Fleet operating costs consist of four categories: fuel, replacement tires, maintenance/repairs, and preventive maintenance oil drains, offset slightly by warranty recovery monies. For the most part, all of the expense categories rose slightly over the last 12 months.
Not surprisingly, gasoline/diesel cost was the big cost story for fleets in 2012, seeing an almost across-the-board increase in all vehicle categories, with a few exceptions in individual mileage bands, which weren’t significant. While total operating costs were up in most segments, light-duty trucks and SUVs were the only segments that clocked in with lower overall operating costs ($481.40 per month in 2012 compared to $488.56 in 2011 for light-duty trucks and $397.24 in 2012 versus $400 in 2011 for SUVs).
These findings and others are highlighted in Automotive Fleet’s 21st annual operating cost survey based on data provided by six survey partners:
● GE Capital Fleet Services.
● LeasePlan USA.
● PHH Arval.
● Wheels Inc.
This year’s survey is based on analysis of actual operating costs incurred by 592,485 vehicles operated by commercial fleets, which are managed by these six fleet management companies.
Together, the fleet management company data and analysis from their experts give a three-dimensional picture of what fleet costs were over the last year and where they can expect to go in the next year.
Technology Helping Mitigate the High Cost of Fuel
Arguably, if there was any piece of automotive news that made more headlines over the last year, it was the volatility of gasoline and diesel prices.
“According to data from the Energy Information Administration (EIA), on average, pump prices were 7-percent higher for regular gasoline and 9-percent higher for diesel (September 2011-August 2012 compared to prior 12 months),” said Angela Feerick, director, strategic consulting for PHH Arval. “Price fluctuation over the past 12 months differed. There was a large price increase between Independence Day and Labor Day, due to the price increase in crude oil and supply disruptions in refining infrastructure.”
Jayme Schnedeker, fuel product manager, GE Capital Fleet Services, noted the cost of gasoline and diesel has continued to influence fleet decisions, adding that fuel price volatility makes this an ever-changing picture.
“As of September, the EIA expects the average price for fuel in 2012 to be $3.64 per gallong for gasoline and $3.96 per gallon for diesel. This is approximately a 3-percent (or 11.5 cent) increase over 2011 prices. If this forecast holds true, it will be the smallest annual increase in 10 years, with the exception of 2009. In 2009, prices were down more than 30 percent on average due to the recession. Nevertheless, the volatility of fuel prices was still a factor in 2012. During the first quarter of 2012, fleets saw fuel prices rise 31 cents for gasoline and 35 cents for diesel over 2011,” Schnedeker said.
However, the net effect of this volatility does not appear to have had an impact on fleets. “Even with higher per-gallon cost, fuel spend did not increase in 2012 when compared to 2011,” said John Bauer, manager, fleet analytics for Wheels Inc.
Why are fleets seeing little impact on their bottom lines while fuel remains so volatile? The answer, in a word, is vehicle technology.
“The overall cost of fuel is down in 2012 compared to 2011 in most age bands. This is attributable to three main factors. First, relative to the cost of retail fuel per gallon, costs in 2012 are less than the previous 12-month period. Second, OEMs continue to improve vehicle fuel economies, and fleets continue to move toward these vehicles during the specification process. This includes spec’ing four- instead of six-cylinder engines or choosing gasoline over diesel. Finally, hybrid and alternative-fuel vehicles have begun to establish a foothold in the fleet world,” said Tony Piscopo, director, fleet management services, ARI.
With the cost of fuel always front of mind, fleet managers are approaching vehicle decisions much differently than in the past, according to Amy Blaine, director of strategic consulting and sustainability for Donlen.
“Fleets have become more aware of the price of fuel than ever before causing them to continually look at the vehicles in their fleets to ensure drivers have only what they need and not more,” Blaine said.
The focus on the most efficient vehicle for the job can have a big impact on a fleet and a company’s bottom line.
“Selecting more fuel-efficient vehicles has been the most effective method to reduce fuel expense. An increase of 1 mile per gallon represents approximately a 5-percent decrease in gasoline or diesel fuel expense.
Subsequently, the greatest potential for cost mitigation that fleets are employing remains with alternative-fuel vehicles,” Schnedeker observed. “Many fleets see alternative-fuel vehicles as a long-term solution to rising fuel prices and fuel price volatility, plus an opportunity to reduce carbon emissions. Compressed natural gas (CNG), propane autogas, and electric vehicles have been the most popular alternative-vehicle types.”
OEMs have been helping fleets in their efforts to save on fuel costs by providing more fuel-efficient vehicles across the board.
“In sedan and SUV fleets, new, more fuel-efficient vehicles are being introduced,” said Bauer of Wheels. “As the older vehicles are being replaced, the average mpg for the fleet is increasing. Truck and van fleets are eliminating unnecessary weight and utilizing precise truck engineering to ensure they have the right vehicle for the job.”
Choosing the right vehicle for the job is only the first step in controlling fuel costs.
“Because there is very little companies can do to influence the cost of fuel, they are now taking a holistic approach to influencing their use of fuel, including driver behavior, purchase locations, and other factors,” said Kristofer Bush, vice president, marketing, for LeasePlan USA.
Piscopo of ARI echoed Bush with the specifics of a holistic approach.
“Tire inflation processes, route optimization, driver awareness, and specification reviews (weight carried, engine specified) are all areas that continue to be mined for fuel-saving opportunities. Smaller engines and hybrid solutions are now accepted as alternatives,” Piscopo said. “Fleets are implementing corporate fuel policies to define proper vehicle use (loading, idling, and personal use), proper driving habits, and proper use of a purchasing instrument (fuel card, etc.).”
The driver is a key component in increasing fleet fuel efficiency.
“Many fleets have initiated communication plans to their drivers that address issues such as unnecessary idling and fuel-efficient driving techniques,” said Bauer of Wheels.
Other fleets have taken a more comprehensive approach. “Fleets are advising their drivers of eco-driving behaviors and the importance of obtaining regular preventive maintenance to a vehicle’s fuel economy,” said Feerick of PHH Arval.
Telematics seems one answer — at least for now — in the ongoing effort to control fuel spend.
“Fleets have been looking more closely at telematics as a way to change driver behavior and improve fuel efficiency. With fuel prices varying by as much as 10-15 cents per gallon in a five-mile radius, fleets are also starting to use tools to better control where drivers purchase fuel,” said Blaine of Donlen.
Data from the pump is also crucial in controlling fuel costs. “Level 3 purchasing data from the purchasing instrument helps fleets enforce policy, and fleets rely on reporting to drive the use of regular grade fuel, discount or second-tier marketers, and self-service pumps,” according to Piscopo of ARI.
No matter how a fleet looks to control costs, it is crucial to do so, according to Bryan Steele, senior vice president, client relations, LeasePlan USA. “For larger fleets, a variation of even 1 mile per gallon could mean significant cost savings,” he said.
The theme of all these cost-control measures is access to data, according to Chad Christensen, strategic consultant, GE Capital Fleet Services. “The increasing number of choices to manage fuel cost all rely on data to effectively demonstrate savings,” he said. “It facilitates an initial evaluation of the solution as well as ongoing validation. Data also provide a means to identify fuel-cost saving opportunities and communicate more effectively with drivers on specific behaviors known to increase fuel cost. As the means for collecting the right data at the right time improves, it will provide fleet managers with additional ability to control fuel expense.”
Going into 2013, fleets can expect more uncertainty in fuel costs due to weather and continued political instability in the Middle East. However there is a glimmer of good news, according to the experts.
“Futures trading in gasoline contracts through the beginning of 2014 suggest fuel prices will remain steady or slightly below current levels,” said Bauer of Wheels.
The forecasted decline in price is due to the economic slowdown in the Far East, according to Schnedeker of GE Capital Fleet Services. “The anticipated decline in average annual price for gasoline during 2013 will be due to the expected decline in China’s growth rate and overall global economic outlook,” he said.
However, production issues closer to home could have a negative outlook for prices.
“Regional price variations continue to be heavily impacted by local refinery situations and ongoing changes to pipeline and production logistics,” said Feerick of PHH Arval.
Action by the federal government could also help keep diesel prices in check, according to Dave Lodding, president of fleet management services for Donlen.
“The government’s recent announcement that the number of gallons of biodiesel has to be increased should help keep the cost of diesel fuel in check. The downside to this is that many of the manufacturers offering diesel engines are recommending lower concentrations of biodiesel than what is being sold in many markets,” Lodding said. “This puts pressure on the driver to either search out what is approved, or risk a possible drivability issue that would not be covered under warranty.”
But, even with the outlook for lower prices at the pump, Blaine of Donlen recommended to take a “glass half empty” approach to budgeting. “Given the volatility of fuel over the past few years and the fact that it’s such a large part of the overall fleet budget, we recommend fleets conservatively budget for an increase in fuel price for 2013,” she said.
Feerick of PHH Arval noted that one thing won’t change no matter what happens at the pump. “We expect to see a continued focus on fuel-efficient vehicles as a selector option and fleets encouraging eco-driving behaviors among drivers,” she said.
The PM Seesaw
While the cost of oil changes continue to rise, there’s good news for fleets on the overall cost side. “The cost per oil change is up compared to last year, although the cost per mile is down due to the extended mileage interval benefit of the oil monitoring systems and new oil specifications,” said Mark Lange, CAFM, maintenance services specialist, GE Capital Fleet Services. “The initial higher price cost spikes for the new oil specification used in oil changes have stabilized. Dealerships are continuing to promote their quick lanes and service reminder e-mails, which have created local competitive pricing pressures. In addition, several OEMs are matching the major national providers with special price bundling of oil changes, tire rotations, and brake inspections.”
Synthetic oil is the big story for fleets and costs. “We are not seeing substantial differences in the cost of standard oil, but we are seeing growth in the costs of oil changes because of the use of synthetics and their higher production costs,” Feerick said.
The good news is that oil-related services on newer vehicles have been comparatively lower, according to Piscopo of ARI. “[This is] primarily due to a greater number of manufacturers extending the oil change intervals beyond the standard 5,000-mile, or even the 7,500-mile mark,” he said. “This is due to the greater availability and acceptance of synthetic (or synthetic blend) oils. While the overall price of oil services has risen, the frequency has lessened, and the overall costs on newer units have been lower. Oil change costs on older units have risen slightly due to higher oil costs.”
There is one thing for certain: synthetic oils are here to stay. “The number of vehicles that require specific synthetic oils continues to increase,” said Dave Jankiewicz, director, maintenance and repair management for LeasePlan USA.
What additional factors have impacted the cost of oil to fleets in 2012?
“With the ever fluctuating and increasing cost of crude oil, the automotive oil industry has continued to invest greatly in synthetic and synthetic blended oils. This initiative is also being pushed by the federal government to reduce our national dependency on foreign oil consumption,” according to ARI’s Piscopo. “In addition, technological advancements in engine design require these advanced types of oil to reduce parasitic draw and increase fuel economy. As synthetics become more commonplace, older vehicles that are getting serviced at some facilities are commonly getting this type of oil, since the shops often do not inventory two variations of oil with the same viscosity rating.”
The bottom line, no matter what type of oil fleets are using, they’re seeing their coffers less full because of this cost. “Fleets following OEM recommendations for oil change intervals and the oil life monitors on their vehicles, whether they are for standard oil or synthetic oil, have seen the year-over-year costs increased about 3-5 percent. Fleets using synthetic oil, but changing it at the shorter intervals required by standard oil, have a greater increase in overall oil costs — likely in the double digits,” Feerick said.
That being said, Lodding of Donlen sees a shift occurring. “The price of oil has climbed significantly over the past few years, so this raw material cost has also caused the average price of an oil change to increase in 2012. With many of the typical maintenance items either being eliminated or the interval being extended, the days of using an oil change as a loss leader may start to come to an end,” he said.
However, going forward the cost of oil, even though partially offset by longer oil drain intervals, will continue to rise. “The cost of oil-related services will continue to rise on a per-ticket basis,” Piscopo said. “But, more OEMs will be pushing extended oil intervals, and these intervals will become implemented by more fleets. An important by-product of this trend is the added importance of detailed vehicle inspections as vehicles are seen by shops at a lower frequency.”
Dave Doyle, director, maintenance and repair management for LeasePlan USA doesn’t expect much to change. “The cost of an actual oil change should not change drastically at national account vendors or independent facilities,” he said.
As with gasoline prices, the wild card in pricing predictions are tied to the political uncertainty in the Middle East.
“Tensions in the Middle East will keep oil from falling significantly,” said Lodding of Donlen. “The one constant lately has been oil and fuel price volatility and we don’t expect that to change in 2013. Between higher costs for synthetic oils and rising oil prices, we are expecting the cost of an oil change to continue to increase somewhat in 2013.”
The High Cost of Tires
In 2011, it was predicted that the cost of replacement tires would rise significantly. The experts were mixed about how accurate this prediction was.
For Lange of GE Capital Fleet Services, tires increased 6-10 percent. “Additional pricing pressure resulted from several tire providers eliminating or reducing the inventory of their lower cost and house brand/private label tires,” he said. “This can create a downtime/cost-balancing scenario when authorizing replacement tires. There was significantly less demand for snow tires as the result of mild winter weather in many areas. However, some demand for winter tires was driven by several OEM models being delivered with summer tire treads in snowbelt states.”
Lange’s experience also was reflected in data from PHH Arval and Donlen. Both FMCs saw increases in their clients’ tire costs.
Paul Ciccarelli, vice president of fleet management services for Donlen, put the blame for the 6- to 7-percent increase Donlen’s clients have experienced on one culprit. “This is mainly driven by increasing oil and other raw material costs, as well as labor costs,” he said.
However, Wheels reported that its clients didn’t see any increases over last year. “We saw some price increases on individual brands and models, but the overall spend was not up this year compared to 2011,” said Bauer of Wheels.
This was similar to ARI’s clients’ experiences, according to Piscopo. “Calendar-year 2011 was a volatile year for tire prices,” he said. “There were a number of increases, which led to a 10-plus percent increase for fleet operating expenses in the tire category. Generally speaking, overall tire expense in 2012 has stabilized and is down across most fleet segments. This is attributable to a few different factors. National account pricing remained stable for much of 2012, and fleets continued to get ‘younger’ as more new cars/trucks with new tires replaced older units.”
There is one trend that Doyle of LeasePlan USA noted, which could increase the cost of tires. “The auto manufacturers continue to use a larger tire size for increased mpg,” he said. “Fleet managers are carefully evaluating if the increased cost of the larger tire is offset by the increase in mpg.”
Ciccarelli also identified the trend toward larger tires as increasing costs. “Fleets will see an increase in tire replacement costs due to larger tires now coming standard with new vehicles. The cost of 17- and 19-inch tires are greater than the 15- and 16-inch tires that have been standard in the past,” he said.
Larger-sized tires can cause challenges, according to Jankiewicz of LeasePlan USA. “With manufacturers continuing to change the size of tires and fleet vehicles needing tire replacement much sooner and more frequently than retail customers, fleets have continued to see increased costs and limited tire supplies for newer model vehicles,” he said.
While the trend toward larger tires are adding costs, fleets have been finding ways to increase the tread life of tires.
“Tire life has increased, along with better attention to rotation and inflation. These are another by-product of communication plans designed to increase mpg,” said Bauer of Wheels.
Lange of GE Capital Fleet Services noted some of the other factors influencing increasing tire costs. “There can be a wide cost variation with tire providers to mount, balance, rebuild/replace the valve stem, and reset the tire pressure monitoring system (TPMS). The majority of national tire providers have established fixed labor and/or parts costs for these services, which may be $20 to $40 less per four-tire replacement than some other providers,” he said.
Piscopo noted that “in comparison to 2011, the costs for replacement tires have remained stable for 2012. This is attributed to some stabilization in the commodity price of two of the main ingredients used in tire production. While the cost of crude oil continues to rise, the cost of rubber has steadied and has led to stable tire prices so far in 2012.”
But, this may be a momentary respite before prices edge up again.
“We expect to see same-tire prices remaining relatively stable in 2013. There are a number of factors that could change this outlook, such as raw material costs, natural rubber supplies, and oil costs,” Lange said. “Fleets moving to larger wheel diameter sizes and delaying vehicle cycling will see higher overall tire expenses. Larger OEM wheel sizes continue to be a major factor in fleet tire costs as many mid-size vehicles, minivans, and others are delivered with larger wheel diameters than in the past. Some vehicles have a standard and optional wheel size available and fleets should check on this when developing selectors.”
Unsurprisingly, spikes in raw material prices could be the deciding factor whether tire prices increase. The primary raw material that could spike tire prices is oil.
“If the price of oil continues to climb, we expect the price of tires to continue on an upward trend as well,” said Ciccarelli of Donlen.
Labor Costs Edge up Overall Maintenance Costs
The good news for maintenance costs is that, overall, they have been flat or down compared to 2011, and there’s an obvious reason for this.
“The quality of vehicles continues to improve and extended powertrain warranties have covered some expensive repairs at high mileage,” said Bauer of Wheels.
Piscopo of ARI noted costs were a reflection of the age of the vehicles. “Maintenance costs were down or flat across most fleet segments. In the newer age bands, maintenance costs were down from previous years’ expenses. Older units were flat compared to 2011,” he said.
The reason for reining in these costs is simple. “More fleets are recognizing the value in programs that offer a monthly budgeted maintenance payment over the life of the lease so that they can have a predictable budget while being protected from inflationary price increases,” said Steele of LeasePlan USA.
Some fleets have seen costs rise. For instance, some of PHH Arval’s clients have seen an approximate 3- to 5-percent increase in maintenance costs.
“The most significant change in maintenance/repair costs continues to be labor rates, which have continued to climb,” said Lodding of Donlen.
But, it wasn’t just the price of labor that added to the cost of maintenance. “Back-orders of OEM parts have created downtime challenges and added interim rental expenses for some fleets. OEMs have not typically provided free rentals for ‘normal’ back-ordered parts, although they may if it’s a safety recall,” said Lange of GE Capital Fleet Services.
While vehicle quality, including new technologies such as infotainment systems, is high and rarely cause problems, it is this technology that is fueling higher maintenance-related costs, including labor.
“The good news is the number of repair incidents on newer vehicles continues to decrease. Less time in the shop is more productive time for fleet drivers,” observed Piscopo of ARI. “But, the same newer vehicles come with increased technology, which requires repair shops make tooling investments to diagnose and repair these systems accurately. As expected, the additional costs shops are incurring are being transferred to the vehicle owners; higher labor rates result from the need for higher skilled technicians required to make these repairs.”
However, because much of this new technology is on vehicles under warranty, fleets haven’t felt as much of a sting in their wallets. “We recommend fleet managers understand the changes in preventive maintenance intervals and requirements resulting from vehicle technology improvements, and implement them in their fleets. The increased mileage intervals between transactions offer opportunities to offset the growth in costs for fluids and parts,” said Feerick of PHH Arval.
As for the future, fleets can expect to see maintenance costs rise at a reasonable level. “There will be characteristic pricing increases based on the evolving maintenance requirements, raw materials, and standard inflation,” said Doyle of LeasePlan USA.
However, Feerick noted that, while costs are expected to rise, fleets can easily keep a handle on maintenance costs. “We expect to see the same 3- to 5-percent growth in transaction costs for fluids and parts that fleets experienced from 2011 to 2012. For fleets returning to a more traditional replacement cycle, they should see lower maintenance costs because most unscheduled maintenance will be covered under new-vehicle warranties,” she said.
Lodding of Donlen has a much rosier view of the future for the same reasons as Feerick. “Fleets should continue to see maintenance costs stabilize or go down slightly due to the increase in maintenance intervals for many preventive maintenance services,” he said.
One potential area of increased maintenance costs is alternative-fuel vehicles, noted Lange of GE Capital Fleet Services.
“A number of hybrid autos/light trucks are coming out of OEM warranty coverage periods and the potential exists for repairs unique to the hybrid components, such as coolant pumps, fan motors, and charging accessories. Many of these will be OEM-only available parts until aftermarket parts providers see an increased demand. The individual cost of replacement hybrid batteries has decreased significantly, and this should be good news for fleets,” Lange said.
Bauer of Wheels noted that technology and resale are issues that also affect maintenance. “Some repairs will be more expensive as technology becomes more complex. The number of repair items will continue to decrease as older vehicles are replaced with newer vehicles. Fleets taking advantage of strong used-vehicle values will see average months in service and mileage decline. This will lead to lower repair costs, but won’t significantly affect the mileage bands covered in this survey,” he said.
Warranty recovery appears to have tightened up in 2012. “Manufacturers continue to require specialized services. It is very important for drivers to adhere to their maintenance schedules. Manufacturers are looking very carefully at pre- and post-warranty claims and their willingness to return costs has decreased,” said Doyle of LeasePlan USA.
Piscopo of ARI added that this more stringent warranty atmosphere is a legacy of the 2008 economic meltdown.
“Post-warranty assistance from the OEMs continues to be distributed and managed on a much more stringent basis than just a few years ago. This is attributable to a number of factors,” Piscopo noted. “As the quality of new vehicles continues to improve, there is a lesser need to support specific situations. Additionally, since the events of 2008 (OEM bankruptcies), all of the major OEMs have re-evaluated the amount of policy support provided to fleet customers.”
One of the other reasons warranty recovery has decreased is due to the changing face of OEM warranties. “We are seeing some decline in overall warranty recoveries. As vehicles with extended powertrain warranties make up a larger percentage of the fleet, there will be fewer repairs to submit and total recoveries will decrease,” said Bauer of Wheels.