Rising Fuel Costs Cause Fleets to Re-Think Selector Choices

Since January 1999, the price of gasoline has increased almost 50 percent, which, alone, has increased fleet budgets an average of $500 per vehicle. Although the increase in fuel prices will have no dramatic impact on total number of fleet vehicles ordered for 2001, there is a growing chorus of fleet managers who are saying that elevated fuel prices will result in modification of their fleet selectors, in particular on whether or not to include sport/utility vehicles.

“We cut back on SUVs last year and plan to do so again this year,” said Jim Will, fleet administrator for Ashland Chemical in Dublin, OH. Likewise, ABM Industries is decreasing the number of SUVs it purchases. “They are too expensive, in terms of acquisition cost, as well as operating cost, which has increased with the price of fuel,” said Ellie Walsh, vice president & director of administrative services for ABM Industries in San Francisco, CA.

The concern about fuel prices crested when the price of a gallon of gas hit $2.30 in the Midwest in June 2000. It made nationwide headlines and prompted the Federal Trade Commission to consider an investigation to determine whether oil companies are overcharging customers at the pump.

The National Association of Fleet Administrators (NAFA) sent a letter to the U.S. Department of Energy and the U.S. Environmental Protection Agency stating, “The unconscionable increase in fuel costs is creating real hardships for corporate fleet operators, utilities, and government agencies.” According to NAFA President Sal Giacchi, “Many utilities and corporate fleets are unable to reduce the amount of essential business travel and face dramatic and unanticipated expenses.”

However, relief appears on the horizon. Economists are predicting that the cost of gasoline will decrease to a nationwide average of $1.50 in the fourth quarter of 2000. However, even this decline represents a 17-percent increase in the price of gas from 12 months earlier.

“The recent rapid rise in gas prices gave us a reality check on how important and how quickly fuel can affect fleet expenses,” said Jim Anselmi, director, fleet operations and travel for Lorillard Tobacco in Greensboro, NC. “Couple this with rising interest rates and we could see substantial differences in lifecycle cost analyses and ultimately vehicle selectors and selection.”

Not since the 1970s has fuel economy been such an issue with fleet managers.

“Higher fuel costs may be the final straw forcing some companies to downgrade their selector,” said Ed Potkay, fleet manager for Cumberland Farms in Canton, MA. “We’re always faced with costs vs. morale building, and in light of further increases in lifecycle costs, this may help slant the balance more toward costs than morale.”

Some fleets have already commenced to downsize to smaller vehicles for some work applications.

“The size of the vehicle we purchase will change due to the escalating fuel prices and downsizing to a certain degree will take place in those areas where a smaller vehicle is available,” said John McCorkhill, fleet services director for the city of Lynchburg, VA.

The growing importance of fuel costs in influencing selector decisions is also stressed by Karen Fries, corporate fleet operations manager for SC Johnson & Son in Racine, WI. “I think the issue of average gas mileage is going to play an important part in many decisions,” said Fries. “For the past few years, there was a trend to use SUVs for employee morale and excellent resale, but I believe that will go away now that gas costs have risen so dramatically.”

Seconding that is Kathy Jebbett, field and fleet expense coordinator for Cooper Tire & Rubber Co. in Findlay, OH. “We will be closely watching gas prices,” said Jebbett. “This may determine the kinds of vehicles we offer for the 2001-model year, especially SUVs.”

Even fleet management companies, which operate internal fleets used by their sales personnel, are re-examining the use of SUVs. One such company is AMI Leasing, headquartered in Worcester, MA. “Savings begin at home, and at AMI we are currently reviewing our internal company vehicle selection list – and SUVs are being looked at quite carefully,” said Tom Hutchins, senior vice president, auto division of AMI Leasing. Several of AMI Leasing’s larger clients follow the lessor’s lead in selector vehicle recommendations. “As companies try to balance economic savings with employee morale, these clients hold off on issuing their selector until AMI finalizes its own,” said Hutchins.

Increased fuel costs are also a key concern for public service fleets. “The 2001 market will be very much influenced by fuel prices. If they do rise, I believe that many companies will opt for less new-vehicle expenditures to offset the gain in rising fuel prices,” said Ruth Alfson, fleet manager for Seminole County in Florida. “The SUV market may flatten and see a slight decrease, since those vehicles are typically fuel guzzlers, and there will be a small upturn in acquiring more efficient vehicles.”

Tom Sours, who manages the fleet for State Farm Mutual Insurance in Bloomington, IL, likewise foresees the fleet market re-examining the inclusion of small vehicles in their operations. “I see the market being driven to more fuel-efficient vehicles, namely cars and, in some cases, mini SUVs, provided the pricing and content are competitive,” said Sours.

Giacchi agrees that as fuel prices increase, or stay elevated, fleets will be looking at more fuel-efficient vehicles. “This may have an impact on their buying and selector decisions as a way to control their fuel budgets,” he said.

Other fleet managers agree, but cite the limited number of extremely fuel-efficient vehicles on the market that can meet fleet applications.

“Fuel costs will have more of an impact on fleet budgets for model-year 2001, but since there is a lack of extremely fuel-efficient vehicles, I don’t expect much shifting in buying patterns,” said Henry Paetzel, manager auto fleet services for General Mills in Minneapolis.

Some fleets are looking to scale back on the offering of SUVs as perk vehicles to their drivers.

“For many companies, SUVs are being used where the application says a car would work just as well. We could see a movement to ‘autos in’ and ‘SUVs out,’” said Charles Bowen, fleet director for Rollins Inc. in Atlanta. “Higher fuel costs for these vehicles have only compounded an already-high operating cost. Their resale values have long since come back down to earth.”

However, removing SUVs from selectors will not be an easy task, especially if driver morale is a consideration. “While we recognize the increased costs of SUVs, it’s very hard to remove them when the company is having a good year and when they are chosen by about 99 percent of those eligible,” said Paetzel.

Although 3M does not anticipate any dramatic changes in its fleet buy for 2001, “I suspect that some fleets will be re-thinking things, especially if they have been buying less fuel-efficient vehicles such as SUVs,” said Dick Martinson, manager, fleet operations for 3M in St. Paul, MN.

A similar observation is made by Potkay of Cumberland Farms. “We will keep a closer eye on higher expense vehicles such as SUVs because of a potential drop in resale value due to lower MPGs and their related costs, which will continue to hurt the resale market and our ability to justify vehicles such as SUVs,” said Potkay. A similar point is made by Teri Nelson, fleet administrator for Cargill in Minneapolis. “I think the SUVs will experience the most backlash from high fuel prices.”

One beneficiary of higher fuel prices will be the fuel card providers. “They provide a source of control for fleet managers in monitoring and controlling fuel budgets,” said Giacchi.

Reinforcing this observation is the fact that Wright Express (WEX) exceeded its universal fleet card growth plan by over 100 percent during the first quarter of 2000. “We have noted several indicators of greater interest in fleet cards, one of which was the even greater need to control fleet costs due to the increase in fuel prices,” said Paul Dioli, vice president of marketing for Wright Express in South Portland, ME. “As the expense to operate a vehicle increases, the need for greater control likewise increases.” Applications for fleet fuel cards on the WEX website have increased by 56 percent.

One suggestion to control fuel costs is offered by Bob Brown, manager, vehicle fleet and operations for Xerox. “Fleet managers need to look at fuel hedging as an alternative so you can lock in a price for a period of time,” said Brown.

Rising Interest Rates Make Holding Costs More Expensive Many fleets will be paying close attention to the upcoming meeting of the Federal Reserve on Aug. 22, 2000. In a survey last June, 39 economists predicted that the Fed will increase short-term interest rates by 25 basis points at the August meeting and another 25 basis points in one of its three remaining meetings in 2000, which are scheduled for October, November and December. The last rate increase occurred on May 16, 2000, which raised the Prime Interest rate to 9.50. The Prime Rate is defined as the base rate on corporate loans posted by at least 75 percent of the nation’s 30 largest banks.

The relentless increase in interest rates by the Federal Reserve, which has raised rates seven times in 17 months, is beginning to cause uncertainty among fleets.

“A rate hike can add thousands of dollars in interest that were unbudgeted,” said Mark Conroy, vice president of marketing for LeasePlan USA.

Potkay of Cumberland Farms echoes this sentiment. “What accompanies the interest rates hikes is uncertainty. Although most bigger companies will buy their usual quantity of vehicles, things will begin to tighten up and further competition for less dollars will take place, which will continue to hurt the resale market.”

Bowen of Rollins Inc. agrees. “Holding costs continue to increase as we witness the effect of higher interest rates on expensive vehicles,” he said. As a result, caution is being expressed by some. “The cost of business is going up,” said Jack Rennels, vice president of marketing for Emkay Inc., a fleet management company headquartered in Itasca, IL. “Interest rates will continue to climb and this obviously translates to higher costs for everyone.”

New-Vehicle Price Restraint Will Keep Acquisition Costs Down As manufacturers have begun releasing 2001 new-vehicle pricing, it is becoming evident that this will be the fourth consecutive year that automakers have attempted to hold the line on pricing.

On June 22, 2000, Ford announced that it will raise the average MSRP on 2001 Ford models by 0.8 percent or an average of $198 per vehicle. In fact, Ford argues that it is actually cutting prices by 0.3 percent on a comparably-equipped basis.

General Motors announced pricing earlier in June for its 2001 cars and trucks with the average increase being $30 on comparably-equipped 2001 vehicles. As of press time, DaimlerChrysler had not released its 2001 new-vehicle pricing.

“Worldwide excess capacity and global competition are yielding very attractive pricing on many new models,” said Scott Pattullo, vice president of Wheels Inc., a fleet management company in Des Plaines, IL. “Out of economic necessity, manufacturers continue to slash sticker prices and offer more compelling auto incentives in order to boost sales. As a result, fleet managers looking to purchase model-year 2001 vehicles are in a better financial position than ever.”

According to David Littman, an economist for Comerica Bank, and who compiles the institution's Automotive Affordability Index, cars have become more affordable in the first quarter of 2000 compared with the same period in 1999.

Factors Influencing Change to Commercial Fleet Selectors

More and more fleets are citing safety considerations by both drivers and their company as an influencing factor in new-vehicle selection.

“Many more drivers are asking about safety ratings before they select a vehicle, this is something that I have not seen in the past,” said Joe LaRosa, manager – fleet administration shared services for Bristol-Myers Squibb.

Some fleets are streamlining their selectors to facilitate online ordering of new vehicles.

“I am going to try to eliminate the wide variety of vehicles offered in the past to ease ordering,” said David Fern, fleet manager for EZGO Textron. “The smaller number of choices will make online ordering with PHH easier and faster. I still emphasize safety first.”

Other factors influencing selector development is acquisition of other companies, as in the case of Cooper Tire, which recently acquired two companies. “Our selector will be changing because of the companies we purchased,” said Jebbett of Cooper Tire. “These companies supply original equipment parts to the automotive industry. We will be adding more makes and models to our selector list.”

Economy Forecasted to Remain Strong for Balance of 2000 CY

“In total sales, the automotive industry in the 2000 calendar year looks a lot like 1999,” said Chris Cortez, vice president, fleet operations for DaimlerChrysler. “The factors that influenced 1999 include high stock prices, a strong economy, and high manufacturer incentives. With stock prices a bit more restrained and rising interest rates, 2000 will likely have a different curve to it. We spent 1999 climbing up to a peak, and now see 2000 edging back down from that peak. It will still be a very strong year,” said Cortez.

According to Cortez, another factor in the strong sales is the demographic change in the country’s population. “Almost half of new vehicles are purchased by people between the ages of 45 and 64. That is where the baby boomers are today and that is where the buying clout is,” said Cortez. “Forty-five percent of vehicles are bought by that group and 78 percent of the total increase we are seeing will be in that age group in this decade. That bodes well for new-vehicle sales.”

The parallel between the consumer economy and the fleet management economy is cited by Hutchins of AMI Leasing. “There are parallels between the two. Unemployment is low and employment is stable, and there are fewer and fewer companies being merged, sold, or bought,” said Hutchins. “All in all, the strength, stability, and, yes, growth we’ve experienced in the 2000 calendar year should carry over to the 2001-model year.”

With the automotive industry producing vehicles at record levels, with the seasonally adjusted annual rate of sales (SAAR) running at 18.4 million in April, the commercial fleet business, likewise, has been extremely buoyant for both cars and trucks for 2000, said Jerry Frick, commercial fleet sales director for North American Fleet, Lease and Remarketing Operations for Ford Motor Co. “The truck market is even stronger, with our biggest issue being able to supply the needs of our customers on a timely basis,” said Frick. “To meet this demand, Ford has increased the capacity of key vehicle lines and key commodities for the 2001-model year.”

The fleet dealer perspective on the 2001-model year is offered by Chuck Scharmen, fleet director for the Tamaroff Fleet Group in Southfield, MI. “A tight labor market, confidence in the national economy, as well as strong consumer spending, have presented fleet dealers with new challenges and kept our business moving briskly. Because of these factors, competition is keen and we anticipate a strong finish to the 2000 business year,” said Scharmen.

Strong consumer confidence in both teh individual and fleet purchasing sectors were also cited by Rick Snyder, senior vice president, fleet services for Enterprises Fleet Services in St. Louis, MO, despite the many increases in the discount rate in the past year. "Sales of light-duty trucks and vans, along iwth SUVs, have been exceptionally robust even though fuel has almost doubled in price," said Snyder. "However, factors such as the stock market, fuel prices, and federal discount rates can all negatively affect buying confidence adn sales, " he added.

One thing that could impact 2001 sales in slow order-to-delivery. "The 2001 market will be a great year if the motor companies can build my requests when required," said Fern of EZGO Textron. "This year, I have had orders canceled after six-plus months and had to buy out of stock. Also, long and unanticipated lead times on some medium-duty trucks have caused problems. We were not told that orders placed for these would have a long delay due to equipment shortages, which caused problems for our service fleet."

However, others express some reservations about the 2001 market.

"The market for next year appears a little cloudy right now because of gas prices, interest rates, and forecasted growth," said Bowen of Rollins. "Interest rates and fuel cost are influencing the retail buyer right now. This represents about 75 percent of the U.S. market and we're certainly seeing the influence of gas prices on the SUV and van market. Commercial fleets have many of the same issues.