Higher interest rates are a relatively new factor putting upward pressure on fleet costs. Fleet budgets have increased in 2023 due to interest rate increases but will also have to be addressed in...

Higher interest rates are a relatively new factor putting upward pressure on fleet costs. Fleet budgets have increased in 2023 due to interest rate increases but will also have to be addressed in 2024 budgets.

Photo: Automotive Fleet 

One issue that all fleet managers agree on is that fleet costs are increasing across the board in every facet of fleet management. One fleet manager summarized her top three challenges: “Cost, cost, and cost of everything.”

Consequently, fleet managers feel intense pressure from their management to cut costs. “Due to the high cost of everything, my top priority is cutting costs,” said one fleet manager who wished to remain anonymous.

Convergence of Fleet Costs

The convergence of higher acquisition costs, increased maintenance expenses, inflationary pressures on goods and services, and escalating interest rates have driven fleet costs up dramatically. Vehicle costs and interest rates have doubled over the past 24 months. What was a $500 payment for a van is now $1,000; what was $1,000 is now $2,000.

Increasingly, fleet managers find themselves operating and managing their fleets in volatile economic environments of elevated fuel prices, rising interest rates, and higher inflation.

Unfortunately, fleet managers have no control over these overall external economic factors. Fleet managers cannot control fuel prices or interest rates but can only seek to implement policies to mitigate overall fleet costs.

Higher Acquisition Costs

Today, every fleet manager is impacted by increasing acquisition costs of fleet vehicles and the subsequent difficulty in acquiring replacement fleet vehicles due to sourcing constraints and fleet budget limitations. As any fleet manager will tell you, vehicle net costs are up, with base prices up considerably over 2021, further exacerbated by lower incentives and higher interest rates.

As one fleet manager said: “Motor company allocations create a situation where I can’t get as many vehicles as I need, and I can’t change manufacturers to buy an alternative make and model as they aren’t taking new customers, or, if they do, you get almost no allocation at all.”

As a result, rising vehicle costs are putting a strain on fleet budgets. Even though there has been some improvement in vehicle availability, fleet managers have not yet seen relief in vehicle costs.

Internal combustion engine (ICE) vehicle costs continue to rise while incentives have not yet returned to industry norms. Those companies transitioning to EVs generally have a higher acquisition cost than a comparable ICE, but TCO is nearly in parity.

Rising interest rates are also substantially affecting vehicle funding and leasing costs.

Higher Repair Costs

The key culprits behind higher fleet costs are the sourcing constraints, making it difficult to acquire replacement vehicles. Also, restrictive OEM fleet ordering allocation systems limit the number of vehicles a company can order, often below the number of vehicles needing replacement. It leads to an average age of fleet vehicles increasing dramatically, an uptick in unscheduled maintenance costs, and the creation of a downstream deferred fleet replacement bubble.

One fleet professional observed that vehicle acquisition and repair costs have been the primary factors exerting upward pressure on fleet costs. Fleet budgets have been strained by these cost increases, with average repair costs per vehicle increasing by thousands of dollars.

This is especially the case when repairing an accident-damaged vehicle. For instance, airbags, modules, sensors, and other safety features add substantially to a routine repair. Repairs of $15,000 to $20,000 or more are becoming more routine because the fleet manager has no choice because they cannot get a replacement vehicle quickly; therefore, they often repair a borderline total loss.

In addition, there are extended rental costs, which can sometimes be as long as six to 10 weeks waiting for the replacement vehicle to be delivered.

As a result, these sourcing constraints have further amplified fleet expenses by incurring excessive rental costs waiting for delivery of an ordered vehicle. Other fleet managers likewise agree that their maintenance and rental costs have increased because they are forced to keep vehicles in service beyond their scheduled replacement.

Keeping vehicles in service longer also incurs other costs at the time of resale due to higher miles and increased wear and tear.

Inflationary Pressures

Cost increases, particularly the steep vehicle and inflationary pressures, such as increasing cost of parts, are impacting all fleet segments, particularly public sector fleets.

Costs for vehicles and parts have risen significantly over the past few years, and public sector fleet budgets have been unable to keep up with the cost escalations.

Higher Interest Rates

Higher interest rates are a relatively new factor putting upward pressure on fleet costs. Fleet budgets have increased in 2023 due to interest rate increases but will also have to be addressed in 2024 budgets. Fleet professionals are always focused on cost. However, today, they are faced with rising acquisition costs of vehicles and rising interest rates.

No one really focused on interest rates a few years ago, as the numbers were so small that they weren’t viewed as a major cost variable. Now, interest rates have escalated to become a significant cost once again when leasing fleet vehicles.

Reduced Resale Increasing TCO

The total cost of ownership (TCO) of fleet vehicles has risen considerably, especially as sky-high resale values have receded. In the final analysis, increased resale values are not offsetting these other fleet cost increases to the extent they once did.

Inflation and low fleet incentives are a challenge as fixed year-over-year costs continue to rise, and the only offset has been strong resale prices, but resale values seem to be softening a bit.

Fuel Prices Escalate

A recurrent variable putting upward pressure on fleet costs is the price of fuel, which is the largest expense category of a fleet operating budget. This is a major challenge for many fleets. This is especially the case with vocational fleets operating full-size pickups averaging $100-$130 each time they fill up at a fuel station, with some drivers filling up multiple times a week.

In addition, the ongoing increase in fuel costs will most likely require additional adjustments to 2024 fleet budgets.

Increase in Taxes and Fees

New taxes and other fees directed at vehicle owners and their assets are proliferating. These are added costs and, in most cases, are not budgeted.

Legislators at the state or local level are increasingly endorsing use of violation cameras for red-light infractions and speeding over the posted speed limit. Tolls are getting more expensive, and more roads will become toll roads. In addition, local property taxes on vehicles went up in spite of the fact that the average age of vehicles is older.

Likewise, there is a growing fear that transitioning to EVs will bring other opportunities for legislators to charge new taxes and fees. With gasoline excise taxes forecast to decrease with the increased share of EVs on the roads, legislators are considering new laws to charge taxes by the miles driven, which will directly impact EVs.

About the author
Mike Antich

Mike Antich

Former Editor and Associate Publisher

Mike Antich covered fleet management and remarketing for more than 20 years and was inducted into the Fleet Hall of Fame in 2010 and the Global Fleet of Hal in 2022. He also won the Industry Icon Award, presented jointly by the IARA and NAAA industry associations.

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