By Mike Antich

Operating costs were flat in the 2010 calendar-year, primarily due to stable fuel prices, which represent the largest fleet operating expense category. Contributing to this is the trend by commercial fleets to downsize to more fuel-efficient four-cylinder engines. Several fleet management companies report that two-thirds of new vehicles ordered by their commercial fleet clients in 2010 were equipped with four-cylinder engines.

Forecast of Gasoline Prices

Fuel costs are forecast to be marginally higher in calendar-year 2011. The average cost of gasoline is forecast by the U.S. Energy Information Administration (EIA) to be $2.90 per gallon, including taxes, across the country in 2011. This equates to an annual increased fuel spend for fleets in the 6-8 percent range in 2011. However, if the world economy continues to strengthen, increased demand may cause prices to rise higher. In addition, the declining value of the dollar could push both gasoline and diesel fuel prices up next year.

Forecast of Tire Prices

Next to fuel, replacement tires are the second-highest operating cost for a fleet. One ongoing factor is that many newer vehicles are equipped with larger diameter tires. Different tire sizes on the same vehicle can add $100 to $200 in additional expense per set of tires. Also, price increases in the raw material costs used to manufacture tires, such as the forecasted harvest shortfall of natural rubber, along with oil and steel prices, will put upward pressure on tire prices. Although most fleets operate under a national account program, which helps keep a lid on price volatility, there is a limit to how long vendors can absorb tire cost increases before passing them on to customers.

Forecast of Maintenance & Repair Costs in 2011

Maintenance and repair costs are forecast to increase in 2011. Labor and parts costs are expected to continue to increase next year. One factor contributing to the increase in maintenance and repair costs will be price increases from service providers. Many providers have been careful not to raise pricing in the current slow economy; however, national account vendors cannot continue to absorb increases to their business costs without passing them along to customers. One prediction is a 3-5-percent pricing increase for parts, labor, and shop supplies (i.e., disposal of fluid, brake cleaners, etc.) at independent repair facilities in 2011.

Improved vehicle quality and extended powertrain warranty coverage helped offset the increased costs. Manufacturer warranties support this trend as fleets report less frequent component failures, with most major component failures the result of inattention to preventive maintenance. However, many fleets extended service lives in response to the economic crisis, which increased non-scheduled maintenance events. However, some fleets started to revert to traditional replacement cycles due to the strong resale market and greater availability of capital.

Looking Beyond 2011

It will become more expensive to operate a fleet in the coming years. Vehicle acquisition costs will increase. Government-mandated combined car and truck corporate average fuel economy (CAFE) standards will increase to an average 35.5 mpg for the 2016 model-year. It is estimated the new CAFE standards will cost OEMs $52 billion to be in compliance and add an average $926 to the cost of a new vehicle, perhaps more. In all likelihood, most (or all) of the cost to automakers will be recovered through higher vehicle prices. The new diesel emissions standards have already increased fleet truck acquisition costs, since 2010-compliant diesel engines are more expensive than predecessor models. The increased costs average $6,000-$9,000. In addition, volatile pricing for commodities, such as steel and aluminum, will further impact truck chassis and body costs.

The forecast beyond 2011 is for higher maintenance costs. Extended vehicle replacement schedules will be a key factor driving future maintenance expenses. Older fleets will incur the expense of an additional set of tires and brakes, along with the increased frequency of repairs symptomatic with older fleet assets.

Another trend is for higher vehicle-related taxes. In 2010, of every $100 spent on fleet, $5 went to taxes. This compares to $4.10 in 2006 and $3 in 1983. This promises to increase in an era of record governmental deficits. Many jurisdictions are generating new revenues through higher vehicle registration/license plate fees, increased sales/rental rate for leased fleets in many states, emissions inspection fees, higher fuel taxes, new environmental fees/surcharges for tire disposal and oil recycling, as well as new taxes on aftermarket components, such as tires and batteries.

In addition, corporate tax rates are forecast to increase. This will exert pressure on bottom-line profits and reinvigorate cost-reduction efforts. Invariably, fleet is one of the expense categories that will be intensely scrutinized. The wildcard continues to be fuel price volatility, which continues to be unpredictable.

Let me know your forecasts.

mike.antich@bobit.com