Higher Fuel Prices Threaten Operating Cost Stability

The good news is that commercial fleet operating costs, in general, continue to remain flat and have been since July 1996.

The bad news is that gasoline prices are at their highest point in the past 28 months. The price of self-serve regular unleaded gasoline, as of September 1999, was averaging $1.28 per gallon nationwide, with the highest prices found on the West Coast, which averaged $1.42 per gallon. Gasoline prices have increased in each of the last seven months since February 1999, when the average per-gallon price was 96 cents, an increase of 32.2 cents per gallon.

This is in dramatic contrast to last year, when gasoline prices were at their lowest level in 90 years after adjusting for inflation.

Although gasoline prices have spiked upward, these cost increases are not fully reflected in this year’s operating cost survey, which captured expenses up to August 31, 1999. "Most of the data captured in this survey was when fuel costs were down. Fuel prices didn’t start increasing until the tail end of the survey period," said Mike Southwick, vice president, fleet management, for US Fleet Leasing in Carrollton, TX.

The data displayed in Charts 1-14 are based on actual operating cost expenditures incurred by 508,487 vehicles managed by four fleet management companies: Automotive Resources International (ARI), GE Capital Fleet Services, PHH Vehicle Management Services, and US Fleet Leasing.

The half-million vehicles surveyed consisted of the following vehicle categories:

• 36,706 compact cars;
• 150,626 intermediate cars;
• 82,897 Class 1 and 2 trucks;
• 2,676 Class 3-5 trucks;
• 116,971 minivans;
• 88,055 full-size vans;
• 30,556 sport/utility vehicles.

Why Have Fuel Prices Increased?

In spring 1999, member countries of the Organization of Petroleum Exporting Countries (OPEC) announced that they would commence restricting the production of oil in order to increase the price per barrel.

"Historically, individual member nations begin cheating by producing oil in excess of their quota," said Greg Stanford, business consultant for PHH Vehicle Management Services. "This summer, that didn’t happen. This, combined with stockpiling out of concern about possible Y2K disruptions, resulted in fuel price increases starting in July 1999."

Compounding this situation were two refinery outages in California, which sign- ificantly reduced the production of California grade gasoline and subsequently caus -ed rapid price increases in California.

"This shortage spilled over into the Rocky Mountain states," said Stanford. "The independent oil producers there saw that they could get a better price by trucking their supplies to the West Coast. That, in turn, produced a supply-and-demand problem in the Rocky Mountain area, causing prices to increase there." Agreeing with this assessment is Bill Powell, supervisor of client reporting for ARI. "Fuel has remained at a higher price due in part to a cut in oil production. This will definitely affect next year’s operating cost statistics," he said.

The question is how long will gasoline prices continue to increase? "There’s one school of thought that says gas prices are going to continue to rise until December," said Stanford. "As long as there are no Y2K disruptions and there are no supply problems, fuel prices could very well drop after the first of the year."

Some Maintenance Costs Are Up

GE Capital Fleet Services reports that maintenance costs for mid-size sedans have increased. "One of the major cost increases has been with ABS brakes," said Eric Strom, manager, North American Customer Services, for GE Capital Fleet Services. "Over the years, ABS has become more of a standard feature on mid-size sedans, which are more expensive to repair." Similarly, rear disc brakes, which have become more common with intermediate-sized vehicles, are more expensive to repair than drum brakes.

"We have also seen higher engine repair expenses for cars in the 48,000- to 80,000-mile range," added Strom. "We attribute this to more high-tech engines, such as the multi-port, 24-valve, dual overhead cam engines. For instance, with dual cams there are more components to repair than there were with the old single cam engines. Not only is there increased parts expense, but there is also an increase in labor costs," said Strom. Similarly, ARI reports an increase in maintenance expenses for higher mileage light-duty trucks. "We have noticed an increase in the 48,000- to 80,000-mile range," said Powell. "This can be attributed to an increase in the cost of parts."

Similarly, GE Capital has recorded an increase in maintenance costs for higher-mileage full-size vans, which Strom attributes to an increased tendency by fleets to overload vans. "What’s causing this overloading is that fleets are acquiring less expensive half-ton vans when they should be using a three-quarter-ton instead," said Strom. "Overloading is the primary cause for increased brake wear and tire expenses for full-size vans."

Despite these maintenance increases, all of the fleet management companies participating in the survey report that vehicle quality has continued to increase. This has been a key factor in contributing to the stability in operating expenses for the past four years. However, as a result of this increase in vehicle quality, some fleets began to extend the in-service periods of their company vehicles, which has resulted in higher maintenance expenses in the higher-mileage ranges.

Another consequence to the improved vehicle build quality is that new-vehicle dealers are being forced to actively pursue PM service business, an area in which they had little interest in the past, said Bruce Horan, maintenance product manager, card services, for PHH Vehicle Management Services. "I believe the additional competition from dealers has helped stabilize the cost of PM services. This trend will most likely continue as vehicle quality continues to improve and the necessity for mechanical repairs decreases," said Horan.

Tire Pricing Keeps Lid on Costs

Tire costs have remained relatively stable and, in some cases, are down. However, this is more a case of manufacturers holding the line on replacement tire pricing rather than a result of improved tire wear. "The quality of tires has improved in terms of control and braking distances as opposed to significant improvements in wear rates," said Southwick. "The entry of discount chains into the fleet market is putting even greater pressure on price reductions. In the past couple of years, Firestone, Michelin, and BFGoodrich/Uniroyal have all reduced prices because of com-petition and economic conditions," added Southwick.

Strom agrees. "Tire cost reductions that fleets have experienced were primarily caused by price reductions by the tire manufacturers," he said. "On a national level, Pep Boys has been opening more stores and offering very competitive tire prices."

However, if oil prices continue to stay elevated, this runs the risk of increasing tire costs, said Strom.

Oil Expenses Remain Consistent

Although fuel costs have increased, the cost of oil changes has remained relatively flat. According to Southwick, low inflation has caused prices to remain stable. However, truck oil change expenses are up, because some trucks are required to conform to severe service requirements, especially if off-road usage is required, added Southwick.

Oil expenses were also up for Class 3-5 trucks, but Southwick points out that this increase may be the result of AF’s survey methodology. "I think this is an issue of how expenses are classified," he said. "With medium-duty trucks, you have A, B, and C services, as opposed to just oil changes. If you take the entire B service expense and classify it under oil, then that cost will be driven up significantly. For instance, a B service includes not only an oil and fluids change, but also a full vehicle inspection."

Looking at it from another perspective is Sally Spangler, manager of information consulting services for PHH Vehicle Management Services. "Higher oil costs on a cents-per-mile basis might actually be a good thing," said Spangler. "This may indicate that drivers are getting preventive maintenance done on a regular basis."

Another trend that promises to influence future operating costs is the installation of on-board oil monitoring equipment on vehicles, which has the possibility of prompting manufacturers to extend their recommended oil change intervals.

"As on-board oil monitoring technology finds its way into more vehicles, we may very well see the manufacturers adjust their oil change interval requirements, which haven’t changed for nearly a de- cade," said Horan.

Forecast of Operating Costs

The consensus among fleet management companies is that fleet operating costs should continue to remain stable into 2000, as long as fuel prices do not continue to escalate.

"Operating costs show every indication of remaining very stable; however, as fleets extend their in-service periods, there will be an upward tick in operating costs for higher-mileage vehicles," said Southwick.

In a possible reversal of the migration to trucks, some fleet management companies are reporting that they are noticing an embryonic trend among some fleets to shift back to four-door sedans.

"In an effort to cut costs, some fleets are taking expensive sport/ utility vehicles off their selectors and switching back to four-door sedans," said Spangler. "These fleets are looking at lifecycle cost and more often than not, they are moving away from SUVs and minivans." Spangler cites the insurance industry as one fleet segment that has begun downsizing the vehicles in its fleets.

The amount of money a fleet can save by switching from an SUV to a sedan will vary by the type of sedan selected, said Stanford. "A recent study for one client indicated that the SUV's monthly cost exceeded the mid-size sedan by approximately $200," said Stanford.

Likewise, Southwick of US Fleet Leasing reports seeing a similar trend. "What is influencing this downsizing is a desire by fleet managers to reduce total lifecycle costs," said Southwick.

In terms of SUV operating costs, there has been no significant increase in the past 24 months. "The cost to operate SUVs lines up pretty closely with minivan costs, although tire costs are more expensive," said Strom.