Operating costs are comprised of fuel, replacement tires, maintenance/repairs, and preventive maintenance oil drain intervals. All of these expense categories witnessed price increases in the first eight months of the 2011 calendar-year.
For instance, fuel prices were approximately 73 cents to $1 per gallon higher than the same period in 2010. The price of replacement tires for light-duty vehicles rose 6 to 10 percent. In addition, the prices of a number of replacement parts increased, while inflationary pressures exerted upward pressure on labor rates in many markets.
These findings and others are revealed in Automotive Fleet's 20th annual operating cost survey based on data provided by seven survey partners:
● Automotive Resources International (ARI).
● Emkay, Inc.
● GE Capital Fleet Services.
● LeasePlan USA.
● PHH Arval.
● Wheels Inc.
This year's survey is based on analysis of actual operating costs incurred by 662,634 vehicles operated by commercial fleets, which are managed by these seven fleet management companies.
"Due to vehicles being held longer than typical replacement policy guidelines in 2009 and 2010, coupled with a strong resale market, 2011 saw a year-over-year increase in the number of vehicles being replaced," said Angela Feerick, director, strategic consulting, PHH Arval. "The entry into the fleet market by many new vehicles resulted in an overall impact to average spend for tire and maintenance as compared to prior years. As clients return to their normal cycling of vehicles this is expected to return back to historical trends."
In addition, Tony Piscopo, director, fleet management for ARI, pointed out that the average miles driven in 2011 are above last year, so the increase in the overall cost-per-month is higher than the average increase in the cost-per-mile.
This year, as with prior years, the operating expense category with the largest cost increase was fuel.
"In 2010, we all enjoyed a relatively stable fuel price environment, with little variability during the calendar-year and averages of $2.78 per gallon for gasoline and $2.99 per gallon for diesel. Also, 2010 fuel costs were largely in line with budgets established in the fall of 2009. This was not the case for 2011. For a good part of the year, pump prices for 2011 were as much as $1 per gallon above prior year levels; well above most budget forecasts for 2011," said Greg Stanford, director, market intelligence, PHH Arval. "We will probably end the year with average prices of $3.50 per gallon for gasoline and $3.85 per gallon for diesel - increases of 28 percent over 2010."
A similar observation was made by John Bauer, manager of fleet analytics for Wheels Inc. "Fuel prices are up $0.73 per gallon over the same period last year and monthly costs are up accordingly," pointed out Bauer.
As fuel costs have increased, many fleets are scrutinizing additional ways to lower their total fleet spend. "One way has been short-cycling into new, more fuel-efficient vehicles. Leveraging the historically strong resale market has helped companies offset rising fuel costs by cycling older, less fuel-efficient vehicles," said Mark Lange, CAFM, maintenance services specialist, GE Capital Fleet Services.
Another factor influencing this year's operating expenses has been the increased mileage as a wide range of businesses emerged from the recession. "Improving economic conditions have led to increased business activity, and, as a result, certain maintenance expenses are on the rise as fleets are logging more miles and retaining equipment for longer durations," added Piscopo of ARI.
As fuel price volatility has been occurring every several years and prices are trending upward, it has begun to change the management of fleet operations.
"Fuel costs have altered the way fleets have historically operated. Fleet managers continue to take into consideration several variables that ultimately affect variable fuel costs," said Mark Donahue, business analyst for Emkay. "Implementation of driver behavior training to reduce speeds, idling, and increased safety awareness and mpgs have gained momentum in 2011. In addition to training, the use of technology and alerts increased in popularity with the selection of more fuel-efficient vehicles and the deployment by fleet managers."
One positive outcome from fuel pricing volatility is that fleets are more experienced in addressing these price spikes and are better positioned to mitigate the price increases with new technologies.
"Fleets were more prepared for rises in fuel costs in 2011. They have done a much better job in taking advantage of all the tools out there to not just budget for fuel costs, but to manage it throughout the year," said Tony Blezien, vice president, operations, LeasePlan USA. "Fleet managers have turned to technology to help educate fleet drivers on how to locate the lower-cost providers in their area. Now, fleet drivers can use their smartphone to pinpoint fuel site locations and the lowest-cost provider within a certain mile radius."
According to Dave Lodding, president of Donlen Fleet Management Services, the key difference he has observed concerning the impact of higher gasoline and diesel prices has been with behavior and focus. "Fleet managers are more interested in looking at every option available to manage their fleet costs. Ideas that may have once been dismissed as 'that would not work for me' are now looked at with a fresh perspective. For instance, with the cost of diesel fuel now more than or equal to gasoline, fleets are reevaluating the overall cost of using diesel pickups unless there are specific business requirements such as heavy loads or towing," said Lodding.
To mitigate the high cost of fuel, many fleets are focusing on changing driver behavior. "As stated by the EPA, the driver can impact the fuel efficiency of a vehicle by as much as 33 percent, so providing guidance to drivers on how even minor changes to their driving behavior can have a big effect. Other areas getting attention are excessive idling and route management as a way to reduce fuel consumption and miles driven," said Lodding.
Engine Downsizing as Fuel Prices Continue 'Upsizing'
One factor that has helped mitigate fuel cost increases is the increase in fleets reducing engine size, as well as implementing telematics systems.
"With the decreasing cost of telematics products, fleets have been more willing and able to adopt this technology. And, by using telematics, companies have seen a 10- to 15-percent decrease in fuel cost by significantly reducing the miles driven, route scheduling, reduced speeds, and idle shut-off tools," said Blezien of LeasePlan USA.
Piscopo of ARI agreed, "The expansion of telematics solutions supports efforts to minimize fuel consumption by reducing idle time and personal use. Telematics are also being used increasingly to optimize routes and geo-fence vehicles to reduce their use in unauthorized sectors."
Engine downsizing, an industry-wide trend, has been occurring since 2006. "The number of four-cylinder engines has increased every year. More fleets are eliminating minivans and SUVs, unless needed, as a work vehicle," said Bauer of Wheels.
Fleets are also adopting a number of other strategies to mitigate fuel cost increases. "Fleets are attempting to offset rising fuel costs by right-sizing their fleets with the most cost-effective vehicle per job application, more aggressive vehicle cycling to take advantage of the strong resale market, and exploring alternative-fuel vehicles," said Lange of GE Capital Fleet Services. "In addition, fleets are beginning to utilize fuel locator and pricing applications found on smartphones, which identify recent pricing by local fueling stations, making it easier for drivers to locate the lowest fuel provider."
Another effective fuel-reduction strategy has been idle-reduction programs. "Fleet clients are taking steps to reduce the number of idle hours, thereby reducing both fuel consumption and carbon emissions. Fleet managers are also providing additional training and online tools to encourage drivers to locate fuel sources with the lowest price available in each market," said Piscopo of ARI.
The participating fleet management companies are also reporting an increase in the use of telematics devices by commercial fleets, along with fuel hedging.
"Clients are leveraging the data captured through telematics and integrating it with routine programs to minimize miles driven. In addition, they are looking for opportunities to monitor idling time and decrease it where feasible," said Feerick of PHH Arval. "Fuel price hedging is also getting some interest. We are hearing a lot more conversation around implementing fuel price protection or hedging strategies to protect against future fuel price volatility."
Feerick added: "Probably the best strategy to mitigate fuel costs is to look at the fuel economy of vehicles being placed in service, and to take advantage of improvements the motor companies are making in fuel efficiencies. Like everyone else, we are seeing increased interest in understanding what alternative fuels might make sense for individual fleets. Mobile devices are also providing drivers with more tools at their fingertips, such as locating a low-cost fuel provider near their current location."
Fleets are taking more of a strategic approach to future vehicle selections and historical trending and analysis. "Ensuring that the vehicles they choose will not only meet their business needs, fleet managers are taking into consideration the cost-benefit of taking advantage of newer fuel-efficient technologies. Furthermore, drivetrain and wheel drive consistently are topics of discussion. Utilizing fewer cylinders, higher-speed transmissions, 4x2 instead of 4x4, and smaller vehicles in general are the factors that are widely being considered," said Donahue of Emkay.
Another trend has been in the area of driver training. "Fleet management services also realize the importance of appropriate driver behavior and route optimization and have created platforms for their customers to utilize. These platforms, primarily online system-based training and vehicle telematics devices, have had great success and truly impact the way the driver behaves while behind the wheel. Metrics commonly support the impact of paying attention to the operating cost of fleets and the need to have proper analytics and technology to best manage fuel expense," said Donahue.
Higher Commodity Prices Cause Tire Prices to Ratchet Upward
During the first eight months of 2011, tire prices have increased at a higher rate than inflation, particularly for light trucks and mid-size cars.
"Tire prices continue to increase from 4-13 percent, as seen over the past several years, especially on truck and commercial tires. An increase in the cost of raw materials is the primary stated reason," said Arnie Barnes, manager, vehicle maintenance assistance, PHH Arval. "Over the past several years, an overall increase in optional and standard tire size, plus a greater variety of popular tire sizes, has led to stocking issues in some smaller store locations, which can result in increased cost, both in direct tire pricing and driver and vehicle downtime."
These price increases are on top of prior-year back-to-back price hikes. However, the price hikes for replacement tires in 2011 were higher than those in 2010. "This year, there have been rather large increases in replacement tire costs compared to previous years," said Michael Crumlett, manager maintenance services for Emkay.
Tire price increases have been higher in the retail market than the fleet market due to national account pricing agreements. "When increases have occurred on the retail side of the business, prices for national accounts have held steady. Having said that, when pricing does change - which is typically on an annual basis - adjustments are made but not at the level seen on the retail side," said Lodding of Donlen.
Contributing to higher replacement tire costs have been the increase in average monthly mileage as vehicles are kept in service for longer periods. "Tire costs are up, especially at higher mileage. This suggests that tire life is extending but tire prices are increasing," said Bauer of Wheels.
There have been multiple tire price increases throughout 2011 and signs point to more on the horizon.
"In the past, national account tire manufacturers have done their best to shield the fleet industry from price increases by holding prices for a 12-month period. Having been financially able to absorb the cost pressures of producing tires in the past, we feel that they will no longer be able to continue to absorb these increases," said Dave Jankiewicz, director, maintenance and repair management for LeasePlan USA.
Another factor has been commodity prices, in particular the higher cost of oil, which is a key ingredient in tire manufacturing. "As oil prices stay high, tire prices will follow," said Bauer.
Most foresee tire price hikes continuing for the balance of the calendar-year. "Expect another round of pricing increases sometime during 2011," said Barnes of PHH Arval.
Another continuing problem has been the increased shift to lower profile tires, which are primarily geared to retail buyers, but find their way on to many traditional fleet vehicles.
"The manufacturers are engineering vehicles to have low profile tires with large wheel diameter sizes up 20 inches on some of their new model vehicles. This alone raises the cost for replacement tires, not to mention raw material costs," said Crumlett of Emkay.
The cost of raw materials has been significantly increasing lately, leading to an increase in tire prices across the board.
"Spikes in multiple raw materials that are driving those price increases are carbon black and synthetic rubber. The price of already scarce carbon black is being edged up by crude oil prices and recovering auto production. Ongoing rubber price pressures include: the lowest inventory levels since 2002, Chinese demand that is expected to grow 9 percent in 2011, and the depreciating U.S. dollar," said Jankiewicz.
A similar observation was made by Crumlett. "The cost of raw materials required to manufacture tires has risen dramatically," he said.
A critical factor driving tire costs are larger tire size and tread design. "The larger tires will lead to replacement costs that may be a big surprise to a fleet manager," said Lange of GE Capital Fleet Services.
Longer in-service periods for fleet vehicles are resulting in additional tire wear-and-tear. "We continue to see vehicles remaining in service outside traditional surplus milestones. This prolonged vehicle utilization exposes clients to additional tire cost over the lifecycle of their fleets," said Barnes of PHH Arval.
The auto manufacturers continue to change the size of tires on newer-model vehicles, which has increased tire prices and resulted in higher tire costs.
"Due to the fact that the replacement production from the tire manufacturer does not start up until a year after the vehicle comes out, fleets have availability issues to deal with and increased pricing due to the small supply of tires. This occurs because fleet vehicles typically incur twice as many miles as the retail customer, thus, requiring replacement tires sooner than retail," said Jankiewicz. "Where this issue is not 'new' is that it seems to be getting compounded as some manufacturers are deciding not to participate in the production of replacement tires on certain models, thus, again limiting options for the fleet customer."
Piscopo of ARI similarly cited tire availability. "We have also experienced some availability issues on new tire models as limited offerings negatively impact both pricing and dealer tire stock."
Another factor impacting replacement tires is supply and demand, especially in relation to the number of new vehicles sold. "When the car manufacturers reduced production so did the tire companies, with some even closing tire plants. As demand has started to increase, their ability to produce tires is being stretched. This impacts availability, which can make it difficult to obtain the desired tire," said Lodding of Donlen.
There are also safety risks to adding a non-OEM replacement tire. "Those tires with a size unique to one tire manufacturer will have limited availability and carries the risk of someone substituting a non-OEM recommended tire size," said Lange of GE Capital Fleet Services.
As manufacturers introduce new models with unique tire sizes, replacement tires are not always readily available and prices can be higher. "There are also challenges finding snow tires when new sizes are introduced. Also, those fleets extending lifecycles have approved more tire replacements at high mileage," said Bauer of Wheels.
One factor affecting tire cost for minivans is the elimination of the minivans when not a work requirement," said Bauer. "The resulting heavier loads and increased mileage have had an impact on minivan tire costs. Another factor for most fleets is that tires are not rotated as frequently as recommended. Wheels believes that tire cost could be reduced with more frequent rotation."
OEMs Require Use of More Expensive Motor Oils
There has been an ongoing trend by OEMs to extend recommended oil drain intervals, which has helped to decrease preventive maintenance expenses.
"In addition, oil life monitors are allowing fleets to extend preventive maintenance intervals," said Bauer of Wheels.
The new GF-5 and Dexos motor oils have raised oil change prices for newer vehicles requiring these motor oils.
"The good news is that many service facilities are embracing menu pricing for synthetic motor oil versus billing a per-bottle upcharge. This has helped keep costs in line. Also, the major tire/service national account providers have been very competitive with their synthetic oil change prices. Many of the quick oil change providers have kept their synthetic motor oil change prices significantly higher than the tire/service national accounts," said Lange of GE Capital Fleet Services.
Others also cited the shift by some OEMs to synthetic motor oils influencing the price of motor oil.
"Increasing requirements for premium/synthetic type oils from OEMs is driving up the cost of individual services," agreed Jankiewicz of LeasePlan USA.
However, the benefits of synthetic oils can offset the higher costs. "In some cases the cost of an oil change has increased, but so has the change interval, resulting in no net change. A side benefit is less time in the shop for the vehicle. The best case is that some of the national account providers have established reduced pricing for synthetic oil changes, which can reduce your total annual cost for oil changes by up to 20 percent," said Lodding of Donlen.
Some fleets have explored the use of recycled oil. "There are obvious environmental benefits, but fleet research should include the oil costs, availability, and assurances that the oil meets GF-5 standards for newer vehicles and has the correct oil specifications, as some providers may not have semi- or full synthetic oils," said Lange of GE Capital Fleet Services.
Also, new engine technologies, especially with diesel engines, have resulted in changes in motor oil used. "Additional oil price increases have occurred as a result of new oil products designed to support new engine technology. Changes related to 2010 diesel emissions regulations have had the greatest impact on diesel engines," said Piscopo of ARI.
In addition, as fleets extended the service lives of many vehicles during the economic downturn, they incurred the expense of additional oil drain intervals, which was captured in this year's data. "Fleets tracked oil more closely when many vehicles required added oil between scheduled preventive maintenance. With very little added oil, most fleets look at the cost of an oil change as one event. Since preventive maintenance intervals are increasing, oil will have less impact on overall fleet costs," said Bauer of Wheels.
Another way to minimize oil drain charges is to ensure that the service intervals match vehicle usage. "When a vehicle requires an oil change there is not much you can do to reduce the cost at that time other than selecting the least expensive vendor. What we have encouraged our customers to do is to make sure their service intervals match their vehicle usage. If you don't have a severe duty fleet, don't follow a severe duty interval," said Lodding of Donlen.
Higher Cost of Replacement Parts
Many fleets are incurring additional miles on vehicles due to increased business activity. "This, in turn, has caused the associated repair costs to rise, and replacement cycling has been escalated as well," said Piscopo of ARI.
There was a shortage in the availability of parts following the earthquake and tsunami in Japan last March, resulting in many repair delays. "In addition, auto manufacturers' proprietary systems are requiring independent vendors to source parts from the OEMs more frequently than in the past," said Dave Doyle, director, maintenance and repair management for LeasePlan USA. "Additionally, the requirement for specific oils and fluids has raised the cost of maintenance on many new models. We have also noticed an increase in vehicle downtime due to economic instability and some of the vehicle manufacturers reorganizing their parts supply chain."
Also, more fleets are adopting longer oil change intervals to help save costs on oil changes, which can be a significant portion of their overall maintenance costs, said Barnes of PHH Arval.
Labor rates have also been rising. "There has been a slight increase in labor rates over the past year, which affected total maintenance costs slightly. The biggest impact we have seen is that replacement tires have risen in cost 10-12 percent year-over-year," said Steve Minier, director maintenance services for Emkay.
Although vehicle quality has increased and there are fewer repairs, the cost for repairs has increased. "For instance, as more minivans are being used as a work vehicle, it is leading to higher expenses for brakes and other components. As in the past, brakes and preventive maintenance are the main cost drivers," said Bauer of Wheels.
The shortening of vehicle replacement cycles, to take advantage of the strong resale market, for some fleets paid big dividends with decreased maintenance spend due to less frequent major repairs and more repairs covered under warranty.
"Fleets with 2010-2011 model vehicles have experienced more required OEM-scheduled maintenance services. Costs increased 10 percent or more in 2011 for fleets that continued to extend their replacement parameters due to capital expenditure constraints," said Lange of GE Capital Fleet Services.
In addition to hard costs, soft expenses - such as driver downtime - are impacting the bottom line of many fleets.
"The biggest hard cost we have seen is tire cost; however soft costs continue to be a concern of ours. Downtime due to parts availability has increased rental vehicle expenses and potential lost revenue due to reps/techs not in the field quicker. The majority of repair shops can no longer afford to keep a large inventory of parts at their locations. Instead they order the required parts daily, as needed, based on the occurrences of the repairs that happen each day. This has increased repair downtime by hours and many cases days," said Minier of Emkay. "The periodic shortage of replacement parts is impacting maintenance expenses. "Increased vehicle repair downtime has had an impact due to parts not being kept in inventory as was commonly done in the past. Repair shops and car dealers now order parts as needed, increasing the amount of time to affect the needed repairs."
New technologies found on 2010-compliant diesel engines have impacted maintenance/repair costs in 2011.
"The most significant change in response to technology has been felt on diesel products as a result of new emission requirements introduced in both 2007 and 2010. Diesel particulate filters, and a combination of selective catalytic reduction and increased exhaust gas recirculation systems have been added by manufacturers to reduce carbon emissions. These components will lead to increased vehicle acquisition and maintenance expenses. The complexity and cost of vocational vehicles requiring upfit modifications will be influenced due to space constraints, and operational expenses will be impacted by additional costs of diesel emission fluid, increased heat generation, and replacement costs of these components," said Piscopo of ARI.
Offsetting these maintenance cost increases is that the OEMs have continued to improve vehicle quality and reliability, which has helped control maintenance spend. "For instance, the increased use of infotainment technology, though less common on fleet vehicle selectors, has not led to any significant maintenance repair issues," said Lange of GE Capital Fleet Services.
New technology on newer-model vehicles has resulted in more complex maintenance problems when things go wrong. "Integration of multiple systems and higher emphasis on hybrid, electric, and alternate-fuel vehicles has led to a requirement for technicians with a higher degree of training, which in turn, drives up the labor cost," said Doyle of LeasePlan USA.
The new 2010 diesel emissions standards have further increased truck operating costs. "Expenses for cleaning or replacing the diesel particulate filter and repairs on related components can add thousands of dollars for a normal vehicle lifecycle," said Barnes of PHH Arval. "The same maintenance issues confront hybrids as they gain popularity. Hybrid vehicles and their unique components add a new reporting category to fleet expenses. Any fuel savings need to be carefully compared to expenses related to maintenance and repair of the hybrid system. This becomes pronounced mainly for fleets with longer lifecycles - over 125,000 miles," added Barnes.
Although hybrids incur additional costs, they also contribute to maintenance reductions in other areas. "Early results suggest hybrid vehicles with regenerative braking systems will have fewer and lower cost brake repairs," said Bauer of Wheels.
OEMs Stricter on Post-Warranty Recovery Dollars
Manufacturers continue to increasingly scrutinize pre- and post-warranty consideration claims.
All fleet management companies report that the manufacturers seem to be budgeting less money for post-warranty adjustments for fleet customers. "The recovery percentage continues to decrease year-over-year," said Minier of Emkay.
"With vehicles requiring more specialized fluids and filters, manufacturers are requiring strict adherence to maintenance schedules along with proper fluid usage," said Jankiewicz of LeasePlan USA.
There was also a slightly negative effect on in-warranty recovery in 2010 due to dealer closings. "If a nearby dealer was shut down by the motor company, in some situations it wasn't worth the time to drive to the next closest dealer for a minor repair normally covered by warranty. This will continue in 2011, but should be offset by increased vehicle quality and a lower warranty claim rate. Post-warranty recovery has generally declined overall in the past few years," said Barnes of PHH Arval.
However, warranty recovery represents a small percentage of a fleet's overall budget. "Warranty recovery has never comprised a large percentage relative to overall expense. In 2011, warranty recoveries are down slightly as manufacturers' staffing and budgets have been reduced," said Piscopo of ARI.