitant to absorb these increasing costs. The margins of smaller
scale operators often suffer, due to their weak bargaining position.
• Federal Government AusLink site
• Federal Department of Transport
• Transport Industry news articles
• Diesel fuel prices
Contact Craig Shepard David Winterbottom
03 8623 3334 02 8257 3030
Robert Hutson Bill Buckby
07 3225 4949 07 4724 5455
Brian McMaster Stephen Duncan
08 9221 6999 08 8223 8106
About The KordaMentha Research Unit
KordaMentha partners undertook the first voluntary administration in Australia, the largest voluntary
administration in Australia (Ansett with 42 companies, 15,000 employees and >$1 billion assets) and
the largest group of voluntary administrations in Australia (Stockford with 84 companies).
The strength of the KordaMentha experiences and our expertise makes us well placed to monitor and
evaluate issues and developments in the insolvency industry and to recommend changes.
Statement of Direction
The KordaMentha Research Unit aims to:
• Develop intellectual property
• Share our knowledge of specialist topics with insolvency stakeholders
• Develop balanced solutions for issues in the industry. We will do this by preparing position papers
on topics of interest, and encouraging discussion with a view that changes to the industry will
The KordaMentha Research Unit is headed by Andrew Malarkey (firstname.lastname@example.org).
All KordaMentha Partners and Directors contribute to the KordaMentha Research Unit.
The KordaMentha Research Unit has conducted research in a number of areas, including:
• 301: Ansett - Part 5.3A and Chapter 11
• 302: Melbourne Development and Construction – A Period of Consolidation
• 303: Large and Complex Administrations – The Courts and Ansett
• 304: Regulatory Review of Australia’s Insolvency Laws
• 305: Employee Entitlements
• 306: Rehabilitating Large and Complex Enterprises in Financial Difficulty
• 401: Melbourne Residential Investment Market – Retraction and Consolidation
• 402: Grouping of Entities in the Event of Insolvency
• 403: Lewingtons Transport Group – A Case Study in Turnaround
• 404: Tassal Turnaround – A Case Study in Turnaround
• 405: Overview of US Chapter 11
• 501: Industry Vitals – Wine Industry
• 502: Property Investment Due Diligence and Risk Management
• 503: Shareholder Claims – Shareholders want some of the credit
• 504: Industry Vitals - Clothing Wholesalers
• 505: Industry Vitals – Transport Industry
• 506: Industry Roundup – Agribusiness December 2005
• 601: Industry Roundup – Agribusiness January 2006
• 602: Industry Roundup – Agribusiness February 2006
• 603: Industry Roundup – Agribusiness March 2006
These papers can be accessed via the KordaMentha website – www.kordamentha.com
This document is intended for discussion purposes and should not be relied upon for any other purpose. No part may be reproduced
or transmitted by any process or means without prior written permission of the Authors.