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Market Trends

Operating Costs Flat for Third Consecutive Year

October 16, 2015, by Mike Antich - Also by this author

Calendar-year 2015 marks the third consecutive year that fleet operating costs have remained stable compared to the past three years, primarily due to the continuing softness in gasoline and diesel prices.

Fuel represents approximately 60 percent of a fleet’s total operating costs, so the price per gallon of fuel has a dramatic impact on overall fleet costs. The past three years have been heaven-sent for the fleet industry overall; however, it has had a dramatic impact on fleets operated by energy companies, which are scrambling to cut costs to offset the decline in fuel prices.

In addition to lower prices at the pump, these cost reductions have been amplified by the ongoing trend by fleets to downsize to smaller vehicle segments and spec’ing smaller displacement engines, when applicable, along with increased driver training to eliminate “fuelish” driving behaviors.

Despite lower fuel costs, corporate sustainability programs remain strong at large multinational fleets. Although there may be less pressure for alternative-fuel vehicles, the focus continues to be to acquire the most fuel-efficient models that can fulfill the fleet requirement. In addition, new-model vehicles tend to have higher mpg ratings than predecessor models, due to light-weighting, the proliferation of higher-speed transmissions, and more efficient powertrains. The increased implementation of telematics systems has also resulted in increased route optimization and easier identification of drivers who are engaging in driving behaviors that are decreasing mpg.

Another trend in calendar-year 2015 has been the narrowing of the price gap between gasoline and diesel. Historically, diesel prices have been lower than gasoline, but this changed in 2005 when per gallon diesel prices surpassed gasoline, but, as this year has shown, that gap is diminishing. One corollary advantage is that lower diesel prices have exerted upward pressure on higher resale values for light-duty trucks. The price of fuel has a causal relationship with resale values, with lower fuel prices benefiting lower mpg vehicles, and higher fuel prices benefiting smaller, more fuel-efficient vehicles.

The forecast from the U.S. Energy Information Administration (EIA) of the U.S. Department of Energy, along with the oil futures market and most fleet observers forecast that per-barrel oil prices in 2016 will remain near 2015 prices, which bodes well for fleet operating expenditures. The prediction is that global supply and demand for oil will remain at today’s levels, which will keep downward pressure on fuel prices. Another important variable is that, over the past decade, the percentage of imported oil has continued to drop with the increase in domestically sourced oil. This has lowered the impact of price volatility in oil-producing regions mired in political instability. For instance, the recent turmoil in Syria, Yemen, and Venezuela resulted in minimal price volatility in the U.S; which, in the past, most likely would have resulted in pricing gyrations.

Tire Prices to Remain Stable

The second highest operating cost is replacement tires, which have been stable in 2015 compared to 2014. The key reason has been the ongoing softness in commodity prices, primarily rubber and oil. A key contributor to the softness in commodity prices has been the sluggish Chinese economy, which was a voracious consumer of raw materials. The hope among fleets is that ongoing softness in oil prices will exert downward pressure on tire prices. Also, the importation of lower-cost tires has contributed to putting downward pressure on tire prices; however, the recent U.S. tariff on Chinese tires will result in higher prices for some manufactuer products.

Maintenance Costs to Remain Flat

Increased maintenance intervals have contributed to lower maintenance costs for fleets. In 2015, the multitude of safety recalls by OEMs, and the resulting parts shortages, triggered in an uptick in maintenance costs primarily due to extended downtime and the need for higher replacement vehicle rental expenses. The widespread use of just-in-time manufacturing has created situations where demand exceeded production capacity and created unforeseen downtime waiting for parts deliveries. In addition, there has been a general uptick in parts pricing. However, vehicle quality continues to remain high, helping to offset these expenses.

One area that is putting upward pressure on maintenance costs is labor. But, maintenance still represents a relatively small segment of overall operating costs; representing just 10 percent of total operating costs. In order for maintenance to have a dramatic impact on total operating costs, it would require far more significant increases than what we have seen in the past, nor what is anticipated to occur in the future.

Let’s keep our fingers crossed that 2016 may be the fourth consecutive year of stable operating costs.

Let me know what you think.

[email protected]

Comments

  1. 1. João Simões [ October 21, 2015 @ 04:33AM ]

    If diesel prices decline I expect operating costs should drop, having into consideration that they represent 60% of all, unless other costs, like labor, have increased.

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