When GE Capital Fleet Services surveyed leaders of mid-market firms in the U.S. in early 2014, concerns about the rising cost of fleet maintenance and finding a way to hold the line on fuel spend were at the top of the list.

That came as no surprise to Steve Jastrow, manager of strategic consulting services at GE Capital Fleet Services, who said the results confirmed much of what he hears on a daily basis.

The survey of 413 companies found that 51 percent of respondents expect their fleet costs to increase in 2014. Vehicle prices generally climb 2 to 3 percent annually, although fuel costs have been flat for a while, said Jastrow, who added that he doesn’t expect any major swings in the latter.

“I would anticipate costs will increase unless the cost of fuel stays relatively flat, and the improved fuel economy is typically enough to offset the increased cost of the vehicle itself,” Jastrow said.

Keeping Vehicles on the Road
Perhaps the biggest change, and a growing issue, is the cost of keeping vehicles on the road, which has taken a sharp upswing in recent years.

“Maintenance costs are continually going up, repairs are getting a little more complex, the technology behind it is a little more expensive,” Jastrow said. “Fortunately, the interval between maintenance events is widening as a result of the improved technology in vehicles; however, when there is some sort of event, it is generally more expensive.”

Following the economic downturn of 2008-09, many companies were left with more vehicles than drivers, which made it easier to decide what would get fixed and how fast it needed to be back on the road, Jastrow said.

“It was easier for them to manage through more comprehensive repair cycles because they had another vehicle they were able to jump in and utilize,” he said.

But, that comes at a cost.

“There are a healthy number of idle assets that you want to avoid business disruption,” Jastrow said. “But, at the same time, a fully amortized vehicle sitting in the corner of a lot still costs a business money. Every month it’s losing a little bit more resale, and the fleet still has to pay insurance, registration, and license and property tax.”

The key for these companies was rightsizing to meet their needs when they had layoffs, but now that hiring has picked up, those firms are getting closer to the margin. Some 27 percent of the surveyed firms expect to add to their fleets this year.

As far as getting a handle on the fleet fuel spend, some of the stability has come as vehicles are getting better fuel economy, according to Jastrow.

“If you think about the car commercials on TV during a football game five or six years ago, it would be unusual to see a fuel mileage rating of 25 mpg,” he noted. “Now, you see 40 mpg on standard, non-hybrid vehicles. They’ve really come a long way. When fuel is 40 percent of your overall fleet spend, having a 20-, 30-, 40-percent improvement on mpg has a dramatic impact on overall costs.”

Among the surveyed firms, only 4 percent report having alternative-fuel vehicles in their fleets, but 48 percent expect to include them within the next five years. Of that group, 64 percent said they plan to add them within two years, and 92 percent in the next five years.

“There are a lot of customers who are dipping their toe in the water,” Jastrow said. “Though there’s not a lot of deployment at this point, the cost equation with some of the technologies is getting more in line, but you still have a bit of an infrastructure problem.”

Jastrow said those issues should be taken care of in the near term.

“I think that’s why you see the number planning to deploy in the next two years and the next five years.”
It would probably take another jump in fuel prices similar to the 2007-08 time frame — when the cost of gasoline reached $4 per gallon for the first time — to get fleet managers to move that timetable up, Jastrow said.

“That quick ramp-up is where everybody started to become real ‘green,’ but it made some economic sense to go and get improved fuel economy in vehicles at that time,” said Jastrow, who noted that the resulting collapse that briefly brought prices back below $2 per gallon took away a lot of the pressure to look at alternative fuel types.

Jastrow said some of the current concerns about moving fleets to compressed natural gas (CNG) sound similar to those about hybrids just six years ago.

“There was a lot of anxiety around the battery pack and the technology,” he said. “There was a bit more of a cost barrier to get into hybrids years ago and that is now the case for CNG vehicles.”

But, there are other factors at work in the firms’ reluctance to go all-in on CNG right now.

“I think a piece of it is the infrastructure, but there are other pieces to the puzzle as well,” Jastrow said. “You’ve got a maintenance network that has to be built up a little more, especially if they do in-house maintenance on it. As well, when companies lease their property rather than own it, the actual owner is a little more apprehensive about allowing changes to go on with the property to make it CNG.”

Additionally, there is still an up-front cost of about $8,000 to $10,000 per vehicle for conversion and there is still some range anxiety with CNG, which Jastrow said makes bi-fuel capability a consideration.

Of the firms surveyed, 30 percent lease their fleet, which does allow for quicker replacement if and when the new technology becomes available as a going concern. Another 28 percent own their fleet assets while just 10 percent reported they used driver reimbursement.

“For me, the 30 percent that lease seems low, but partly because we only do leasing at fleet,” said Jastrow. “Companies don’t need to tie up their capital in a depreciating asset. One of the things that happened during the financial debacle was that capital expense budgets shrank dramatically. They are quick to shrink and very difficult to open back up, so leasing provides a nice alternative.”

According to the survey results, 50 percent of the firms expect their industry to expand in the year ahead while 39 percent anticipate capital expenditures to rise.

While the survey was a new one for GE Fleet Capital, it plans to repeat it twice per year going forward to keep track of the trends in fleet costs. In addition to fleet, the survey tracked industries such as construction, healthcare, retail, automotive, and trucking.