Sky-High Fuel Prices Spike Fleet Operating Costs in 2005

Fuel prices have climbed dramatically during the past 12 months causing overall fleet operating costs to increase in 2005 compared to 2004. In fact, the operating cost data presented in this survey is not truly reflective of the actual increase this year. Data collection stopped in September 2005 and does not include the spike in fuel prices, which occurred after Hurricane Katrina, causing gasoline prices to shatter the $3-per-gallon threshold. The average fuel price reflected in this year’s survey is between $1.80 and $2 per gallon. “In next year’s survey, fuel prices will be more reflective of an average $2.50 to $2.70 per gallon,” said Greg Corrigan, vice president of strategic business services for PHH Arval. Jeff Whiteside, vice president of operations for LeasePlan USA, offers a similar observation. “At the beginning of the year, gas was $1.87 per gallon, now we are at a nationwide average of $2.91. Almost a 50-percent increase,” said Whiteside. The data for the Automotive Fleet annual fleet operating cost survey is provided by its survey partners: ARI, GE Commercial Finance Fleet Services, LeasePlan USA, PHH Arval, and Wheels. This year’s study is based on the analysis of actual operating costs incurred by 651,955 vehicles operated by commercial fleets and managed by these five fleet management companies - the largest-ever analysis. Inflationary Pressures
“We have seen some maintenance costs go up due to labor rate increases. Also, replacement parts prices have increased in some areas, but not all. I see this as inflationary pressures in the economy,” said Whiteside. Scott Edidin, senior account manager for Wheels Inc., agreed. “We’ve seen a slight uptick in operating costs, primarily driven by fuel and tires. In addition, maintenance labor rates have gone up, especially in high cost-of-living areas, hitting as high as $120 per hour,” said Edidin. Although fuel costs are up, overall fleet depreciation has decreased due to large manufacturer incentives, which have helped to reduce net acquisition costs, and improving resale prices in the wholesale market, said Corrigan. “On the whole the rest of the expense categories were generally flat. Maintenance was up a little due to labor costs. In addition, environmental disposal fees are increasing. We are seeing more costs passed through by shops than before, especially environmental fees,” said Corrigan. However, other fleet operating costs have remained relatively flat during the past 12 months, although some costs in each expense category have increased. “Overall, across all categories, operating expenses, outside of fuel, remained flat,” said Tony Piscopo, manager of fleet management services for Automotive Resources International (ARI). “We actually saw some operating costs decrease with intermediate cars and SUVs, but it was a very small amount, so it is hard to attribute it to any cost driver,” added Piscopo. {+PAGEBREAK+} The Fuel Spike of 2005
As no surprise to anyone, fuel was the number one reason for higher operating costs in 2005. “In 2005, we have experienced abnormally high fuel prices because of tight fuel supplies, high product demand, and two devastating hurricanes,” said Paul Heckmann, fuel product manager for GE Commercial Finance Fleet Services. “Market conditions remain tight even with Europe assisting the United States with a supply of refined product. The Northeast uses diesel #2 for heating homes, so this region creates dual demand for diesel fuel, which could cause prices to rise in the winter throughout the Northeast. World demand is also on the rise. China’s demand for oil is at an all-time high. All of these factors hitting at the same time result in fuel costs negatively impacting fleet’s fuel budgets.” Fleet Dollars are Finite
Fleet budgets are comprised of a finite amount of dollars. “When fuel costs increase, they impact the rest of the budget, across the entire fleet. Fleet managers have to manage all expenses since fuel consumes a larger part of the fleet budget. The increased cost of fuel was an unexpected expenditure. Not too many fleet managers budgeted for such an increase in fuel,” said Piscopo. “We are seeing fleet managers analyzing their fuel reports in greater detail, and we’re assisting them in evaluating every avenue they can take to reduce fuel costs,” said Heckmann. “One of the things we are advising clients is to review their personal use chargeback policies to account for higher fuel prices,” said Corrigan. Another measure that Corrigan advocates to increase mpg is to re-evaluate upfitting packages to ensure they are not over-spec’ed to minimize vehicle curb weight. Replacement Tire Prices Rise
Goodyear increased the price of replacement tires in April 2005 an average of 3 percent, said Whiteside. Recently, Bridgestone/Firestone announced that it has raised prices. Citing increased raw materials costs, Bridgestone Firestone North American Tire and Bridgestone Firestone Canada raised prices on the companies’ Bridgestone, Firestone, Dayton, and private brand tire lines. The increases were up to 8 percent and took effect Nov. 1. “With the price of oil going up, I really anticipate another tire increase sometime by early 2006,” said Whiteside. “The next increase could be our biggest.” More and more fleets are looking closely at managing the cost of replacement tires. “For instance, there is a growing use of off-brand tires,” said Corrigan. “This has always been part of our policy consultation with clients when we set up their maintenance policies. This decision has mostly been driven by cost considerations. Most of our clients have fleet policies to buy the lowest-cost tire.” Mark Lange, lead customer service advisor for GE Commercial Finance Fleet Services, made a similar observation. “Customers are scrutinizing tire costs now more than ever. More customers are choosing house brands or retail brand tires to offset rising tire costs,” said Lange. Edidin offered the following suggestion to help decrease tire expenses. “Rotate tires to ensure you get the maximum life out of them. The OEM tires are the cheapest tires because they come with the car. Try to make them last longer by regularly rotating them.” Oil Drain Intervals Lengthen
“We forecast prices for oil changes to remain flat,” said Tim Derochie, product manager for maintenance for GE Commercial Finance Fleet Services. One factor impacting fleet oil expenses is the expanded availability of onboard oil life monitoring systems in GM vehicles. “GM has broadened the oil monitoring system to its entire lineup except for the Chevrolet Aveo and Pontiac Vibe,” said Lange. Some fleet managers with GM fleets now base oil change intervals on the onboard oil life monitoring systems instead of mileage intervals. “Today, we have some fleets following GM-recommended preventive maintenance schedules, which include extended oil change intervals, but also stipulate that if the oil life monitor light doesn’t come on after one year, to take the vehicle in for service,” said Lange. “The problem with using oil life monitoring systems is fleet managers have no way of knowing when the light comes on. Some drivers will ignore the light and may wait too long to schedule an oil change, which could cause severe engine damage,” said Whiteside. This concern may be short-lived, especially with more widespread adoption of wireless telematic devices in fleet. “With telematics, you will be able to monitor oil life gauges to determine whether drivers are out of compliance,” said Whiteside. The onboard oil life monitoring systems have impacted the volume of business at quick-lube facilities. “The quick-lube shops report they are seeing less business for oil changes. As a result, they have expanded their preventive maintenance services to supplement this loss of business,” said Eric Strom, manager of maintenance operations for GE Commercial Finance Fleet Services. “We are seeing quick-lube vendors getting into air conditioning services, battery replacements, tire rotations, and even in-depth oil usage analyses as additional options,” said Strom. “These are services they didn’t provide two or three years ago.” In addition, some auto manufacturers now specify extended oil drain intervals as part of their recommended service schedule. “For instance, Saab offers extended oil drain intervals,” said Lange. “It depends on the engine in the vehicle. In the Saab lineup, there are turbo-charged engines with different performance options. The high performance turbo-charged options require the use of synthetic oil. Saab also recommends that synthetic blend or full synthetic oil be used on all engines. The oil change interval is longer with the synthetic oil than the conventional oil engines. Saab models have oil change intervals at 10,000 miles, with free oil changes at the dealerships for the first 30,000 miles,” said Lange. {+PAGEBREAK+} Bulk of Maintenance Cost is PM
Preventive maintenance expenses and replacement of wear items, such as brakes, account for 70 percent of a fleet’s total maintenance expenses, said Piscopo. “The cost of repairing brakes is the No. 1 expense in every vehicle category and every mileage band. However, several new developments with brakes are helping to reduce these maintenance costs,” said Strom. “We are now seeing not only ceramic brake pads, but also ceramic composite rotors. The rotors are manufactured with ceramic material to reduce brake noise and extend durability. We are actually seeing a decrease in maintenance costs when ceramic brake components are used,” said Lange. “There are also fewer rotor replacements with the use of on-the-car brake rotor lathes to cut the rotors. This reduces the need for return service and the replacement of the rotors,” Lange added. Vehicle are More Complex
Increased vehicle complexity is contributing to higher repair costs. “Technology helps drive cost down, but it also adds cost into a vehicle,” said Strom. “Today, a radio is integrated into a larger navigation/GPS module. The entire module may have to be replaced if you want to repair a radio/CD player. Another example is keyless entry, which embeds a microchip in the key to start the car. If you lose the key, some manufacturers require changing the entire module that controls the starting circuit in the vehicle, which may cost up to $1,000 on some models,” said Strom. The increased use of electronics and modular units is driving many repairs to franchised dealers. “Some of our national vendors have a list of repairs that are not allowed at a store level because of the complexity,” said Lange. Increased penetration of hybrid vehicles into commercial fleets in the future may exacerbate this issue. “As hybrid technology advances, you will see more shops less likely to take on some of these repairs because of the type of equipment required to work on them and the associated safety concerns,” said Derochie. Increased vehicle complexity may make the franchised dealers more involved in servicing fleet vehicles. “We are seeing many more vehicles going back to the dealerships because of electronics such as GPS systems. More vehicles will go back to dealerships, such as hybrids and specific models such as the Sprinter, because some national accounts are unable to work on these vehicles,” said Edidin. As vehicle quality has increased over the years, dealers have seen their service volume decrease. As a result, dealers are changing the marketing strategies for their service businesses to be more fleet-friendly. “For instance, instead of just a dedicated oil change bay, dealers are now packaging brake pricing and battery pricing. These dealership services are competitively priced with independent service facilities,” said Strom. Warranty Recovery is Stable
Vehicle quality has improved dramatically over the years. In fact, several manufacturers have reported that warranty volume is down. “I don’t see any difference today than last year for goodwill adjustments. Dealer repair rate to warranty repair rate is down, indicating that quality is up. So if there is any downward trend in the dollar amount, it is because we have fewer warranty claims,” said Piscopo. Overloading an Ongoing Issue
Overloading continues to be a chronic fleet problem and a key cause of unscheduled maintenance, said Piscopo. “We are noticing that maintenance expenses for minivans in the 48,000-to 80,000-mile range seems to spike when compared to costs in the 24,000- to 48,000-mile band,” said Edidin. “We attribute this to overloading, which over time causes components to fail.” “Some of these expenses might also be attributable to fleets that try to economize by going to minivans while their cargo capacity continues to require a full-size van. This overloading causes cumulative wear and tear on the vehicle,” said Edidin. Total Lifetime Mileage Increasing
The average total lifetime miles and average months-in-service for commercial fleet vehicles has been increasing for several years, said Piscopo. “Rather than keeping vehicles for 55,000 miles, fleets are keeping vehicles for 65,000-75,000 miles. Many fleets are running trucks up to 75,000-100,000 miles,” added Edidin. “With the resale market in the doldrums, some fleets try to maximize in-service use to minimize net depreciation,” said Edidin. “We are seeing mileage increase as months-in-service is extended. We see pharmaceutical sales fleets keeping vehicles for longer than 30 months. However, as long as the huge incentives are offered by the manufacturers, we feel vehicle service lives will plateau at 75,000-80,000 miles,” added Edidin. View charts here