State of the Commercial Fleet Industry: 2014

Everything in fleet revolves around money. As a consequence, the No. 1 challenge facing today's fleets continues to be cost containment.

Reducing fleet costs is a constant, never-ending struggle for all fleet managers, but, lately, there seems to be even more pressure emanating from senior management. The mantra directing many commercial fleets is to decrease costs while maintaining services and customer satisfaction.

Many fleet managers report they are given a specific percentage-reduction goal in annual fleet costs, and it is up to them to figure out how they are going to achieve it. As a result, fleets are adopting a multipronged approach to cost containment. Industry-wide, there is ever-increasing pressure to find creative ways to cut costs without impacting productivity and employee morale.

Below are the top seven trends in commercial fleet management cited by fleet managers:

1: Vehicle Acquisition Trends

Fleet ordering for the 2015 model-year will be fueled by ongoing improving

business conditions and company expansion. One example is fleets in the energy sector, which are experiencing robust growth. Business expansion, especially through corporate acquisitions, is another factor contributing to increased fleet order volume.

The forecast is that total commercial fleet orders, on average, will increase in the 2015-MY compared to the prior model-year. Among the key factors driving 2015 model-year buying decisions are corporate initiatives to acquire the most fuel-efficient models available for the fleet application, downsizing to smaller displacement engines, and the incorporation of additional safety features and options into company-provided vehicles.

A common strategy to reduce fleet cost is to downsize to smaller, more fuel-efficient vehicles, but the line between downsizing and driver dissatisfaction is a fine one. Since 2006, fleets have been moving to more fuel-efficient, smaller displacement engine options. Other cost-control strategies include a shift to smaller vehicle classes when the fleet application allows it. For instance, in areas where a full-size truck is not needed, fleets will look at the mid-size truck segment, such as the Chevrolet Colorado, to reduce acquisition costs, along with lowering depreciation and fuel costs.

In addition to downsizing for greater fuel efficiency, other fleets continue to look at hybrids, if total cost of ownership (TCO) pencils out for their application.

Another trend is to experiment with different vehicle segments, such as replacing service vans with service trucks. This is primarily driven by fuel-economy considerations, employee requests, productivity initiatives, and resale opportunities.

There is also an ongoing trend to standardize selector choices and, in the process, reduce the number of choices available to drivers. These fleets want to standardize fleet specifications to offer more consistency for transferring units from one business unit to another. This trend also allows for standardized upfitting.

However, most fleets will not be making any major changes to their selectors. After years of experimentation, they are satisfied with the vehicles offered.

Influencing 2015-MY ordering is the introduction of several all-new models and the addition of new safety features as standard equipment.

The 2015 models include many new features and improvements, such as back-up cameras. Some fleets held off replacing some 2014 models and moved them into their 2015 model-year buy to take advantage of the new enhancements.

The upcoming discontinuation of the Ford Econoline is prompting fleets to find a substitute model. Based on feedback from fleet managers, this sourcing decision is impacting a number of commercial fleets. The all-new, full-size "Euro-style" vans are prompting some van fleets to look at increasing their 2015 fleet orders.

One additional factor influencing fleet order volume is the still strong vehicle resale market. Many companies shortcycled vehicles in prior model-years, which is causing them to decrease their fleet order volume for the 2015-MY. Shortcycling is the practice of taking vehicles out of fleet service earlier than normal to sell them in the used-vehicle market to take advantage of the strong resale values. Those fleets that shortcycled in prior model-years consequently have younger fleets.

Some companies "flipped" their entire fleet in 2012 and 2013 to take advantage of the strong resale market. As a consequence, they placed very few orders for the 2014-MY, but anticipate a larger buy in 2015.

The use of an accelerated replacement schedule as a remarketing strategy is being continued by some fleets to take advantage of the ongoing strong used-vehicle market. These fleets are currently looking to replace more vehicles than usual to take advantage of the still relatively good resale values.

There are a variety of reasons why some companies are decreasing their fleet orders in 2015-MY. One factor causing 2015 orders to decrease is fleet rightsizing initiatives. Fleets are reviewing their selector list to see where it might be possible to eliminate models to rightsize their fleets.

2: Safety Gains Increased Urgency

Driver safety and reducing liability exposure is a major challenge cited by commercial fleet managers. In particular, the challenge is to reduce preventable accident rates and associated repair costs, downtime, and liability risk. Some fleets are focusing on driver training to reduce the incident of preventable accidents.

Also, in an era of higher expenses, the cost to repair accident damage is often an eye-opener for many fleet managers. Often, what appears to be minor to moderate damage can turn into a substantial expense.

In addition, fleets are also focusing on ways to minimize driver distraction. They view driver distraction as a major challenge affecting their operations. One challenge is ensuring drivers comply with company distracted driving policies.

Although already having high visibility on the fleet manager's radar screen, driver distraction has taken center stage as senior management becomes increasingly concerned about the consequences of potential liability exposure. Universally, senior management views driver distraction as a significant liability risk, especially as drivers ignore corporate restrictions and surreptitiously use their own mobile devices in company-provided vehicles.

As more drivers use their personal handheld mobile devices, it is becoming a greater fleet issue. How do you effectively control the use of all the technical equipment, such as a laptop, cell phone, GPS, and tablet computer, such as an iPad, and still know your drivers are safe in their vehicles?

Most fleets have a documented fleet safety policy that is distributed to all drivers who are required to acknowledge receipt and sign that they have read the document. The challenge with driver safety is not only documenting requirements in a fleet policy, but ensuring drivers adhere to the policies.

The bigger issue is how to create a corporate-wide safety culture. A key issue is getting buy-in from senior management, as well as drivers, on the importance of a robust safety program. You need to get the right people involved in making hard decisions.

Sometimes, this is difficult to do. Conveying the importance of safety and driver distraction to executive management at a time when productivity seems to be the primary success lever in most business units can be a tough sell.

Other fleet managers say their primary safety challenge is identifying problem drivers through risk assessment, as well as procedures for dealing with them is a challenge, with personal use compounding this issue.

Other fleet managers cite additional concerns. One top priority is managing driver risk assessment as part of the hiring process. This also includes managing driver behavior, particularly, DUI/DWI and reckless driving. Other aspects include preventing driver fraud of fuel purchases, having drivers respect the company vehicle — particularly at turn-in time — and managing compliance with fleet policy.

3: Vehicle Maintenance Trends

The good news is that vehicle maintenance costs have been flat. Overall, the quality of vehicles from all OEMs continues to steadily improve and extended powertrain warranties have covered some expensive repairs that occur at higher mileages.

Across all vehicle types, the expenses related to the maintenance and repair of fleet units have decreased. Over the past few years, repair volumes have remained flat or decreased. When repair incidents decrease, fleet driver productivity increases.

However, the increased number of recalls, especially among high-volume fleet vehicles, has led to some driver dissatisfaction. A greater fleet awareness on the impact of OEM recalls has led to fleet driver complaints when experiencing parts delays, rental costs, and loss of productivity.

One factor putting upward pressure on maintenance costs is increased vehicle complexity. As service providers strive to stay current with new technologies, it has become increasingly difficult to diagnose and repair complex failures, which, in turn, increases labor costs and downtime. Complicated areas, such as emissions systems and advanced wiring systems, are a bigger percentage of these expenses.

The ongoing technician shortage is also putting upward pressure on labor rates. Technician staffing shortages create a backlog of work in many facilities throughout the country. The technician shortage is especially acute in the oil patch and rural areas. This has created delays in repair times and added expenses for fleets.

It is forecast that the volume of new-model introductions will accelerate as the industry approaches the new mandated CAFE deadlines. Some fleet managers fear the large number of new models in the market may result in temporary parts shortages and increased downtime.

Shortcycling, driven by favorable resale market conditions, has also helped hold maintenance expenses in line by reducing the average age of vehicles in service.

Another ongoing issue is the shortage of replacement components and price

increases for replacement parts. In many cases, the price increases for parts is due to raw material cost increases, especially those built of materials that are oil-based, such as plastic parts. Also, OEM proprietary systems require national account vendors to source parts from the OEMs, rather than the aftermarket.

In terms of preventive maintenance (PM), extended oil drain intervals are a major factor in decreasing motor oil expenses; however, some OEMs now recommend using only synthetic oil when performing PMs on certain makes and models. While the synthetic oil is more expensive, extended service intervals have lessened the impact of this price increase. Others, however, see the increased adoption of synthetic motor oils by OEMs as ultimately putting upward pressure on PM expenses.

One unintended consequence of longer oil drain intervals is the possibility of fewer vehicle inspections.

Maintenance costs should continue to decrease in the future if more manufacturers start to cover oil changes and tire rotations for the first few years of ownership.

A growing fleet maintenance issue revolves around the "soft costs" of driver and vehicle downtime. For instance, vehicle rental costs have increased, in some cases, as a result of delays due to replacement parts on backorder, repair provider workload capacity, repair technician shortage, and oil patch area challenges with repair provider capacity.

4: Replacement Tire Cost Trends

While the industry forecast is for replacement tire costs to remain stable, unpredictable raw material costs will continue to be a wild card in determining future costs. A key factor to higher tire prices is commodity price increases for raw materials, in particular, the higher cost of oil, which is a key ingredient in tire manufacturing. If rubber and oil prices remain stable, then tire costs should remain flat.

One factor that has helped mitigate overall tire costs was the widespread shortcycling of vehicles that has occurred in recent years. Many fleets that accelerated their vehicle replacements in late 2012 and 2013 are enjoying lower tire costs because of fewer replacement tires needed.

However, the biggest factor influencing tire cost has been the increased diameters of OEM-specified tires. This ongoing trend impacts the cost of replacement tires because lower-profile, larger-rim diameter tires require more material to manufacture. Some fleets may experience "sticker price shock" when buying their first replacement tires for larger wheel diameters and low-profiles tires.

Newer, unique, limited supply tire sizes have also increased overall tire costs for certain makes and models. For example, there were only 111 recognized auto radial tire sizes in 1990. That number grew significantly to 337 by 2012, according to the Tire & Rim Association. Of those, the majority of fitments 20 years ago were 13- to 15-inch wheel diameters, whereas in 2012 the popular sizes ranged from 15- to 20-inch diameters.

Automotive manufacturers continue to use larger tire sizes to increase mpg and performance. Fleet managers are carefully evaluating whether the increased cost of the larger tire is offset by the improvement in mpg. Longer tread life mitigates the increased purchase price by helping lower the cents-per-mile cost of tires. New tire technology is offsetting increased tire costs by extending tread life and helping to reduce other operating costs, namely fuel consumption. Tire design and manufacturing is becoming increasingly sophisticated by lowering rolling resistance to help enhance a vehicle's overall fuel economy.

Model changeover and newer vehicles spec'ed with different size tires will put upward pressure on tire costs. The discontinuation of some tire models and introduction of select new models may drive up the overall average cost per tire. Some commercial van fleets switching to the new generation models may see replacement tire costs increase, due to the tire's lower profile and larger diameter wheel.

For fleets interested in gaining fuel efficiency by tire selection, no matter what type or brand of tire is used, drivers should be instructed to regularly check tread depth and condition, and especially tire inflation. Properly inflated tires will benefit the vehicle's overall performance, provide even-wearing tires for longer tread life, and help improve overall vehicle fuel efficiency.

In the final analysis, the cost of oil and rubber will dictate the cost of tires. If oil prices are stable, tire prices will be stable.

5: Unpredictable of Fuel Prices

Fuel continues to be the No. 1 fleet operating cost and fleet managers are relentlessly examining ways to reduce their fuel spend. As the largest cost component of operating expenses, fleet managers are focusing on a multitude of fuel-reduction strategies, which often morph into corporate sustainability initiatives. In many ways, fuel-efficiency initiatives and sustainability initiatives are very much intertwined.

The key issue is the unpredictability of fuel costs and how long they will remain stable. One silver lining to higher fuel prices is that it has prompted many companies to reinvigorate fuel-efficiency initiatives. All aspects of fuel management are being examined, including route efficiency, vehicle payload, territory coverage to reduce miles driven, and fraud management processes.

Although pricing volatility has moderated, fuel continues to represent fleet's largest operating expense.

Despite stable fuel prices, fleets continue to adopt a variety of fuel-reduction strategies. The majority of fleets are incorporating more fuel-efficient vehicles in their ordering/replacement cycle. Fleets are evaluating new, smaller displacement engines and new transmissions, such as continuously variable transmissions, on their impact on fuel costs.

Improving overall mpg remains a primary fuel cost-reduction strategy for fleets. In addition, fleets are seeking ways to increase driver awareness of cost-savings opportunities. They are also becoming more vigilant looking for potential instances of fuel-card misuse and fraud.

Specific cost-saving steps include installing and monitoring vehicle telematics, implementing no-idle policies, and optimizing routes.

Fleets are rightsizing their vehicle selectors to take advantage of fuel-efficient technologies, weight reductions, higher speed transmissions, and appropriate drivetrains to meet their business requirements. Furthermore, the importance of driver behavior is essential. According to the U.S. Environmental Protection Agency (EPA), a driver can impact fuel efficiency as much as 33 percent. The implementation of driver behavior training to reduce speeds, idling, and rapid acceleration, and increase accident avoidance continues to gain momentum within the industry.

6: Trends in Fleet Sustainability

Sustainability continues to gain importance as a top job focus for many fleet managers. The degree of sustainability pressures from management is often commensurate with fleet size. Corporations, especially multinationals, have publicized their corporate mission statements to shareholders and customers, committing to reducing their corporate greenhouse gas (GHG) footprint. Since vehicle fleets are key contributors to corporate GHG emissions, a quick way to meet emissions-reduction goals is to modify the fleet program.

Since most companies replace approximately one-third of their fleet vehicles each year, they can tailor selectors to favor the selection of more fuel-efficient vehicles. For most fleets, anything that increases fuel economy and allows them to be green at the same time is viewed as a positive.

One of the biggest obstacles to fulfilling green fleet initiatives is the lack of capital spending and shrinking fleet replacement budgets. Most commercial fleets agree that before any green initiative is implemented, it will need to provide an acceptable return on investment.

In addition, as internal combustion engines become more fuel efficient, in the minds of some companies, it reduces the need to examine alternative fuels. The challenge is finding a balance.

More fleets are also using eco-driving training as a way to reduce emissions. They are working on ways to improve sustainability by modifying driver behavior.

Although many fleets are looking at alternative fuels, there continues to be gaps in available models that can fulfill fleet applications.

7: Productivity Strategies

Implementing productivity strategies in large corporations is very difficult, since fleet touches many stakeholders within an organization, ranging from finance to human resources to sales to risk management.

Many fleets are looking at technological solutions, such as GPS and telematics systems, to increase driver productivity. A primary application for GPS and telematics systems is to enhance route and operational efficiency. Other fleets are using GPS to modify driver behavior, identify fraud, improve service delivery times, reduce miles driven, and enhance fleet safety.

Driver behavior has come to the forefront as being one of the top challenges currently facing commercial fleet managers. The key issue is driver compliance.