Will Fuel Overtake Depreciation to Become the No.1 Fleet Expense?
March 20, 2012
By Mike Antich
The recent breathtaking increase in gasoline and diesel prices gives us a reality check as to how quickly fuel can dramatically increase fleet operating expenses. From January 2011 to March 2012, the average nationwide price of a gallon of regular unleaded gasoline increased 25 percent (from $3.08 to $3.84), which represents, on an annualized basis, an average increase of more than $650 per vehicle driving 2,000 miles a month.
With fuel prices at a near all-time high and ongoing strong resale values decreasing depreciation costs, will fuel costs overtake depreciation as the No. 1 fleet expense in 2012, as it almost did in 2006?
Six years ago, gasoline prices shattered the $3-per-gallon threshold for the first time. At the time, it was predicted if the price of gasoline reached $3.25 per gallon; it would exceed depreciation as fleet's No.1 expense, based on the incentives and residual values prevailing in 2006. This would have been a milestone event in the fleet industry, having never occurred before, but fuel prices never reached that level. As of March 19, 2012, the nationwide average price of gasoline was $3.84 per gallon (the $4-per-gallon threshold had long-since been shattered in the California market), and the question reemerges whether fuel has surpassed depreciation as the No.1 overall fleet expense.
"From what we have observed, I do not know that it is possible to make the overriding statement that fuel has overtaken depreciation as the No.1 overall expense," said Craig Neuber, director, strategic consulting for Automotive Resources International (ARI). "Although it can be true in certain instances, our experience has shown this hypothesis does not universally hold true."
Shrinking Variance Between Fuel & Depreciation
One vehicle segment in which fuel expense comes close to matching depreciation costs is with compact and mid-size cars, the bread-and-butter vehicles of commercial fleets. "Compact and mid-size cars have the smallest variance between depreciation and fuel expense. Contributing factors likely include an even more robust resale market for these vehicles and fuel mitigation strategies more prevalently employed in this segment," Neuber said.
For the past four years, many fleets have adopted compensatory strategies to mitigate high fuel costs. "Fleets are beginning to see the benefits of fuel-mitigation strategies employed as a response to the 2008 run-up, helping to offset fuel expenses and keep expense ratios consistent with historical trends, even in a more robust resale environment. These mitigation strategies include (but are not limited to) downsizing, rightsizing, increasing fuel-efficient OEM engine offerings, route optimization planning, alternative-fuel vehicle deployment, and driver behavior modification strategies," Neuber said.
Diesel prices, which have been exceeding the price of gasoline, have increased 16 percent from January 2011 to March 2012, with the retail average nationwide price of $4.12 per gallon, as of March 19, 2012.
"The truck and van segment seems to have a larger variance as it relates to fuel and depreciation expenses based on a number of factors. The main factor is the average number of miles driven," Neuber said. "As fuel increases, it can have a larger impact because the decreased resale value is not necessarily a 1:1 relationship to the increased fuel expense. Compared to the car segment, trucks and vans are experiencing modest resale gains. This combined with what are typically higher average months in service and higher mileage, harder-driven vehicles make this segment more likely to experience inverted fuel and depreciation curves. However, in certain fleets, these variables can quickly be offset by considerably larger acquisition costs."
High Resale Values Decrease Depreciation Costs
As anyone who remarkets vehicles in the wholesale market will tell you, resale values for used vehicles are extremely strong and are expected to remain strong for another year or two. However, today's high resale values are an anomaly caused by the shortage of used vehicles in the wholesale market due to the extremely low sales of new vehicles during the 2008-2011 time frame. However, these artificially high prices will ultimately decline as used-vehicle supply increases with more trade-ins generated by higher retail sales.
In terms of out-of-service fleet vehicles, most are remarketed at wholesale auctions. After a dramatic drop-off in consignments, over the past several years, expectations are that auction inventory will increase between 2013 and 2015. As wholesale used-vehicle supply reaches equilibrium with buyer demand, resale values will soften. It is estimated that current resale prices are inflated 10-15 percent. When the market starts its return to normalcy, many foresee a comparable decline, losing a few percentage points per year through 2014. Although opinions vary when this will occur, everyone agrees residuals will soften.
The return to a "normal" used-vehicle market will increase depreciation costs, widening its variance with fuel costs. However, if, at some future date, fuel prices should begin to exceed the $5-per-gallon threshold or even higher, we may very well have this same debate again in a future editorial.
Let me know what you think.
Author: Mike Antich | Posted @ Tuesday, March 20, 2012 12:00 AM