Fuel Costs Bust Fleet Budgets; Other Operating Costs Remain Stable

Not since the fuel crises of the 1970s has the cost of fuel played such havoc with fleet operating budgets. From June 1999 to September 2000, the national average retail price for a gallon of gasoline increased a whopping 46 percent, causing most commercial fleets to substantially exceed their budgeted fuel costs. During the same period, the average price of diesel likewise increased by 39 percent.

“The increase in fuel prices is having a huge impact on fleet operating expenses,” says Bob White, manager, fleet services for ARI in Mt. Laurel, NJ. “What has exacerbated the situation is that the spike in fuel costs was, for the most part, unanticipated. The increase started right around the first of the year, which was after most fleets had put together their operating budgets.”

This is in dramatic contrast to last year’s survey period – July 1998 to June 1999 – when gasoline prices were at their lowest level in 90 years after adjusting for inflation.

Although the cost of fuel is at a 20-year high, the strong profitability of most companies has allowed fleet departments to get the additional funds necessary to cover the budgetary shortfall.

This and other findings (displayed in Charts 1-7) are based on a survey of actual operating cost expenditures incurred by 418,262 vehicles in commercial fleet usage, which are managed by four of the country’s largest fleet management companies: Associates Fleet Services, Automotive Resources International (ARI), GE Capital Fleet Services, and PHH Vehicle Management Services.

One consequence to the higher fuel prices has been a sharp increase in demand for fuel management exception reports. “A lot of fleet managers are pushing for ways to cut fuel costs and are relying on fuel exception reports to help them manage fuel purchases,” said Simon Wilkinson, product manager, maintenance management for GE Capital Fleet Services in Minneapolis, MN. The exception reports are being used to identify drivers buying premium-grade fuel or those not using authorized gas stations.

“We’re working to make sure our drivers adhere to our fueling guidelines,” says Louise Gore, lease administrator for PMI Mortgage Insurance Co. in San Francisco. “Our drivers are required to use regular unleaded and self-serve, where it is available. It does make a difference.”

Gore reports that PMI Mortgage Insurance’s operating costs did increase this year, but it was primarily because of the higher cost of fuel.

“We have seen a lot more interest in fuel exception reports, while in the past, the interest had been primarily with oil change exception reporting,” says Wilkinson.

Despite the strain on fleet budgets, higher fuel prices have not yet prompted companies to change their 2001 selectors to buy more fuel-efficient vehicles, notes Greg Corrigan, senior business consultant for PHH Vehicle Management Services.

For instance, Lillian Palmieri, manager, fleet operations for Novartis Pharmaceuticals Corp. in East Hanover, NJ, says she will not change her selector in response to higher gas prices. The Novartis Pharmaceuticals 2001 selector includes the Intrepid, Impala, Grand Prix, Caravan, and Explorer.

However, others believe that sustained elevated fuel prices will prompt some fleets to re-examine their selector choices. “I believe higher fuel prices will cause some fleet managers to re-evaluate their selectors, and where it makes sense, to consider instead more fuel-efficient vehicles,” said Mike Southwick, vice president, fleet man- agement for Associates Fleet Services in Carrollton, TX.

Despite the high cost of fuel, not everything is bad news in terms of fleet operating costs. If fuel is excluded, other operating costs have remained stable during this 12-month period, says Wilkinson.

Southwick agrees saying, “With the exception of fuel costs, operating expenses are pretty much a continuation of what we saw last year.”

Stephen Levine, fleet manager for Pharmacia Corp. in Peapack, NJ, says that the only operating cost increases he has seen this year were in fuel prices. “Other than that, I haven’t noticed any big hit in any particular area. Fortunately, the manufacturers are building decent cars and that keeps our maintenance costs down.”

This is confirmed by an examination of this year’s operating cost data, which are based on the actual expenditures of 418,262 vehicles, comprising the following vehicle categories:

• 31,196 compact cars.

• 115,356 intermediate cars.

• 90,238 Class 1 and 2 trucks.

• 5,394 Class 3-5 trucks.

• 77, 789 minivans.

• 65,032 full-size vans.

• 33,257 sport/utility vehicles.

In-Vehicle Electronics May Increase Maintenance Expenses

Inflation, which itself has been relatively flat, has not had a big influence on the cost of oil, mechanical, or tire expenses. In addition, preventive maintenance expenses have remained stable due to the use of longer-life spark plugs, transmission fluid, and anti-freeze. 

“When you look at the past five years, maintenance costs have been pretty much in line with inflation and, in some cases, even lower,” says White of ARI. However, labor rates are starting to increase throughout the country because of the tight job market, adds Wilkinson of GE Capital.

Although vehicle build quality has improved dramatically in the past five years, which has helped to lower operating costs, overall vehicle quality has leveled off, adds Corrigan. “We are not seeing the great leaps in quality as we did in the past five years; improvements now are more incremental,” he says.

“One of the surprising revelations in this year’s survey was that there is not a big difference in operating costs between compact and intermediate cars,” said White. “Some of the intermediates are more cost-effective in terms of maintenance, even though compacts have better fuel economy.”

According to Wilkinson, one reason for the high operating costs for compacts is because of the typical nature of their fleet application. “In courier or delivery applications, these vehicles are driven harder and longer. They, most likely, have multiple drivers and overall, get less frequent care,” he says.

One area where maintenance expenses will most likely increase in the future is with on-board vehicle electronics, which are projected to become an ever-greater percentage of a vehicle’s components and cost.

“There are two reasons why this will increase maintenance expenses. First, if you have a problem, it is typically a more expensive problem. Second, you need a higher level of expertise and diagnostic equipment to fix the problem, which means you need to have the vehicle serviced at a dealership, which a has higher overhead cost,” said White of ARI.

Wilkinson of GE Capital agrees. “This will be especially the case as navigation and more on-board computers are added to vehicles in the future; this is going to add more complexity to the mix.”

Another factor that will lead to increased maintenance expense in future years is that vehicle service lives are being extended by more fleets.

“We are seeing some companies extending light-duty vehicle replacement periods for their work vehicles to between 80,000 to 100,000 miles,” said Corrigan. “Because of this, we are seeing a higher incident of bigger ticket maintenance events such as transmission and major engine repairs.”

The trend in extending replacement periods is occurring primarily with light-duty trucks. There has been no significant change in replacement periods for medium- and heavy-duty trucks. Likewise, passenger car fleets have not experienced the same lengthening in replacement cycling as light-duty trucks.

“In terms of cars, we have seen a gradual increase in the amount of miles cars are kept in service. The average today is roughly in the 60,000 to 65,000 mile range. Years ago it would have been closer to 55,000 miles,” says Corrigan.

Maintenance expenses for executive fleet vehicles, which are increasingly becoming SUVs, have remained stable, even though they are typically higher than those for sales and service vehicles because many of them are serviced at dealerships. The cost to operate SUVs lines up pretty closely with minivan costs, although tire costs are more expensive.

Vehicle categories that have experienced the greatest increase in maintenance costs are SUVs and Class 3-5 trucks.

A key reason for the increased maintenance costs for Class 3-5 trucks is overloading. “Drivers think they are driving a Class 6,” says Wilkinson. Most of the increase for Class 3-5 was with repair expenses. “It is not associated with preventive maintenance and tires,” said Wilkinson. “It is other breakdowns and component failures, either engines, transmissions, and brakes.”

Overloading is also a key factor in higher cents-per-mile operating costs for light-duty trucks and vans, says Wilkinson. Overloading primarily results in faster brake and tire wear. “This has been an ongoing problem, especially as pressure increases on fleet managers to minimize or contain acquisition costs. Often they opt for lower-GVW trucks, while their load-carrying requirements remain the same,” said Wilkinson.

Corrigan, likewise, acknowledges overloading as an ongoing problem. “Everyone is trying to get away with the minimum acceptable vehicle they can and that leads to frequent overloading,” he says.

Another ongoing trend to 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. This additional competition from dealers is helping to stabilize the cost of PM services and this trend is projected to continue as vehicle quality continues to improve and the necessity for mechanical repairs decrease.

Tire Expenses are Flat

Replacement tire costs have remained relatively stable and, in some cases, have decreased. The reason is more a case of manufacturers holding the line on replacement tire pricing rather than a result of improved tire wear. In many cases, replacement tire expenses have declined as a result of national account price decreases, which have occurred for the past three years, and the entry of new national account vendors such as Pep Boys, which are marketing inexpensive replacement tires to the fleet industry.

One trend is the tendency of more vehicles to be equipped with larger, 15-inch diameter tires, which, as a consequence, makes replacement tires more expensive.

Another factor that could increase tire costs in the next 12-month period is the fallout from the Firestone recall, says White of ARI. “We have seen a big increase in tire costs for this reason. These companies seeking to swap out all Firestone tires from their fleet vehicles run the gamut, ranging from insurance companies, pharmaceuticals, forestry-type services, and utility companies.” Most of these companies simply want to eliminate any possibility of liability exposure associated with any Firestone tire. However, none of the fleet management companies reported seeing any price increases on replacement tires. “Right now, it is just a case of limited product availability,” says Corrigan.

If crude oil prices continue to stay elevated, there is a risk, in the long run, of tire production costs increasing.

Oil Expenses Remain Stable

Oil expenses have remained relatively static during the past 12 months. One reason why oil costs have remained relatively static is because of the competitiveness in the fast oil change market and the need to keep oil change charges at a certain level.

Out-of-Warranty Adjustments

A big trend in reducing maintenance expenses has been the recapturing of out-of-warranty costs during the repair process by fleet management companies rather than after-the-fact, according to Southwick of Associates Fleet Services.

“The trend in on-site adjustments at the dealer level has been going on for the past several years,” said Southwick. On-site policy adjustment assistance for repairs outside of the manufacturer’s new-vehicle warranty has increased as factories and dealers have adopted more flexibility in performing goodwill adjustments for post-warranty repairs.

Future Trends in Operating Cost

The consensus among the participating fleet management companies is that all operating costs, other than fuel, should continue to increase only at the rate of inflation, which is projected to be 3 to 4 percent per year. In terms of fuel costs, the participating fleet management companies did not anticipate any likelihood of decreased prices in the foreseeable future.

“I see fuel prices continuing at current levels or even higher in 2001,” says Wilkinson of GE Capital.

Still, operating costs have essentially remained stable for the past three years. “If you take out fuel costs, operating costs are flat. But when you factor in fuel, operating costs are increasing, and the end result is that it will be much more expensive to operate your fleet in the next 12 months,” says Wilkinson.

Likewise, Corrigan foresees operating costs remaining flat for the next 12 months. “We are going to see a gradual increase in maintenance costs, such as an increase in replacement parts and the cost of labor,” said Corrigan. “Historically, it has been hard to recruit technicians and mechanics, but it is even more difficult today. As a result, we are seeing more cost pressure on the maintenance side and as a consequence you may see maintenance costs creep up a bit,” said Corrigan.

In the short term, operating costs show every indication of remaining very stable; however, as more fleets extend their vehicle replacement periods, there will be an upward pressures on operating costs as a result of more higher-mileage vehicles in operation.

Depreciation Costs Decline

In addition to operating cost data, Automotive Fleet requested the four participating fleet management companies to provide information on depreciation expenses for the 418,262 surveyed vehicles.

Overall, there has been a stabilization in the depreciation expense because of the ongoing strong used-vehicle market.

Used-truck price increases have stayed ahead of new-price increases, which results in decreasing depreciation cost per mile and dollars per month.