There is a growing concern voiced by many commercial fleet managers that fleet costs are experiencing across-the-board upward pricing pressures affecting both fixed costs and operating expenses. The real concern is that these pricing pressures are uncontrollable and difficult to manage. For many fleet managers, it seems the best they can do is to mitigate the impact of these higher costs.
“Costs are on the rise – raw material pricing is affecting tire pricing; fuel pricing is on the rise, as well as interest rates. How do we mitigate what might appear to be uncontrollable expenses?” asked Brenda Davis, strategic sourcing commodity manager at Baker Hughes.
These inflationary forces are being felt in a variety of cost centers, ranging from higher vehicle acquisition prices resulting from the proliferation of onboard safety equipment, to increased material costs being passed on to end-users in higher pricing for replacement parts, upfit, and replacement tires.
On the whole, fleet maintenance costs have steadily trended upward over the past 12 months as a result of more complex vehicle technology requiring greater diagnostics, the ongoing skilled labor shortages that has been increasing labor rates, increased replacement tire prices, and the proliferation of engines that require higher cost synthetic motor oils when performing scheduled PMs.
When analyzing 2019 maintenance and repair costs to those of 2018, these costs have increased faster than the rate of inflation using a year-over-year comparison. However, these cost increases have been somewhat mitigated by ongoing improvement in vehicle build quality and longer-lasting components. While the incident of repairs has been decreasing, the cost per repair has risen due to increased vehicle complexity with widespread electronics, software, sensors, cameras, and advanced driver-assistance systems. While these systems are very reliable, when issues occur, they are expensive to rectify.
As a result, the growing level of vehicle complexity and the cost to pay this increased level of content is pushing up both fixed costs and operating expenses, which is impacting a vehicle’s overall total cost of ownership (TCO).
Another inflationary pressure on fleet maintenance and accident repair costs is the increase in labor rates around the country, especially in high-cost-of-living metro areas. “The combination of increased complexity and inability to acquire capable and qualified technician personnel is forcing in-house fleet operations to rely more on external repair vendors, which is starting to significantly increase costs,” said Steve Saltzgiver, director, business development for Mercury Associates. “Additionally, reliance of external repair shops is further impacting fleets by the lack of practical knowledge and skills of the new generation of techs that is being lost due to the widespread retirement of Baby Boomers techs. This will inadvertently raise costs as ‘analyst skilled employees’ lacking hands-on knowledge and not knowing the right questions to ask repair shops will result in higher costs.”
Operating Costs are Increasing
Operating costs are increasing primarily due to higher fuel prices and maintenance costs. Also, upward pressure on maintenance labor rates and higher commodity prices are impacting the cost of replacement tires and retreads.
However, the biggest factor behind an increase in operating cost is the price of fuel, which many fleet managers, such as Denise Cross, senior commodity manager for Carrier Corporation, cite as one of the primary challenges facing her fleet. Others likewise identify the cost of fuel as being the primary challenge facing their fleet operations.
“One of the greatest challenges related to fuel costs is accurate planning, budgeting, and mitigating the variable cost of fuel. This can be achieved more easily by a combination of addressing driver behavior and monitoring fuel usage reports. The other way to achieve a better outcome related to rising fuel costs would be to look into various fuel-saving technologies, including electric vehicles, hybrids, and diesel, as well as fuel-saving devices,” said Joshua Chamuler, director, transportation/fulfillment at ThriftBooks in Seattle, Wash.
However, there is a resignation that the price of fuel simply boils down to the cost of doing business. “Fuel is a topic that will likely always challenge fleets. It’s out of our control and a recurring cost,” said Lauren Parker, fleet safety and project coordinator for Vivint Smart Home in Lindon, Utah.
The key consternation about rising fleet costs is that, for the most part, they are uncontrollable. “How do we control the rising cost of running a fleet? Vehicles are getting more complex with added sensors and safety features that are driving up the cost of repairs. While the newer units are getting better fuel economy, fuel prices seem to fluctuate wildly from month to month,” said David McCauley, North America fleet manager for Service Experts.
Selecting models with higher mpg than the predecessor model continues to drive many fleet acquisition strategies, along with corporate sustainability initiatives. As a consequence, some fleets have elected to expand on this fleet initiative by increasing their acquisition of hybrid vehicles.
Other fuel spend reduction initiatives are being implemented such as “right-sizing” vehicles and maintaining awareness of fuel consumption among drivers.
Rising Acquisition Costs
Corporate fleet managers report that the 2020 model-year will be another strong asset acquisition year, comparable to MY-2019, based on an AF survey of the buying inclinations of a broad cross-section of fleets in the commercial segment. However, upfront acquisition costs are steadily increasing, and fleet managers report a lack of capital for replacement units and the overall increase in the cost of vehicles.
The top factors influencing the types of vehicles to be acquired by commercial fleets in the 2020 model-year are similar to those that drove 2019 vehicle selections. These include upfront acquisition costs, suitability to fleet application, corporate initiatives to acquire the most fuel-efficient models available for a specific fleet application, the incorporation of additional safety features and equipment options into company-provided vehicles, and overall total cost of ownership.
At some fleets, a key reason for the overall increase in fuel costs in the fleet budget is because trucks and SUVs are a growing percentage of their overall fleet vehicle composition.
Upfront acquisition costs are steadily increasing due to increased vehicle content, such as vehicle safety packages and advanced driver-assistance systems. “Whether its safety related, comfort, or new fuel-savings technology, this equipment is causing costs to increase,” said one fleet manager who wished to be unidentified.
Another uncertainty is the volatility of vehicle financing costs, whose rates can suddenly increase and just as suddenly decrease, which as cited by several long-time fleet managers who had experience managing fleets during periods of high interest rates.
Maintenance Trending Upward
Maintenance costs have steadily trended upward over the past 12 months as a result of more complex vehicle technology, the ongoing skilled labor shortages, increased replacement tire prices, and the proliferation of engines that require higher cost synthetic motor oils.
“Maintenance costs are on the rise. What bothers me is, we have no control of it,” said Tom Armstrong, director of fleet at thyssenkrupp Elevator.
In 2019, maintenance and repair costs have increased faster than the rate of inflation year over year. However, these cost increases have been somewhat mitigated by ongoing improvement in vehicle build quality and longer-lasting components.
However, what is somewhat dampening this trend is that the build quality of new vehicles has never been higher. With each successive model-year, fleets are operating better-built vehicles that may be driven longer without reaching catastrophic system failures. Nowadays, these failures are fewer and trending toward later in life, which is a good object lesson justifying the implementation of set vehicle replacement parameters to schedule an ongoing rejuvenation of a fleet by removing those units that have a higher propensity to incur future maintenance issues.
Labor Rates are Increasing
In the past several years, many repair shops have raised labor rates and this trend is expected to continue. Skilled technicians are exiting the trade at a rate faster than entering. This will put more pressure on shops to increase wages to attract the best talent.
“While parts pricing is up slightly, increasing labor costs have been the primary factor driving the increase in maintenance/repair costs in 2019,” said Mark Lange, CAFM, managed maintenance analyst, ASE-certified for Element Fleet Management.
Higher labor costs will continue to increase the maintenance spend for routine repairs in 2020, especially at service facilities located in high-cost-of-living metro areas.
“Labor costs, whether associated with aftermarket or OEM parts suppliers, will be important to follow. Our expectation is that labor costs will be the primary cost driver for the foreseeable future,” said Lange of Element Fleet Management.
Higher PM Transaction Expenses
There has been a decade long shift of fleets extending service intervals for oil drains, based on OEM-recommendations, which has resulted in longer periods between preventive maintenance services. This is attributed to improvements in engine refinement and synthetic oils, as well as more sophistication of vehicle oil monitoring systems.
Preventive maintenance costs have been increasing as OEMs recommend more expensive, but longer-lasting, synthetic motor oils. The proliferation of smaller displacement engines in fleet applications is causing the shift to synthetic oil because it provides 47% better engine protection, maximizing engine life. “Changes in manufacturer requirements for oil specs are driving up the cost of preventive maintenance,” said Lange of Element Fleet Management.
“We see the impact of rising labor costs as minimum wages increase. Historically, quick lube oil change facilities and tire retailers have been a good starting point for individuals interested in being automotive technicians or working in the industry while attending a technical college,” said Chad Christensen, strategic consultant for Element Fleet Management. “Wages at these types of facilities are typically comparable to other low skilled positions or entry level positions in other service industries. These types of positions are most likely to be impacted by increases in minimum wage with the larger metropolitan areas passing ordinances for $15 or higher hourly wages. For that reason, labor cost will be the driving factor increasing oil change, basic preventive maintenance services and tire installation costs.”
Replacement Tire Prices are Up
The primary factor putting upward pressure on tire costs is the increase in raw material costs. The cost of commodities used to manufacture tires, such as the price of oil and rubber, continue to be the key factors driving the price of replacement tires for passenger cars. “Like-for-like replacement tire prices for passenger cars increased 5-10% in calendar-year 2017 compared to CY-2016. We could see another 5-10% increase in 2018 if raw materials continue to increase at the same rate as they did in 2017,” said Christensen of Element Fleet Management.
Higher Replacement Part Prices
Higher commodity prices are also causing the price of replacement parts to increase. In addition, individual parts are increasingly being aggregated into more expensive modules. For instance, fuel pumps, which used to be replaced as an individual item, are now part of an entire module. Another example is wheel bearings and replacement seals, which used to be replaced individually, are now part of an entire wheel-hub assembly complete with electronics and sensors.
Also, the contentious trade negotiations between China and the U.S. and the implementation (or threat) of tariffs is causing price distortions as companies react to the possibility of future price increases, said one fleet manager who asked not to be identified. This was a topic brought up by other fleet managers.
This impact on pricing and the uncertainty of tariffs was a key challenge likewise cited by Cross of Carrier Corporations. Others made similar points.
“On my list of concerns is the future cost of mechanical repairs if tariffs cause the price of replacement parts to soar,” said Bret Watson, CAFM, manager, corporate fleet for Sprint. “We are keeping a close look on that.”
Increase in Repair Costs
Driver distraction continue to be major concerns for fleets, leading to an uptick in preventable accidents. It is a perennial problem for fleet managers who struggle with developing strategies to decrease preventable accidents, which is bringing to the forefront the increasing expense to accident-damaged vehicles.
For instance, vehicle complexity is increasing not only maintenance costs, but also the cost to repair an accident-damaged vehicle.
“When a vehicle sustains damage in an accident, the increased content of electronics and sensor components in a vehicle dramatically drives up the cost of repairs. In addition, with the demands for increased fuel-efficiency and safety, vehicles have become lighter, thus more susceptible to additional damages,” said Bob Martines, president and CEO of Corporate Claims Management. “Add the safety components, such as airbags, sensors, and additional structural supports, the cost adds thousands of dollars to the repair costs. How does a fleet manager go to management with cost projections that are uncontrollable?”
Death by a Thousand Cuts
Many taxes and transaction fees that impact fleets are small, but add up.
Taxes vary nationwide because there is no uniformity between states or even within a state. Governmental jurisdictions look for ways to generate more revenues through motor vehicle-related taxes, such as higher registration fees, additional taxes on tires and batteries, and environmental fees and surcharges.
In addition, there is the on-again, off-again movement by states from a sales tax to a rental tax for leased vehicles and the “double-dipping” taxation that occurs when vehicles are transferred between states without any prorated rebate provision.
One annoying cost factor this is increasing challenging fleets is the increase in fleet transaction fees. “Many FMCs are using third-party vendors to manage certain programs, such as tolls, registrations, and MVRs, whose additional transaction fees get passed on to customers,” said an anonymous fleet manager.
Tech Increasing Repair Costs
New technologies such as Advanced Driver Assistance Systems (ADAS) require special equipment and training when service is needed, which create additional maintenance costs.
“One factor that emerged in 2018 and continued to gain momentum in 2019 is the growing number of fleet vehicles featuring ADAS, such as collision avoidance and lane departure warning,” said Chris Foster, manager, truck & equipment maintenance for ARI. “This technology is now included as standard equipment on a wide-range of popular fleet models and these systems include expensive components that are pushing repair costs higher.”
A minor collision that used to only require a bumper cover replacement can now involve bumper cover and radar replacement, along with pre- and post-system scans and ADAS recalibration.
“The introduction of ADAS has made the greatest impact on vehicle repair costs. ADAS is a great step forward for vehicle safety because it helps prevent many accidents. Some collision repair costs are saved through the prevention of accidents; however, this new technology adds new components to vehicles, such as cameras, proximity sensors, and radar/lidar,” said Kelley Hatlee, national service department technical support supervisor for Enterprise Fleet Management. “It also adds additional steps to common repair procedures that didn’t exist previously. For example, many minor body repairs, windshield replacements, and steering and suspension repairs now require ADAS recalibration. This adds to the complexity of the repair, increasing labor costs.”
Cost Reduction Initiatives
A key challenge is finding new ways to drive out cost, especially, in well-managed fleets where most of the low-hanging cost savings have already been removed.
“One of the most difficult challenges for fleet professionals is to demonstrate cost savings or to manage cost increases through cost avoidance,” said Mike Butsch, manager national accounts for of Pro Haul Manufacturing in Gallipolis, Ohio. “Eventually these fleet professionals will run up against OE price increases, discount reduction and company culture that limits the ability to lower or maintain costs.”
Management demands for additional cost reduction have become more strident in wake of rising fuel prices. Fleet managers are tasked with balancing expense reduction initiatives without negatively impacting employee/driver morale.
“Every fleet is tasked with reducing costs but with the advancement in technologies and features, costs continue to grow. Finding opportunities to save while still getting the quality is a difficult tasks sometimes,” said Parker of Vivint Smart Home. “It is important to learn how and when to leverage partners to make a mutually beneficial scenario.”
The pressure to reduce costs is constantly felt by fleet managers, especially in today’s climate where maintenance costs have increased and fuel (a volatile cost) are the largest contributors to total cost of ownership.
“The ever-increasing maintenance cost requires fleet managers to engage their fleet providers and OEMs to become your partner in cost reduction efforts,” said Ralf Wessel, manager, global security, global fleet & corporate facilities for AGCO Corp. in Duluth, Ga.
One emerging option to control fleet costs is greater utilization of new mobility tools.
“The good news is that the rise of vehicle sharing options and mobility solutions present opportunities for fleets to reduce costs and increase efficiencies. The concept of vehicle pooling has been made popular in the B2C space, and now businesses are realizing they can also take advantage of having one central pool of vehicles to share among drivers. In these arrangements, utilization can be increased, and idle assets can be reduced” said Adam Secore, senior vice president, operations for Merchants Fleet Solutions. “Under vehicle sharing subscriptions, multiple businesses can even share a single pool and have the freedom to pay for only the time they use vehicles rather than carry a lease.”
More fleets are conducting utilization studies to identify vehicles with low utilization for removal from the fleet. Besides not attaining their full revenue potential, under-utilized units cost money with registration fees and PM expenses.
“As companies grow, so do the assets that they hold and utilize. A general concern is that the asset will be underutilized which is a loss of an investment,” said Parker of Vivint Smart Home.