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Market Trends

The Cost of Operating a Fleet Will Increase

May 10, 2010, by Mike Antich - Also by this author

By Mike Antich

It will become more expensive to operate a fleet in the coming years. Vehicle acquisition costs will increase. Fuel prices, in all likelihood, will trend upward and maintenance costs will ratchet higher due to more companies adopting extended replacement schedules. In addition, vehicle-related taxes will increase. "Fleet costs will not only continue to increase, but costs will accelerate," said Jim Frank, CEO of Wheels Inc. Let's examine the dynamics that will force fleet expenses to escalate.

Higher Acquisition Costs: Government-mandated combined car and truck corporate average fuel economy (CAFE) standards will increase to an average 35.5 mpg for the 2016 model-year. It is estimated the new CAFE standards will cost OEMs $52 billion to be in compliance and add an average $926 to the cost of buying a new vehicle, perhaps more, within five years. In all likelihood, most or all of the cost to automakers will be recovered through higher vehicle prices. In addition, as manufacturers build to demand (and not capacity), there will be downward pressure on incentives. "Fleet inflation is looming on the horizon," said Tom Keilty, senior VP and COO for PHH Arval. "Vehicle prices are going up, and incentives are under pressure."

New Costs Resulting from Regulatory Compliance: The new diesel emissions standards have already increased fleet truck acquisition costs since 2010-compliant diesel engines are more expensive than predecessor models. The increased costs average $6,000-$9,000. "Current and future regulations - primarily emissions regulations - will cause price increases," said Keilty.

Higher Replacement Tire Costs: All tire OEMs have increased prices June 1 due to higher raw materials costs. Firestone and Dayton brand truck radial tire base prices will increase up to 6 percent. Michelin North America Inc. will raise prices on its Michelin, BFGoodrich, and Uniroyal brand passenger and light truck tires up to 6 percent, as will Hankook Tire America Corp. Kumho Tire will raise prices on passenger and light truck tires up to 8 percent. Cooper Tire & Rubber Co. will increase prices for its passenger and truck tires up to 7.5 percent. Goodyear, Bridgestone, Yokohama, Toyo, and Continental will also raise tire prices.

Higher Maintenance Costs: The industry trend to extend vehicle replacement schedules will be a key factor driving future maintenance expenses. Older fleets will incur the expense of an additional set of tires and brakes, along with the increased frequency of repairs symptomatic with older fleet assets. Also, there will be inflationary pressures for higher parts and labor costs,

Higher Vehicle-Related Taxes: In 2009, of every $100 spent on fleet, $5 went to taxes. This compares to $4.10 in 2006 and $3 in 1983. This cost promises to increase further in the coming years, especially in an era of record governmental deficit spending. Keilty agrees. "State and municipal taxes, as well as traffic violations, will be higher due to government budget shortfalls."

States and other governmental jurisdictions are scrambling to find ways to generate new revenue to offset lower tax revenues. In addition, unlike the federal government, most states are required to balance their budgets. Many jurisdictions opted to generate new revenues through motor vehicle-related taxes, such as higher vehicle registration/license plate fees, increased sales/rental rate for leased fleets in many states, emissions inspection fees, higher fuel taxes, new environmental fees/surcharges for tire disposal and oil recycling, as well as new taxes on aftermarket components, such as tires and batteries. In addition, there is a hidden corporate expense of increased tax administration. Another hidden fleet tax has already occurred at many localities with increased fines for traffic and parking tickets, along with enhanced enforcement through the proliferation of red-light cameras and speed-monitoring cameras.

Higher Corporate Taxes: The forecast is for corporate tax rates to increase. This will exert pressure on bottom-line profits and will reinvigorate cost-reduction efforts. Invariably, fleet is one of the expense categories that will be intensely scrutinized.

Volatile Commodity Prices: The volatile pricing for commodities, such as steel and aluminum, will further impact truck costs, which have already increased due to the new emission technology required by the 2010 diesel emissions standards. "Many light- and medium-duty trucks have bodies, and the rising cost of material surcharges in commodities will increase the cost of bodies," said Ezel Baltali, fleet services applications engineer for PHH Arval.

Higher Fuel Prices: Fuel price volatility is unpredictable, but a very high probability. The "psychological pricing thresholds" have been shattered during the past decade - first at $3 per gallon following Hurricane Katrina, then $4 per gallon in the summer of 2008. Don't be surprised to see the next pricing volatility upswing with prices north of $4 per gallon. Every long-term forecast predicts prices to trend even further upward. Also, new regulations, such as the possibility of mandated CO2 reductions, will increase fuel prices. If such legislation becomes law, one energy analyst predicts it could add 77 cents per gallon to the cost of fuel.

Potential of Higher Interest Rates: One wild card is the potential for interest rate hikes. "Many analysts believe base interest rates will go up. However, it may not happen in a significant way until after the mid-term elections. Keep in mind rates are at historic lows and have been for over a year," said Keilty.

Food for Thought: These impending cost increases will hit fleets like a fiscal tsunami. What are you doing to prepare?

Let me know what you think.

[email protected]

 

Comments

  1. 1. Mike [ May 17, 2010 @ 10:31AM ]

    Mike as always a very timely article. In the past few months I have been covering these very same topics. As a result we continue to "Right Size" our vehicle fleet...both in unit count and vehicle type. Thanks Mike Butsch

  2. 2. Brian Reynolds [ May 18, 2010 @ 02:09PM ]

    Further evidence that we cannot continue doing things as they have always been done. Fleet managment will continue to become a point of scrutiny for potential cost controls and savings. It is of absolute importance that fleet professionals make themselves aware of options, facts, and trends so they can answer intelligently to the senior management teams when they come calling.

  3. 3. Susan Miller [ May 25, 2010 @ 03:21PM ]

    right on as usual Mike. A strategy presentation on these topics should be in every fleet managers hand that also addresses the issue of driver reimbursement as the solution to keeping the corporate costs down. Stay in front with knowledge and measures to your management.

  4. 4. FMC - Client manager [ June 28, 2010 @ 07:11PM ]

    Mike,

    I agree, how do you and the rest of the industry see the likes of Audi, Mercedes Benz and BMW , not to mention the Korean OEM's making a impact with their progams. Frankly they are mitigating much of the risk, when it comes to Open End Leasing, maint , etc....

  5. 5. John Awa [ July 02, 2010 @ 10:57AM ]

    For straight-truck fleet managers, one truck acquisition strategy worth exploring is the Demountable Truck Body System. Instead of purchasing two new straight-trucks with fixed bodies, a single straight-truck chassis/cab with a hydraulic lift installed in the chassis, and two bodies with retractable legs installed in their base frames, can do the same work at a significantly lower acquisition cost.

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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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