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State of the U.S. Commercial Fleet Market: Cost Containment is No.1 Challenge Facing Fleet Managers

A survey of commercial fleet managers identifying the challenges facing their fleets found the overwhelming response focused on escalating costs for acquisition, fuel, maintenance, and accident repairs, while budgets remain constrained.

April 2011, by Mike Antich - Also by this author

Commercial fleet managers are casting a wary eye toward higher fleet costs, which has also gained senior management's increased scrutiny following the rapid escalation of fuel prices, triggered by the upturn in global economic activity and unpredictable geopolitical events occurring in oil-producing nations.

This was the key takeaway of a recent survey of commercial fleet managers, which asked them to identify the top challenges facing their fleets in 2011.

One survey respondent, Sam Alfano, fleet manager for Cook's Pest Control, succinctly summarized his top three challenges by stating: "Fuel prices, fuel prices, and fuel prices."

This sentiment was echoed time and again by other fleet manager survey respondents. The response from Xerox summarized the concern of most fleet managers. "The major challenge facing our fleet is increasing fuel prices," said Paula Morisey, fleet manager for Xerox.

Compounding the impact of the fuel price volatility is that most fleet budgets were already approved, which anticipated a much lower price per gallon.

Here is an example of the dilemma of one fleet operating diesel-powered assets. "My major challenges for 2011 and 2012 will be controlling escalating fuel costs throughout the next two years. Since budgets are already set for 2011, we are struggling to control our fuel costs. We are also challenged with our larger diesel trucks on DEF fluids, storage of fluids, and educating our drivers on these new models," said Charlie Stevenson, fleet manager for Aqua America in Springfield, Pa.

Similar observations were made by other fleet managers, one of whom said, "The growing instability in the oil market will make cost planning even more difficult when trying to formulate future fleet budgets."

Dave Meisel, director - transportation services for Pacific Gas & Electric, summarized the impact on fleet budgets.

"The rapid rise in prices and the instability in some of the oil-producing parts of the world are going to continue to be a challenge for fleet budgets. Crude prices jumped more than 15 percent in one week, and when you manage a large fleet, it can equate to a serious impact to the budget. The price of crude impacts many areas, such as tires, plastics, lubricants, oils, solvents, etc., in addition to fuel. The impact is bigger than many people realize," said Meisel. "Looking ahead into 2012, the challenges will continue to be with crude oil. I think this issue will once again start to push fleets to look at other technologies, such as natural gas and electrification, to name just a few. Even though some fleets are more ready than others in this area, this is still going to be a major challenge for all fleets."

Most of the surveyed fleet managers foresee fuel price volatility continuing for the balance of this year and extending into calendar-year 2012.

Not only are fleet budgets feeling the impact of higher fuel prices, they are also being stretched by an across-the-board increase in almost all fleet expenditures.

"All pricing for everything we touch is now on the rise after a few years of being flat. Fleet managers are feeling the extra pressure. The prices for fuel, parts, tires, oil, and maintenance in general are all increasing," said one well-known fleet manager who wished to remain anonymous.

Escalating fleet costs are making fleet managers cautious in their fleet planning and forecasts. "2011 promises to be more difficult than 2010. Fuel prices are on the rise, which has a huge impact on every fleet. Predictions of even higher fuel prices for this year have us all bracing for the impact," said Alicia Hammond, fleet administrator for Ambius in Buffalo Grove, Ill.

Another concern voiced by fleet managers about the rapid run-up in fleet costs is the inevitable knee-jerk reaction by senior management.

"I, too, foresee fuel pricing volatility for the remainder of 2011. With the recent unrest in the Middle East, the ability to execute and to rationally plan are severely impacted. Upper management tends to react in a knee-jerk fashion, when more methodical planning is required," said one Top 300 fleet manager who wished to remain anonymous. "Balancing these pressures will be a challenge."

One longer-term impact of higher fuel prices is that fleet managers are beginning to reassess the models to be offered on selectors for the 2012 model-year.

"We will have an increasing focus on fuel economy during selector development by identifying vehicles with better fuel economy and possibly implementing technological devices to track/control driver behavior behind the wheel," said one fleet manager who requested anonymity.

However, there are trade-offs to modifying selectors to include smaller, more fuel-efficient cars. "First, having more fuel-efficient vehicle choices priced competitively will be a challenge. Second, locating fuel-efficient vehicles with cargo-carrying capacity will continue to be challenging," said one fleet manager who wished to remain anonymous.

A similar concern was cited by David McCauley, fleet manager for Red Bull North America, Inc. "Fuel pricing will ultimately drive what directions we take with truck purchases and the types of vehicles we have on our selectors," he said.

There is also an employee morale consideration to transitioning to more fuel-efficient vehicles. "Going forward, I think we will have to find ways to keep employee morale up as we move to even smaller vehicles," said one fleet manager. "The manufacturers are going to have to understand small vehicles need to offer the options currently available in mid-sized cars. Many of us will be looking for small, economical, safe, and quiet vehicles that have options such as a power driver seat, heated seats, GPS availability (without all the other garbage), Bluetooth, and other things commonly thought of as only available in more expensive larger vehicles. I see vehicles meeting our business needs changing."

An Uncontrollable Expense

Many fleet managers acknowledge fuel as their No. 1 challenge, but most are resigned to the fact that it is an uncontrollable expense they will have to deal with as the best they can.

"Obviously, fuel costs are our top challenge, but my observation is it is almost uncontrollable in my type of fleet operations," said Steven Franz, fleet manager for Highmark.

This sentiment was echoed by other fleet managers. "I see the major challenges facing our fleet as all external," said Susan Miller, CAFS, manager, fleet program services for McDonald's Corp. "The ongoing and increased political unrest throughout the Middle East continues to present a major challenge for 2011. Overnight, the price per gallon in Chicagoland increased 20 cents on the saber rattle of Muammar el-Qaddafi. Trying to anticipate and manage things beyond our control, which have direct impact on operating expense, is the major challenge. Predictably, energy prices and petroleum-based and dependent products will continue to challenge through 2012 and beyond."

Here is another comment from a prominent fleet manager, who likewise wished to remain anonymous: "One major challenge for 2011 (and 2012) will be increasing fuel prices and the fact there is nothing we can do but watch them go up. Our company has moved to more four-cylinder vehicles over the past three years, so we will be in better shape than we previously would've been if/when fuel remains at $4-plus per gallon. Unfortunately, the savings previously predicted with the move to the four-cylinder sedans will be offset by the higher fuel prices. I assume alternative-fuel vehicles will be more of a topic of discussion for our company as fuel prices rise."

One silver lining to higher fuel prices is that it has prompted many companies to reinvigorate fuel-efficiency initiatives.

This was illustrated in a comment by one fleet manager. "Increased fuel expenses have really caused us to focus more on route efficiencies and territory coverage."

A similar observation was made by Mike Lahr, director of logistics for LKQ Corp., in Urbandale, Iowa. "We have become very conscious of fuel economy and fuel alternatives. In doing so, we have looked more closely at driver productivity, routing, and payload of product to reduce the miles driven," he said.

Other fleet managers are looking to increase car-sharing among employees.

"I believe our biggest challenge will be rising fuel prices. We are looking at the possibility of using pool cars at some of our larger offices," said Chuck Kukal, supervisor, fleet, mail and administrative services for Infinity Insurance Company in Birmingham, Ala.

Other fleets are looking to mitigate increased fuel costs by increasing personal use charges.

"Last year, we increased our personal use deduction from $75 to $115," said one fleet manager. However, the laws of diminishing returns eventually confront all fuel management initiatives.

"Of course, rising gas prices are showing up on the radar once again.  However, we can only right-size the fleet so much before the vehicle we provide our drivers doesn't work or makes their job more difficult," said Brett Switzky, fleet services administrator for American Family Mutual Insurance Co.

Already fleet managers are gearing up to deal with potential fraudulent use of corporate fuel cards, especially as employees set out for family summer vacations using the company vehicle. "Fuel pricing this summer is going to be very challenging. We are paying a close eye on personal fuel fraud, etc.," said Lisa Kneggs, fleet manager for Coinmach Corporation & Appliance Warehouse.

The high cost of diesel is a top concern for truck fleet managers. "Our challenge is the high cost of diesel fuel, its seemingly unexplained and uncontrolled rise, and its premium cost over gasoline," said Mike Payette, fleet equipment manager for Staples Inc. "Our other challenges are the high cost of diesel emissions technology, and its impact on new truck prices, and the use of DEF and its cost on a fleet's bottom line. Diesels in inner-city operations are not allowed to complete DPF regeneration due to shortened duty cycles resulting in dealer-forced regens or DEF premature replacement at high cost."

In reaction to the ongoing higher diesel prices, a few fleets have shifted from light-duty diesels to gasoline engines. These fleet managers say the switch was prompted by the consistently higher price of diesel, the high cost of diesel engine acquisition, and the increase in the cost of diesel maintenance. "These changes have easily overcome any benefits associated with the use of diesel technology, such as improved fuel economy and longer life span," said one fleet manager who made the switch.

For businesses that rely on fleet vehicles to move their product to market, higher fuel prices not only impact fleet operations, but their business in general.

"Higher fuel costs are a concern because the margins are already tight in our business. We must find less costly ways to distribute our products," said Gregg Hodgdon, CAFM, manager, fleet operations for Deli Express/E.A. Sween Co., in Eden Prairie, Minn. 

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