Operating costs for fuel, replacement tires, maintenance/repairs, and preventive maintenance (PM) oil drains were flat in the 12 months ending August 2013 compared to the prior 12 months.
These findings and others are revealed in Automotive Fleet's 22nd annual operating cost survey, based on data provided by seven survey partners, including ARI, Donlen, Emkay, Inc., GE Capital Fleet Services, LeasePlan USA, PHH Arval, and Wheels Inc.
This year's survey is based on analysis of actual operating costs incurred by 775,556 vehicles operated by commercial fleets, which are managed by these seven fleet management companies.
Fuel Price Trends
The most notable occurrence was that gasoline and diesel costs for commercial fleets were stable compared to 2012.
"From a pricing standpoint, the market has remained relatively flat through most of the year, but we continue to see fleets heighten their focus on overall cost reduction strategies. Fleets are becoming increasingly sensitive to fuel costs and are initiating more fuel-saving programs this year over last," said Tony Piscopo, director fleet management services for ARI.
Although pricing volatility has moderated, fuel continues to represent fleets' largest operating expense.
"Fuel continues to be the No. 1 fleet spend. As new engines and new transmissions become available, fleets are evaluating these and their impact on fuel costs," said John Bauer, manager of fleet analytics for Wheels Inc.
The forecast for fuel prices is to remain stable throughout the 2014 calendar-year.
"After years of increasing fuel prices, gasoline prices moderated a bit in 2013, while diesel prices held relatively steady. However, both are expected to decline marginally in 2014, according to the U.S. Energy Information Administration (EIA). Seeing fuel spend decline slightly after years of increases was a welcome relief to fleets in 2013," said Amy Blaine, VP, consulting, analytics, and sustainability for Donlen.
The moderation of fuel prices has resulted in a tangible decline in per-gallon prices.
"Favorable trends in fuel price are reducing the cost of fuel for fleets in 2013. The average national price of gasoline in 2013 is expected to be 2 percent, or 8 cents, lower than 2012. Through August, the average price of gasoline was 5 cents lower year-over-year. The price of diesel is only half of 1 cent higher and is expected to end the year 1 cent lower or a 0.2 percent decline," said Jayme Schnedeker, fuel product manager for GE Capital Fleet Services.
In addition to price declines, fleets have experienced a decrease in overall fuel consumption as a result of operating more fuel-efficient vehicles.
"Gallon consumptions have decreased 0.62 percent for diesel and increased 2.47 percent for gasoline. Current portfolio fleets have utilized newer-vehicle technologies, implemented appropriate driver behavior measures, and rightsized their fleets," said Mark Donahue, business analyst for Emkay.
Some trace the current stabilization of fuel prices back to the summer of 2012. In fact, fuel prices have been stable since 2011.
"Comparing the 12 months ending August 2013 to the prior 12 months, average fuel prices for gasoline stayed relatively flat, while average fuel prices for diesel had a small uptick under 2 percent. Going back four years, fuel prices increased steadily from 2009 through May 2011, then began to stabilize over the next two years. Fleets have become accustomed to this higher, stabilized cost of fuel, and the impact of the last year-over-year change in pump prices has been minimal," said Bob Sandler, vice president of enterprise consulting and analytics for PHH Arval.
One consequence to the stable fuel prices has been a decreased interest in hybrid models. As has happened in the past, there seems to be a direct relationship between the price of fuel and interest in hybrids and other alternative-fuel vehicles (AFVs).
"When gasoline reaches the $4-per-gallon range, as it did twice in 2012, the fleet industry's focus on hybrids and other alternative-fuel vehicles significantly increases. However, gasoline prices have been below $3.75 so far in 2013, resulting in a decrease in hybrid quotes and orders. Even with the decline in activity around AFVs, fuel economy remains a top focus during the vehicle selection process. Furthermore, the trend towards improving fuel economy through a migration to smaller displacement (non-hybrid) engines continues," said Becky Langmandel, director of strategic modeling and analytics research team at LeasePlan USA.
Strategies to Mitigate Fuel Cost
Not lulled by stable fuel prices, fleets continue to adopt a variety of fuel-reduction strategies. According to Sandler at PHH Arval, the majority of fleets are employing one or more of the following strategies to mitigate the cost of fuel:
- Incorporating more fuel-efficient vehicles in their ordering/replacement cycle.
- Monitoring fuel purchases more closely.
- Educating drivers on the importance of proper vehicle maintenance to their vehicles' fuel economy.
In addition, there are a multitude of other initiatives being adopted by fleets to reduce fuel consumption.
"Improving overall mpg remains a primary fuel cost-reduction strategy for fleets. In addition, fleets are seeking ways to increase driver and operator awareness of cost savings opportunities," said Piscopo of ARI. "They are also becoming more vigilant looking for potential instances of fuel card misuse and fraud."
- Specific cost-saving steps cited by Piscopo include:
- Installing and monitoring vehicle telematics.
- Implementing no-idle policies.
- Modifying fuel-based PM strategies.
- Optimizing routes.
Other strategies include a regular vehicle replacement schedule, the use of alternative fuels where applicable, and the implementation of telematics systems.
"Investment in opportunities to reduce fuel consumption continues to be a focus for fleets seeking to mitigate fuel cost. Replacement of older vehicles or those not meeting efficiency expectations has been an important step. This, combined with implementation of alternative-fuel vehicle programs for select use cases, has been an important action to reducing cost," said Schnedeker of GE Capital Fleet Services. "Finally, installation of telematics to enhance fleet utilization has been essential to fleets seeking to optimize fuel costs. The information generated by telematics to reduce idling, enhance driver behavior, and increase vehicle productivity has contributed to reductions in fuel consumption and overall fuel expense."
Additional fuel-reduction initiatives include downsizing and the use of non-traditional fuels, such as switching to diesel and hybrids.
"There is a continuation of the trend to smaller vehicles, diesel engines, and hybrid vehicles," said Bauer of Wheels Inc.
Another strategy focuses on the adoption of new technologies and modifying driver behavior.
"Fleets are rightsizing their vehicle selectors to take advantage of fuel-efficient technologies, weight reductions, higher speed transmissions, and appropriate drive types to meet their business necessity. Furthermore, the importance of driver behavior is essential," said Donahue of Emkay. "According to the EPA, a driver can impact fuel efficiency as much as 33 percent. The implementation of driver behavior trainings to reduce speeds, idling, and rapid deceleration, and increase accident avoidance, continue to gain momentum within the industry. When paired with technological GPS solutions, route optimization can reduce miles driven, scheduling, speeds, and personal use."
The proliferation of hybrids and AFVs has given fleets more options when selecting vehicles to help them manage their fuel spend.
"The ROI for hybrids and alt-fuel vehicles are attractive, even at current fuel prices, particularly since conversion costs are declining a bit and there are many more options available on the market today," said Blaine of Donlen. "In addition, OEMs are starting to offer fleet incentives on some hybrid models, so there are many cost-effective options on the market today. Fleets are using telematics as a way to control fuel spend; however, fleets are looking for telematics to bring spend reductions in more areas than just fuel. With fuel prices varying by as much as 10 to 15 cents per gallon within a three-mile radius, fleets are also using online tools and smartphone apps to better control where drivers purchase fuel."
Nowadays, fleets are taking a more broad-based approach to reduce fuel consumption and fuel costs.
"This includes starting with the basics, such as downsizing vehicles where possible, reducing weight and idle time, and increasing driver involvement and education. Concurrent with these relatively simple steps, many more fleets are employing telematics and others are moving to gaseous fuels such as CNG and LPG, where feasible," said Wayne Reynolds, manager of upfit design and consultation at LeasePlan USA.
Forecast of Future Fuel Costs
The biggest impact on future fuel prices is the increasing supply of liquid fuels from non-OPEC countries. For instance, the EIA expects Brent crude oil prices to fall to $102 per barrel in 2014, from $108 per barrel in 2013.
"As fuel efficiencies improve, the EIA projects lower gasoline consumption. The EIA increased the average regular gasoline retail price forecasts during the 3rd and 4th quarters of 2013 to $3.60 and $3.44 per gallon while forecasting an average of $3.43 in 2014 due to falling crude oil prices," said Donahue of Emkay. "These fuel prices can continue to be offset by several defensive and strategic tactics that include, but are not limited to, vehicle selection, driver training, telematics, and proactive operational consulting."
Others, likewise, foresee current market trends leading to lower prices in the 2014 calendar-year.
"While there are a number of variables that can increase volatility in the marketplace, we foresee relatively flat pricing in the coming months," said Piscopo of ARI. "We are constantly on the alert for potential spikes, so we encourage our fleets to keep a proactive fuel management program in place at all times. Dodd-Frank legislation has changed the fuel-price hedging market; therefore, creating hedging programs for smaller volume clients has become a challenge. As a result, small- and mid-sized fleets are more vulnerable to market price fluctuations."[PAGEBREAK]
The other unknown variable is the extent to which alternative-fuel vehicles will be integrated into commercial fleets.
"Increased usage of alternative-fuel vehicles should help fleets lower their PM costs and lessen the impact of potential oil price fluctuation," said Chad Christensen, strategic consultant for GE Capital Fleet Services.
Although the anticipation is for fuel prices to decline, other unpredictable market forces could cause them to increase. "Both gasoline and diesel prices are expected to decline somewhat in 2014; however, market conditions create significant volatility in fuel prices, so we recommend fleets budget conservatively," said Blaine of Donlen.
While others also foresee lower fuel prices in 2014, they caution about potential volatility caused by other external forces.
"We anticipate the average cost of fuel to decline in 2014, which will have a favorable impact on fleets. The Energy Information Administration (EIA) is predicting an average price of $3.40 and $3.76 for gasoline and diesel, respectively, as of the Short-Term Energy Outlook published on October 8," said Schnedeker of GE Capital Fleet Services. "Short-term volatility will depend on Middle East geopolitical status and global economic growth rate."
In fact, most fleet management companies are basing their fuel price forecast on data provided by the EIA.
"Due to the inherent volatility and multitude of uncertain supply and demand independent variables impacting price, LeasePlan relies heavily on established government/industry forecasts (mainly EIA) for internal planning and external fuel price forecast dissemination. Currently, the EIA is forecasting average retail pump prices at $3.38 per gallon for the remainder of 2013 and $3.37 for 2014," said Paul Fortin, economist and vice president of strategic modeling and analytics research team at LeasePlan USA.
Despite moderate prices, most fleet managers will continue to aggressively implement fuel-management initiatives.
"Fuel will continue to be a number 1 cost focus. This should be true, even though fuel prices are dropping this fall," said Bauer of Wheels Inc.
Replacement Tire Cost Trends
After many years of ongoing price increases, tire costs were finally stable in 2013.
"In 2013, tire pricing was flat or even a bit lower than 2012 depending on the size," said Paul Ciccarelli, VP, fleet management services for Donlen.
This was echoed by Bauer of Wheels. "Tire costs were flat in 2013 after having increased previously," he said.
However, there still continues to be upward pressure on tire prices.
"Tire costs were fairly stable in 2012, but they have begun to increase again in 2013. While the 2013 increases have not been as significant as they were in 2011, they have had the largest cost impact on fleet operation expenses this past year," said Piscopo of ARI.
One factor that has helped mitigate overall tire costs was the widespread shortcycling of vehicles that has occurred in recent years.
"Many fleets that accelerated their vehicle replacements in late 2012 and early 2013 are enjoying lower tire costs because of fewer replacement tires needed," said Christensen of GE Capital Fleet Services.
However, the biggest factor influencing tire cost has been the increased diameters of OEM-specified tires.
"Automotive manufacturers continue to use larger tire sizes to increase mpg and performance. Fleet managers are carefully evaluating whether the increased cost of the larger tire is offset by the improvement in mpg. Fleet managers rely on the fleet management company for information regarding replacement size and price during the vehicle ordering process," said David Jankiewicz, director, maintenance and repair at LeasePlan USA.
This observation was also made by Emkay. "Newer unique limited supply tire sizes have increased overall tire cost for certain make/models," said Gino Fontana, assistant vice president of North American maintenance operations for Emkay.
However, longer tread life mitigates the increased purchase price by helping lower the cents-per-mile (CPM) cost of tires.
"In regards to tires and maintenance/repair for 2013, we've seen more of a trend with clients paying attention to the cents per mile of the tire, rather than the initial cost of the tire, often choosing to go with higher-priced tires to achieve better overall return on investment. Our expectation is the same for 2014," said Sandler of PHH Arval.
Another factor that has helped mitigate some tire costs are the retail price wars that have occurred in many markets.
"Pricing wars between the tire companies have helped level tire prices and bring them down slightly. The flip side is the increased tire sizes that came out in the 2012/2013 model-years will be coming up for tire replacements this year," said Fontana of Emkay.
This was reinforced by Christensen of GE Capital Fleet Services. "We expect more stable replacement tire pricing for the same model tires, but the overall costs may be offset by larger wheel sizes and the introduction of newer, higher-priced tire models."
There are efforts within the fleet industry to try to stabilize costs at the national account level.
"The major tire manufacturers are working closely with the FMCs to keep tire pricing at, or below, current levels. Overall, tire prices should be stable in 2014," said Ciccarelli of Donlen.
Another factor helping curb tire cost pressures has been more stable commodity prices.
"Tire costs have remained flat due to the stabilizing of the cost of carbon black and rubber. In some instances, tire prices have shown a decrease within certain sizes," said Tony Blezien, vice president of operations for LeasePlan USA.
Another positive trend is that newer tires tend to have lower costs.
"For fleet units in the 1 to 24,000 mileage band, tire costs have decreased. We attribute this to newer tire technology typically installed on units recently placed in service. This technology can help extend tread life on these units, delaying the first set of replacement tires. Other benefits to new tire technology include operating cost reductions, namely fuel consumption," said Piscopo of ARI.
In the final analysis, the cost of oil will dictate the cost of tires.
"If oil prices are stable, tire prices will be stable," said Bauer of Wheels Inc.
Forecast of Tire Costs in 2014
As in past years, commodity prices will dictate future tire prices.
"We need to be watchful of global changes to raw material costs as this is a key price lever for replacement tires," said Christensen of GE Capital Fleet Services.
Critical commodities are the price of oil and rubber.
"If rubber and carbon black prices remain stable, then tire costs should remain flat in 2014, with the exception of new tire sizes," said Blezien of LeasePlan USA.
Model changeover and newer vehicles spec'ed with different size tires will put upward pressure on tire costs.
"The discontinuation of some tire models and introduction of select new models may drive up the overall average cost per tire," said Christensen. "Some commercial vans switching to these new models may see up to a 30-percent increase, due the tire's lower profile and larger diameter wheel."
Dave Lodding, executive vice president, fleet management services for Donlen, seconds this observation.
"As new car models are introduced with tire specifications (as they are now), pricing should remain the same. However, new and/or unique tire sizes are typically more expensive when first introduced, so until the demand increases, and the competition in that size increases, the prices of these tires will remain high," said Lodding of Donlen.
Limited availability of replacement tires can result in increased downtime.
"Some fleets are facing challenges with tire sizes unique to a single tire manufacturer for the initial several years of the tire introduction. Limited availability of these tires may result in downtime delays at time of replacement," said Christensen of GE Capital Fleet Services.
Maintenance & Repair Cost Trends
Data from AF's 2013 operating cost survey indicates that maintenance and repair costs were flat in 2013.
"Overall costs have maintained fairly level prices, labor rates have become more of a focus, and services that some fleets consider 'extras' such as transmission and coolant flushes are being pushed out to higher mileage levels," said Fontana of Emkay.[PAGEBREAK]
Maintenance costs have decreased across the board with the primary factor being increased overall vehicle quality.
"Across all vehicle types and most mileage bands, the expenses related to the maintenance and repair of fleet units has decreased. This has been the trend over the past few years, whereas repair volumes have remained flat or decreased. We attribute this to the OEMs' abilities to continuously improve vehicle quality. When repair incidents decrease, fleet drivers' productivity increases," said Piscopo of ARI.
Another factor influencing maintenance expenses has been the bundling of services at discounted rates.
"Routine maintenance costs have been reduced by longer maintenance intervals and some vendors are 'bundling' services. As an example, many national account providers have included free tire rotations with their oil change services," said Ciccarelli of Donlen.
Another factor has been budgeting set at monthly maintenance payments.
"More fleets recognize the value in programs that offer monthly budgeted maintenance payments over the life of the lease. The budgeted maintenance payment allows a predictable budget and protection from inflationary price increases," said Blezien of LeasePlan USA.
However, the increased number of recalls, especially among high-volume fleet vehicles, has led to some driver dissatisfaction.
"A greater fleet awareness on the impact of OEM recalls has led to some fleet driver complaints when experiencing parts delays, rental costs, and loss of productivity," said Christensen of GE Capital Fleet Services.
Other Factors Impacting Maintenance & Repair Costs
One factor putting upward pressure on maintenance costs has been increased vehicle complexity.
"As service providers strive to stay current with new technologies, it has become increasingly difficult to diagnose and repair complex failures, which, in turn, increases labor costs and downtime. Complicated areas, such as emission systems and advanced wiring systems, are a bigger percentage of these expenses," said Piscopo of ARI.
The ongoing technician shortage is also putting upward pressure on labor rates. "The industry is challenged to staff fully trained and qualified truck and upfit equipment technicians. Staffing shortages create a backlog of work in many facilities throughout the country," added Piscopo.
The technician shortage is especially acute in the oil patch and rural areas.
"Significant increases in business related to the oil and natural gas industries have produced geographical markets where the ratio of vocational trucks and equipment exceeds that of qualified repair technicians. This has created delays in repair times and added expenses for fleets," said Piscopo.
While the introduction of diesel particulate filters (DPF) has introduced a new cost component for truck fleets, there have been developments to decrease this cost.
"A positive trend we are seeing in 2013 is the number of suppliers who are providing reconditioned or refurbished DPFs. In the past, consumers were limited to purchasing new components, typically from the OEM. Parts pricing for DPFs has been greatly reduced, due the number of options that have become available to consumers over the past few years," said Piscopo.
But, the No. 1 factor behind reduced maintenance expenses has been the overall increase in vehicle quality.
"Vehicle quality continues to improve, reducing failures for fleets and their drivers. While the new technologies on today's vehicles can be expensive to repair, their failure rates are fewer and the impact is minimized," said Ciccarelli of Donlen.
Also, onboard oil monitoring systems are helping to extend oil drain intervals.
"Increased use of oil life monitoring (OLM) and warranties continue to get better," said Mike Crumlett, manager, North American truck maintenance operations for Emkay.
One complication has been parts shortages, resulting in longer downtime.
"Vehicle repairs have been impacted by 'national back orders' due to a lack of in-stock replacement parts. Delayed repairs often lead to additional downtime and the need for rental vehicles, which aren't routinely reimbursed by dealers or OEMs," said Christensen of GE Capital Fleet Services.
Forecast of Maintenance & Repair Cost Trends
The forecast is for maintenance costs to continue to trend downward.
"Marginal difference in overall costs, they continue to trend down. Continued entrance into the 'fast lube' market by the OEMs has forced additional competition, helping to give fleets and drivers more choices and again contributing to stabilization of pricing," said Fontana of Emkay.
Lodding of Donlen, likewise, foresees downward pressure on maintenance costs.
"Maintenance costs for 2014 should decrease if more manufacturers start to cover oil changes and tire rotations for the first few years of ownership. Overall maintenance cost should remain similar to what they have been over the last few years as a result of the extended maintenance intervals," said Lodding.
It is anticipated that the volume of new-model introductions will accelerate as we approach the new CAFE deadlines. The large number of new models in the market may result in temporary parts shortages and increased downtime, especially if there are any national recalls, as was witnessed in the 2013 model-year.
"The influx of many new OEM models will have a big emphasis on improving fuel economy to meet CAFE requirements," said Christensen of GE Capital Fleet Services. "These changes may have a downstream effect on repair providers who may have issues with aftermarket parts availability, experience a technician training curve, and the need for an investment in tools and technology. Some alternative-fuel vehicles may have limited repair provider options for specialty work because of possible ventilation and lighting requirements."
Although typically reliable, when electronics technology does malfunction, it has a higher per incident repair cost.
"Technology continues to evolve, which ultimately results in an increase in the cost of repairs. Manufacturers are continually incorporating technology and updating maintenance standards, which will increase a fleet's maintenance and repair cost," said Jankiewicz of LeasePlan USA.
Trends in PM Oil Drain Costs
There are a variety of factors that have impacted the cost of PM oil drains.
"Oil change prices have stabilized due to increased availability of lower cost, OEM approved semi-synthetic oils along with some national providers beginning to package oil changes with tire rotations and inspections for a discounted bundled price," said Christensen of GE Capital Fleet Services.
Another factor is the increased use of synthetic oil, which, although more expensive, has extended the interval between oil drains.
"Cents per mile by vehicle class in 2013 is very similar to the cents per mile experience in 2012. We attribute this to a leveling off of overall costs — as it relates to oil — with the transition from fossil to synthetics. This is reflective of the fleets' adoption of expanded oil change intervals," said Sandler of PHH Arval.
This observation is seconded by Piscopo of ARI.
"Oil prices have remained stable in 2013 with no significant technological innovations recently introduced into the field. Synthetic and synthetic-blend oils continue to increase market share. While still significantly more expensive than mineral oils, synthetic oil costs continue to decrease," said Piscopo.
This phenomenon is also occurring in the truck fleet market.
"Higher use of semi-synthetic and full synthetic oils by the manufacturers has increased PM costs, leading some customers to stretch their LOF (lube, oil, and filter) intervals," said Crumlett of Emkay.
Extended oil drain intervals are a major factor in decreasing motor oil expenses.
"Oil has not been a focus of fleet managers for several years. That changed in the past few years. First, some makes and models have recommended using only synthetic oil when doing preventive maintenance. While the synthetic oil is more expensive, extended service intervals have lessened the impact of this change," said Bauer of Wheels Inc.
Others see the increased adoption of synthetic motor oils by OEMS as putting upward pressure on PM expenses.
"With more manufacturers mandating the use of synthetic oils, we foresee oil change costs moving upward," said Mark Ackerman, manager of maintenance and repair management at LeasePlan USA.
Although transaction prices increase with synthetic oils, the extended drain interval will result in an overall price decrease.
"The change to synthetic oils by many of the manufacturers has increased the average oil change transaction price. However, the frequency of a synthetic oil change is lower, so the total cost of oil changes for many fleets was mitigated in 2013. Some national account providers have reduced their oil change transaction price in 2013 and this had a noticeable impact on the price trend as well," said Blaine of Donlen.
Forecast of Motor Oil Cost
One unintended consequence of longer oil-drain intervals is the possibility of fewer vehicle inspections.
"We believe the cost of oil-related services will continue to rise on a per-ticket basis. But, more OEMs will be pushing extended drain intervals, which will be implemented by more fleets. An important byproduct of this trend is the added importance of detailed vehicle inspections, as vehicles are seen by shops at a lower frequency," said Piscopo of ARI.
There seems to be consensus among observers that we will see increased use of synthetic oils in fleet vehicles.
"We expect to see higher percentages of synthetic oil usage and programs offering complimentary preventive maintenance for the initial in-service years of the vehicle," said Fontana of Emkay.
Bauer of Wheels Inc. made a similar observation. "It appears that there will be more vehicles requiring synthetic oil and more manufacturers offering free preventive maintenance."
The migration to synthetic motor oils will cause transaction prices to increase.
"The continued switch to synthetic fuels will keep transaction prices higher, but we expect fleets to be able to mitigate their total oil change spend due to the reduced frequency of oil changes. Over time, the cost of synthetic oil will continue to decline as the utilization increases," said Lodding of Donlen.