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Market Trends

The Cancer of Higher Fuel Prices

June 12, 2007, by Mike Antich

Like a cancer, the malignant effects of the high cost of fuel have spread throughout the fleet industry. Many companies have seen fleet fuel expenses double in recent years. Especially hard hit are truck fleets as the cost of diesel has risen at a faster rate than unleaded gas. These fleets are now paying more for diesel due to the higher price of mandated ultra-low sulfur diesel. The increase in gas and diesel prices gives us an ongoing reality check as to how quickly fuel can dramatically increase fleet expenses.

The high cost of fuel has wreaked havoc on fleet budgets and caught the attention of senior management. At present, fuel costs are still viewed as the cost of doing business. However, early indications are that fuel economy considerations will play a much greater role in selector decisions in 2008 than in previous model-years. Ongoing high fuel costs are prompting fleets to establish minimum mpg requirements for vehicle inclusion on a selector list. However, the reality is that fleet application restricts vehicle choices. Most fleets have limited options to change their selectors and still get the right vehicle for the job.

Feeling the Pinch
The high cost of fuel has a domino effect in increasing prices of other fleet-related commodities. All major tire manufacturers increased tire pricing due to rising oil costs. In fact, most had multiple price increases. These increases led to an 8-10-percent increase in tire expense across all vehicle segments. All fleets are adopting compensatory strategies to reduce fuel expense. Many fleets are not only looking to minimize fuel costs, but they are seeking to reduce their CO2 emissions as part of a larger corporate initiative. Fuel management exception reporting is being modified to be more robust. Some fleets have been able to deflect the impact of fuel increases by shifting to more fuel-efficient vehicles. These fleets are re-evaluating the use of SUVs or have moved to smaller SUVs. Fleet policies have been changed so AWD and 4x4 are only allowed where absolutely essential.

Other fleets are transitioning from cargo vans to crossovers to reduce fuel expenditures. Fleets across the board are looking to “right-size” cargo vehicles to minimize fuel expenditures, but are restricted by fleet application requirements. Increasingly, it is the lack (or future lack) of van product that is prompting fleets to consider crossovers. Fleets that are environmentally conscious or have green initiatives are acquiring hybrid vehicles. Although hybrid fleet sales volume continues to be negligible in terms of the overall industry, it is a growing segment. Several fleets have already made the commitment to become all-hybrid fleets.

To decrease fuel costs significantly, fleets have three options: switch to a smaller vehicle, specify a smaller engine, or both. The concern with downsizing is that it will negatively impact the performance, safety, and morale of drivers. For instance, smaller vehicles often can’t fulfill business needs, due to reduced room to carry samples, materials, and equipment. Vehicle downsizing also raises liability concerns over driver ergonomics and safety.

Fleets have sought to increase overall fleet mpg by spec’ing four-cylinder engines instead of six cylinders, but the decreased power leads to other maintenance and safety issues. A more promising strategy is telematic solutions to reduce fuel spend by optimizing trip routing and curbing unnecessary idling. Early fleet pilot programs show the efficacy of telematic solutions.

Shifting Costs to Employees
Reimbursement discussions are re-emerging in reaction to the high cost of fuel. The motivation behind this is pressure at some companies to reduce the overall number of company-provided vehicles. One area receiving increased behind-closed-door scrutiny is driver eligibility. The high of cost of fuel is prompting companies to reassess and tighten employee eligibility to receive a company vehicle as a way to reduce fleet costs. Historically, one criterion for a company vehicle assignment is if an employee drives more than 12,000-15,000 business miles per year. Several major fleets are studying the feasibility of increasing the annual mileage threshold. Those employees unable to meet the new criterion will be shifted to driver reimbursement.

The dramatic spike in the price of fuel has also increased the cost of allowing personal use of company vehicles. A growing number of companies now question whether they charge employees enough for personal use to offset the increased cost of fuel. As the cost to provide this benefit increases, companies are deciding to share this increased cost with their employees.

What Will be the Pain Threshold in 2017?
Fast forward 10 years into the future. Imagine that the price of fuel has continued to remain above $3 per gallon or higher for the past 10 years, with prices seasonally spiking above that. What long-term impact will this have on the attitudes of senior management struggling to control indirect costs or to decrease the carbon footprint of the corporation? As one fleet manager told me: “What happens to the fleet when the expense to the company is more significant than the value to the employee?”

Let’s pray this cancer goes into remission.

Let me know what you think.

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Author Bio

Mike Antich

Editor and Associate Publisher

Mike has covered fleet management and remarketing for more than 20 years and entered the Fleet Hall of Fame in 2010.

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