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Market Trends

Higher Operating Costs Forecast for CY-2012

October 24, 2011, by Mike Antich - Also by this author

Fleet operating costs are forecast to trend higher in calendar-year 2012. In particular, replacement tire prices are expected to increase 6-10 percent due to higher raw material costs and higher commodity prices. In addition, higher commodity prices will put upward pressure on component costs. Similarly, inflation will put upward pressure on labor rates in high-cost markets. The one bright spot is that fuel prices are forecast to remain at 2011 levels due to the ongoing sluggish economy. The U.S. Energy Information Administration is forecasting CY-2012 fuel prices of $3.43 for gasoline and $3.73 for diesel, comparable with 2011.

This outlook is reinforced by recent developments in the futures market. “The futures market suggests fuel prices will be steady for the rest of 2011 and 2012. We expect prices to continue at levels similar to 2011,” said John Bauer, manager of fleet analytics for Wheels Inc.

Ultimately, market demand and consumption will drive fuel prices. “It is the demand side that is likely to drive energy costs next year. If the slowdown in the global economy extends into 2012, energy demand could diminish, leading to lower oil prices,” said Greg Stanford, director, market intelligence for PHH Arval. “Consensus forecasts of sluggish global growth in 2012 could keep a lid on pump prices until economic conditions improve.”

However, the volatility of fuel prices could throw these forecasts out the window. “As we’ve witnessed in the past, all of this can be changed in an instant by a weather-related incident, further unrest overseas, and a continued lag in the economy,” said Tony Blezien, vice president, operations, LeasePlan USA.

The forecast for diesel consumption by truck fleets continues to have several unknowns created by the 2010 diesel emissions  standards. “For trucks, there are claims that emissions components on new diesel vehicles meeting the 2010 standards can increase fuel efficiency up to 5 percent, which can be difficult to verify in many fleet applications. Diesel exhaust fluid (DEF), currently around $4 per gallon, adds an indirect cost to using diesel fuel. Until market pressure drives down the cost of DEF, it will add measurable costs,” said Arnie Barnes, manager, vehicle maintenance assistance for PHH Arval.

More Expensive Rubber Meets the Road

Tires are the second highest operating expense for fleets and will continue to remain a high-ticket item into 2012.

“Tire prices will continue to rise in the coming year with 6- to 10-percent or higher increases expected in the auto/light-truck fleet market. However, this increase will be lower than we expect to see for medium-truck tires,” said Mark Lange, CAFM, maintenance services specialist for GE Capital Fleet Services.

PHH Arval offers a similar forecast for future replacement tire prices. “Based on fleet trends over the past 24 months, the cost for replacement tires could grow by approximately 6 percent,” said Barnes.

The root of tire price increases is volatile commodity prices. “Replacement tire costs, in our estimation, will continue to rise in the upcoming year due to expected increased cost of rubber, steel, and oil,” said Michael Crumlett, manager of maintenance services for Emkay.

Upward Pressure on Maintenance/Repair Costs

Maintenance costs are projected to increase 3-plus percent in CY-2012. “The trend line for maintenance costs in 2011 has been similar to that of 2009, with moderate growth likely to be in the 3 percent to 3.5 percent range,” said Barnes of PHH Arval.

Factors that will impact future maintenance prices are inflation and commodity prices. “Our forecast is for a continued increase in cost for routine maintenance and repairs. The amount of price increases will depend on the increase in cost of the commodities needed to produce motor oil and replacement tires,” said Steve Minier, director maintenance of services for Emkay.

Each model-year, new vehicles are contented with an increasing number of technological components. “While new technology continues to improve driver comfort and increase productivity, these new components also add to maintenance expenses. We expect repair and maintenance costs to rise at a rate slightly higher than inflation through 2012 as a result of increased costs associated with new technology,” said Tony Piscopo, director, fleet management for ARI.

Labor and parts costs are also expected to increase in the coming year. “Fleet costs will be higher than the 2010-2011 maintenance repairs consumer price index (CPI) increase of 2.1 percent,” said Lange of GE Capital Fleet Services.

Another factor that will increase PM costs is the increased use of synthetic motor oils by OEMs. “We are anticipating a moderate increase in the cost of oil based on the increasing demand for premium/synthetic oils. This cost increase may not be as drastic in the long run as the less frequent maintenance interval leads not only to a balance in the overall expense, but also to a potential increase in productivity of the vehicle,” said Dave Jankiewicz, director, maintenance and repair management for LeasePlan USA.

In the final analysis, the anemic economy is moderating price increases. However, if there is a sustained uptick in economic activity, the forecast is for even higher prices, especially for fuel.

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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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