How to Manage Fuel Expenses Like a Pro
Photo via istock.com.
Fuel — managing it can leave fleet managers feeling overwhelmed, underfunded, and unprepared. But, it’s not all doom and gloom.
With the pricing volatility of the past few years leveling out, increased vehicle fuel efficiency, and new technology, managing fuel costs is not only possible, but within easy reach.
The U.S. Energy Information Administration’s (EIA) Short-Term Outlook for the cost of gasoline anticipates costs to remain flat in 2015, with a national average of $2.40, projected to increase to a national average of $2.73 in 2016. Diesel prices are expected to average around $2.86 in 2015 and increase to around $3.24 in 2016.
“All indicators seem to point toward continued downward pricing pressure through much of 2015 and into 2016. I agree with most analysts, who suggest oil pricing will stay below the $60-$70 range over the next 12-18 months. That said, the global market is as volatile as ever and one climate or political incident could disrupt the marketplace overnight,” said Steve Durdin, global product manager, Fuel and Garage Management Systems at ARI.
However, fleet managers shouldn’t “rest on their laurels,” even though low average fuel prices are anticipated.
Photo via istock.com. Source: WEX.
“Some fleets have started moving away from more fuel-efficient vehicles and into larger vehicles due to lower fuel prices; however, it is recommended to continue to consider fuel economy when making vehicle selection decisions. Even in today’s environment of relatively low fuel prices, fuel is still one of the largest components of the fleet budget,” said Megan Delano, consulting business analyst at Donlen.
Others also see a move away from fuel-efficient vehicles, at the potential detriment of future savings.
“With fuel prices continuing at the current price levels, we expect to see a continued decline in fleet demand for hybrids and alternative-fuel vehicles (AFVs). When reviewing analytics comparing traditional gasoline-powered vehicles versus hybrids and AFVs, the break-even point in the cost analysis (due to the higher depreciation costs for the hybrids and AFVs) almost always exceeds the lifecycle of traditional fleets using the current fuel prices,” said Becky Langmandel, director, strategic modeling & analytics at LeasePlan USA.
Fleet managers are cautioned not to rely on this low-price environment for the long term.
“The low-price environment, relative to previous years, is not something I expect to persist in the long term. The lack of economic incentive for businesses and countries for sustained lower prices will likely result in oil production cuts or other market disruptions that cause prices to increase,” said Jayme Schnedeker, fuel product leader at GE Capital Fleet Services. “There are indications of this in North America based on the reduction in oil rig counts, down almost 50 percent from 2014. However, the geopolitical environment could swing prices either way. For example, a nuclear deal with Iran would lift sanctions and reintroduce their oil supply into the market. The EIA forecasts that this reintroduction of supply would reduce prices in 2016.”
Source: AF Research Department.
Additionally, changes are occurring in the fleet fuel card market.
“Overall, we’re seeing increased usage from a transaction and acceptance perspective. One reason is that today’s fuel card is so much more than a mere payment option — it’s a data-collection tool integral to optimum fleet program management. The data it captures can be sliced and diced in myriad ways, to track dollars spent at each merchant, fuel economy of each vehicle, cards with highest gallons purchased, and any number of other factors to help organizations evaluate and control the cost of ownership of their fleets,” according to Ramel Lindsay, group product & program manager at U.S. Bank.
Additionally, use of fuel cards can provide additional opportunities for data evaluation.
“MasterCard has a unique ability to see the fueling space, able to look at fueling markets worldwide, across both commercial (retail and bulk) and consumer fueling environments. Some of the more recent observations include market studies illustrating the shift from historical periods of long price stability to the current market trend of long periods of fuel price volatility punctuated by short periods of price stability,” said Mark Aquilina, VP and Senior Business Leader at MasterCard Global Fleet Products and Large Market Commercial Payables.
According to Aquilina, current key trends include a consolidation of fuel card issuers, merchant fragmentation, and an overall consolidation of spend. In terms of consolidation, he explained: “We are seeing an increasingly large number of fleets (across multiple issuers) converting to one-card products in an effort to more efficiently consolidate all fleet spend categories (such as fuel, maintenance, lubricants, crew travel, parts & services, etc.) onto a single billing and reporting platform, and therefore more easily calculate, and manage the risk associated with, their total cost of operations.”
One way fleet managers can better manage fuel costs and usage is through learning from past mistakes.
“The No. 1 mistake we see is fleet managers who simply don’t do enough with the data that they have in today’s Level III environment. The typical fuel transaction will generally provide details including odometer, time of day, consumption, and price per gallon. When properly analyzed and managed, there is so much a proactive fuel cost management program can do with that information. For example, simple reports can show poor performers in the area of average mpg. Using this data, a fleet manager can begin to understand what factors may be behind that poor performance. Could there be maintenance issues? Is the vehicle overweight or is it idling excessively? Once the manager has the information in hand, strategies can be developed to help improve results,” said Durdin of ARI.
Fuel prices for both gasoline and diesel have dropped exponentially during a one-year period, with one of the highest price differences between gasoline and diesel seen since before 2011. Source: WEX
Monitoring fuel use by type is another key to success. The national average cost of a gallon of premium gasoline can be as much as 40 cents, or more, versus the cost of regular gasoline.
“Fleet managers need to closely monitor premium fuel and personal use expenditures. Fuel platform and vendor policy enforcement are essential to keeping these operational costs low. Also, strategic selector MPGs should always be taken into consideration regardless of market trends or forecasts. Given the high level of uncertainty in the oil market, several factors could cause prices to deviate significantly from current or projected forecasts. Uncertainty remains on both the supply and demand side of the oil market and price volatility is likely to persist,” according to Brad Vliek, VP of Client Services at Emkay.
Fleets should also avoid interpreting short-term low fuel costs as something permanent.
“Fuel costs are expected to rise again — it’s just a question as to when this will occur. Fleet managers need to continue making their selector decisions appropriately based on need. For example, allowing drivers to select a lower fuel-efficiency vehicle when a sedan could do the job will result in higher fuel costs today and when fuel costs rise, it could have a dramatic impact on the bottom line,” said Kathy Evans, senior business consultant at Element Fleet Management.
Delano of Donlen agreed. “It’s critical that fleets be managed with the same consistency and discipline when fuel prices are low as when they are high. Consider multiple fuel price scenarios when comparing the projected total cost of ownership (TCO) among various vehicles. Fuel economy will have a significant impact on TCO — both in terms of operating costs and resale performance — when fuel prices return to ‘normal’ levels,” she said.
Also in agreement was Laura Jozwiak, VP of Client Relations at Wheels Inc. “Although fuel expenses have been cut in half as of late, our account managers continue to caution our clients to stay vigilant on fuel management best practices, expectations for future budgets, and proper vehicle selection,” she said.
Fleet managers should also be leveraging technology and data to manage fuel costs.
“Another frequently missed opportunity is not leveraging exception reports to identify unnecessary spending. Exception reports identify anomalies such as premium grade fuel purchases, transactions above tank capacity, and excessive purchases within short time periods. These reports provide fleet managers with an easy to implement, scalable solution to first identify and then manage costly behaviors,” Delano said.
Overall, however, fleet managers are doing well controlling fuel costs.
“Fleet managers are actually doing well with controlling fuel costs by choosing cost-efficient sedans and small SUVs and crossovers with high mpg ratings. Fuel efficiency is one of the top considerations, along with depreciation expenses and maintenance costs, when comparing like-vehicles using total cost of ownership (TCO) analysis. Due to the continued increase in fuel efficiency in new vehicles, along with the decline in fuel prices, fleet fuel costs continue to fall,” said Langmandel of LeasePlan USA.
Increasing use of route optimization and mobile apps can continue to positively impact fleet fuel budgets.
“Route optimization and mobile app technologies are becoming more and more commonplace. Mobile apps can direct drivers not only to the closes gasoline station, but to the lowest cost providers as well,” said Mark Donahue, business analyst at Emkay.
Further utilization of vehicle data can also help.
“Availability of vehicle data and payment technology over the next three years will have a dramatic effect on new opportunities to optimize fuel spend for fleets. As a result, there will be an increasing number of options for fleet managers to evaluate. It will be increasingly important to focus on material opportunities and experiment to figure out what works within a fleet based on the type of vehicle, driver, and use case,” said Schnedeker of GE Capital Fleet Services.
Fleet managers can also incentivize drivers to become more fuel efficient.
“Fleet managers can introduce an incentive program to their drivers to reduce overall fuel expenses,” recommended Delano of Donlen. “By instilling a culture of measuring, monitoring, and incenting the right behavior, a fleet’s overall fuel expenses can be reduced. Providing internal recognition to the most fuel-efficient drivers, offering gift cards, or incorporating driving behavior metrics into performance reviews are some of the ways that companies can incent drivers to change behavior to reduce fuel usage.”
Additionally, if allowed, personal-use policies and charges should be evaluated and adjusted if needed.
“If your company charges drivers for personal use of the company vehicle, the amount charged is most likely linked to your organization’s total vehicle operating cost. As these costs increase, companies either increase the charge or absorb them. Decreasing personal-use charges for drivers when fuel costs are low may have a positive impact on driver culture and may communicate to drivers that organizations react to changing economic factors not only when costs increase, but also when they decrease,” said Evans of Element Fleet Management.
Additionally, new technologies in the fuel card market in the U.S. by 2017 could bring some big changes.
“The introduction of Europay/MasterCard/Visa (EMV) and chip technologies into the United States by 2017 represents the single largest opportunity to change the face of the fleet card world. EMV compliance will bring vast, new card security features to the U.S. retail payments space — security features that will require oil company merchants to develop new authorization and settlement processes for point of sale (POS) device solutions,” noted Aquilina of MasterCard. “Implementing microchip applications at the point of sale device will finally allow seamless integration of purchase security and data, with vehicle-based diagnostics, telematics, and location-based services. The end result of this integration will enable revolutionary new data and analytics services that exponentially increase fleet management efficiency while simultaneously eliminating all currently known forms of driver fraud and misuse.”
And, don’t forget the basics such as vehicle downsizing, reducing weight and idle time, and increasing driver involvement and education.
“In addition to the basics, we see the more successful fleets employing telematics and moving to alternative fuels,” said Tony Blezien, VP, operations at LeasePlan USA.
In the end, use this time of low fuel prices to prepare for the future.
“Use this time of low fuel prices to explore opportunities that can have long lasting, positive effects on your fleet spend, even if the low cost of fuel is temporary. For example, when fuel prices are low, consumers may be more willing to consider larger, less fuel-efficient vehicles. Therefore, now may be a good time to sell your older gas-guzzlers and replace them with newer, more fuel-efficient vehicles,” said Evans of Element Fleet Management.