High Cost of Fuel Increases Operating Costs
Overall operating costs for commercial fleets operating intermediate-sized cars increased 3 percent in 2007, according to industry data compiled by Automotive Fleet magazine. Across all vehicle classifications, this increase was directly attributable to high fuel costs.
The higher fuel also had a domino effect on increasing prices for other oil-based products, such as replacement tires.
These findings and others are based on a survey of operating cost data provided by survey partners: Automotive Resources International (ARI), GE Capital Solutions Fleet Services, LeasePlan USA, PHH Arval, and Wheels Inc. This year’s annual operating cost survey is based on analysis of actual operating costs incurred by 436,865 vehicles operated by commercial fleets and managed by these five fleet management companies.
High Fuel Costs Hit Fleets Hard
Fleets were hit hard by consistently high fuel prices in 2007, which remained elevated after the substantial increases in 2006. Especially hard hit were truck fleets as the cost of a gallon of diesel remains higher than a gallon of unleaded gasoline.
Although fuel prices increased above 2006 levels, they did so at a slower pace than in the 2005 calendar year. “The overall increase from 2005 to 2006 was 13.4 percent for gasoline and 12.5 percent for diesel,” said Bob White, vice president of operations for ARI. “From 2006 to 2007, the increase in gasoline was reduced to 6.9 percent and an even greater reduction for diesel at 4.1 percent.”
In 2007, diesel-powered vehicles are required to use ultra low sulfur diesel (ULSD), which has increased the price of fuel. “The requirement for ULSD has negatively impacted the overall cost of diesel fuel. The increased cost of manufacturing has resulted in an average of $.06 per gallon over regular diesel,” said White. “Based on our research in the field, the availability of ULSD, although not at every fuel provider, has not been of major concern. That may partially be due to the fact that 2007 engines are just now starting to see regular service in the field.”
Also, SUV fuel costs remained stable as the migration to more fuel-efficient compact models helped offset price increases.
Other fleet-related commodities and services were also impacted by the high cost of fuel. “We are all seeing increases in oil-based products such as tires,” said Laura Jozwiak, senior account manager for Wheels.
Many fleet-related service providers also raised prices in reaction to the high price of fuel.
“Similar to 2006, there have been increases in the cost of mobile repair services and towing, as well as the cost of PM services due to the increases in the cost of fuel and oil. However, the 2006 to 2007 increases were not as dramatic as the previous year,” said White.
Besides raising prices to cover increased overhead costs resulting from higher fuel prices, some service providers are charging an additional fuel surcharge. “Mobile glass repairs and towing providers are charging fuel surcharges to recoup some of their fuel expenses,” said Eric Strom, maintenance product manager for GE Capital Solutions Fleet Services. The forecast calls for gasoline costs to remain stable for the remainder of 2007 and increase slightly in 2008.
“With the election year upon us, I don’t think fuel will get out of hand,” said Jozwiak. “Also, the hurricane season was much calmer than expected. Hopefully, costs will stay below $3, but obviously no one can tell.”
The cost of diesel is predicted to remain higher than the cost of gasoline in 2008. “The forecast is to expect a minor 2.8-percent increase in the price of gasoline and a 5.1-percent increase in diesel per forecasts from the Energy Information Administration,” said White.
Others are bearish about the prospect of fuel prices in 2008. “We are ending 2007 at a much higher price point than we ended 2006, about 30-40 cents per gallon higher. We expect the average cost of regular gasoline to come in around $2.75 for calendar year 2007. We anticipate an increase to $2.85 per gallon or higher for 2008,” said Greg Corrigan, vice president, business intelligence for PHH Arval.
Corrigan cites four reasons for his forecast of 2008 fuel prices. “Many state governments are considering gas tax increases. There is no new refining capacity, global demand is increasing, and geopolitical tensions are growing in most oil-producing countries.”
Even more bearish is Eric Hjerpe, interim fuel product manager for GE Capital Solutions Fleet Services. “At this time, we estimate the cost of gasoline will be in the $3 to $3.50 per gallon range in 2008,” said Hjerpe.
In addition, the dramatic fluctuations in fuel prices in 2007 and 2006 have made budgeting very difficult. “Even though the yearly cost per gallon for regular unleaded was $2.75 in 2007, the monthly average ranged from $2.25 to $3.05 per gallon,” said Hjerpe. “In 2006, the yearly average cost per gallon was $2.64, with the monthly average ranging from a low of $2.29 to a high of $3.03.”
The wild price swings play havoc with fleet budgets. “Fuel prices will go up year after year. The real challenge for fleet managers is price volatility making accurate budgeting difficult for this line item. If they do not allocate enough money to fuel, it may impact other operating expense lines in order to meet overall budget requirements,” said Hjerpe.
One consequence of higher fuel prices was increased consideration to acquiring hybrid or alt-fuel vehicles. “More fleets are talking about moving to hybrid or alternative-fuel vehicles to help manage fuel costs, but not many have taken action, mainly due to higher acquisition costs and concerns about possible impact on driver satisfaction. As the price of fuel drops, the discussion drops and as fuel prices climb, the discussion builds again,” said Jozwiak.
One silver lining to higher fuel prices is that it has helped decrease depreciation expense for certain vehicle segments. “Fuel efficiency is having a substantial impact on the resale market,” said Corrigan. “Less efficient vehicles have taken significant resale value hits, while the opposite is true for the more efficient vehicles.”
Oil Change Costs Remains Stable
An ongoing industry trend is to extend oil drain intervals, which in the long run, promises to decrease oil drain costs in the future.
“More fleets are willing to adopt the General Motors oil life monitoring system for oil change reminders. The extension of oil change intervals has impacted diesel trucks for the 2007 model-year because of the required use of motor oil specifically designed for use in the newer diesel engines. Ford diesel trucks went from 5k to 10k intervals,” said Dick Feist, supplier initiatives director, maintenance and safety solutions for GE Capital Solutions Fleet Services.
The greatest change with the cost of oil changes occurred with diesel-powered trucks.
“The new requirements of the 2007 diesel emission engines require the use of CJ-4 oils. As compared to the CI-4 oils that can be used in the pre-2007 engines, the CJ-4 engines carry a 10-percent or higher premium in cost. The concern surrounding the choice of oil to use is two-fold. First, will the potential benefits of using the CJ-4 oil in pre-2007 engines outweigh the additional cost of the new oil? Secondly, improper use of the CI-4 oil in post-2007 engines will potentially void warranty coverage, reduce drain intervals, and prematurely plug the DPF (diesel particulate filter),” said White of ARI.
As more vehicles, in future model-years, transition to CJ-4 oil, the outlook is for increased oil change expenses for truck fleets.
“For light trucks using CJ-4 oil, the price per quart has increased 10 percent, and in some cases nearly 25 percent, for bottled oil,” said Mark Lange, maintenance customer service specialist for GE Capital Solutions Fleet Services.
Diesel engines complying with the 2007 emission standards require maintaining existing oil drain intervals.
“The 2007 emissions require specific CJ-4 oil in order to maintain existing drain intervals. Many of the diesel engine manufacturers have gone to increased exhaust gas recirculation (EGR) with particulate traps in order to meet the stringent 2007 emissions. Increasing the EGR puts more of the emissions back through the engine, therefore, requiring additional additives in the oil to maintain previous drain intervals,” said White.
The forecast is for the overall cents-per-mile cost of oil changes to decrease in 2008. “We expect changes in 2008 as we believe more fleets will move to adopt the GM and Chrysler OEM oil life monitoring systems. Bottom line cost savings can be realized from these systems and help offset the type of oil, crankcase capacity, and labor and disposal fees. There is also an eco-friendly aspect of extending oil change intervals,” said Strom. “Ford has extended its recommended intervals from 5,000 to 7,500 mile intervals.”
The use of synthetic oil by some vehicle manufacturers has extended oil drain intervals, but is increasing the cost per oil change.
“Some OEMs are recommending semi-synthetic oils. The use of semisynthetic oils may add $10 to an oil change service. Additionally, crankcase capacities in some cases have increased up to seven quarts and this has added costs to an oil change service,” said Lange.
The more widespread usage of synthetic oil and synthetic blends has allowed the manufacturers to continue to extend recommended drain intervals.
“However, the extension of oil change intervals may have a negative impact,” said John Romano, manager of maintenance and collision repair services for Wheels. “Typically, you will see with standard oil change intervals a vehicle also getting the equipment courtesy check. Extending this service may increase the risk of breakdown or service failure related to missing the courtesy checks such as for wheel and brake inspections,” added Romano.
Prices Increase for Tires
Due to rising materials cost, most major tire manufacturers increased base tire pricing for fleets in 2007. Earlier price increases occurred in 2006 for the same reasons. “The tire companies are making up-and-down pricing adjustments on individual tires, but overall we have seen, on average, a 2- to 4-percent increase in replacement tire costs,” said Feist.
Although the cost of replacement tires continued to increase in 2007, it was at a slower pace than in 2006.
“Overall, the tire replacement increase in cost has not been as dramatic as in 2006. Last year we saw multiple increases in tire cost from the major tire suppliers, whereas this year has seen very little change from the initial pricing in January. Overall the tire replacement cost has grown in the area of 3 to 4 percent as compared to approximately 8 to 10 percent last year,” said White of ARI. On a positive note, Goodyear actually lowered tire pricing by an average of 3 percent Sept. 1 to be more competitive in the market.”
Larger tire sizes are another reason for the increased cost of replacement tires. Tire sizes are generally increasing for many fleet cars and trucks, resulting in higher replacement costs. “The prevalence of larger wheel sizes has increased the average price for tires. Traditional mid-size automobiles may now have 17-inch or larger wheel sizes,” said Lange. “Larger wheel sizes and the lack of tire replacement options from multiple tire manufacturers have been the number one reason for higher tire costs.”
The limited product lines of new tire sizes are also a factor. Manufacturers are now, more than ever, developing new tire sizes for new-model vehicles that come out each year. This limits selection and availability on replacement units.
The limited number of replacement options is a key factor impacting replacement tire costs.
“We continue to see many new tire sizes offered, and in most cases, without many replacement options available. The diversity has driven prices up,” said Romano of Wheels. “Many sizes and not enough replacement options are keeping prices higher. As oil prices continue to rise and limited options for replacement are available, we expect that prices may continue to increase,” added Romano.
White agrees. “Manufacturers continue to offer new vehicles with a much broader variety of tire sizes. This trend continues to minimize the opportunity to source alternative replacement tires. Years ago, the top 20 tire sizes would satisfy almost 80 percent of the market. Today, those same top 20 tire sizes would satisfy less than 50 percent of the market,” said White.
However, the situation is improving. “The availability and selection of aftermarket tires at non-premium prices have improved. More fleets are adopting tire policy changes to authorize lower-priced replacement tires and house-brand tires,” said Feist.
The forecast is for the cost of tires to increase in 2008, but at a slower pace. “The market for tires seems to be more stable than in years past. We would anticipate a smaller increase in cost of about 3 percent year-to-year,” said White of ARI.
However, tire sizes promise to continue to proliferate, which will increase replacement tire costs due to limited inventory. “In 2008, we expect to see more unique tire sizes and challenges to finding aftermarket tires in the short-term. Wheel sizes will increase and the overall fleet costs for tires may increase as a result,” said Strom.
One consequence will be more imported replacement tires. “Offshore tire manufacturing by tire companies will increase to hold the line on tire costs,” said Feist.
Maintenance & Repair Remain Flat
Outside of fuel- and oil-based products, repair and maintenance costs were relatively flat in 2007 compared to 2006 levels.
“In looking at overall maintenance costs, we have seen a decrease across the board for passenger cars, light-duty trucks, and vans,” said Strom. “Maintenance costs have actually decreased enough to offset labor rate increases and the impact of crude oil pricing to parts costs. Manufacturer initial quality continues to improve — a key factor influencing maintenance costs. Now under-the-hood components require less frequent servicing, such as cooling, transmission, differential, spark plugs, and fuel filters, which has led to decreased maintenance costs year-over-year,” added Strom.
Recently introduced OEM extended powertrain warranties are forecast to reduce the cost of fleet maintenance and repairs in 2008.
“In 2008, improved OEM powertrain warranty coverage will slightly reduce costs. Chrysler is moving to lifetime coverage; GM moved to 5- year/100,000; and Ford moved to 5-year/60,000,” said Feist of GE.
The factor with the most impact on maintenance and repair was the 2007 EPA emissions on diesel engines in light trucks.
“The more stringent requirements have forced the engine manufacturers to push the technological envelope with regard to increased EGR and particulate traps necessary to meet the standards. The use of this type of technology requires stricter adherence to the maintenance schedules. Additionally, the training and tooling is so specific, requiring significantly more expertise to properly maintain and repair these engines,” said White of ARI. “Focusing on the 2007 emissions, there are several new requirements that will impact maintenance cost. The new technology requires the use of ULSD fuel which, is more expensive, as well as the latest oil blend of CJ4-SM. In those applications, the adherence to maintenance schedules becomes more critical in avoiding unscheduled repairs,” said White.
Additional factors that influenced fleet maintenance expenses in 2007 were rising oil prices and normal inflation. Increased oil prices forced the price of gas up and, in turn, elevated the price of distribution, one of the most costly factors in getting products to market. All parts prices have increased in the past two years as manufacturers, wholesalers, and retailers had to pay more to ship parts around the country.
Other indirect factors also impacted maintenance costs. Use of synthetic oil and repairs to import vehicles increased maintenance expenses. Higher labor rates also drove up costs.
However, these increases were offset by the lower frequency of repairs, directly attributable to improved vehicle quality. “Overall, the maintenance costs are fairly flat. OEM quality keeps improving, which has helped offset parts and labor cost increases. Initial quality, electronic trouble-shooting, and diagnostic codes have reduced the guesswork associated in the past with determining what to repair,” said Lange.
What is impressive is that OEMs have introduced significant new features in new models, but maintenance costs have remained stable. “While keeping costs fairly level, the manufacturers have been able to add front and side airbags, ABS brakes, and other driver safety components as standard equipment,” said Romano of Wheels.
Another factor that has helped stabilize fleet maintenance costs in 2007 was replacement glass pricing.
“Glass pricing has continued to be very competitive. The glass installation quality and corporate training initiatives to increase repair versus replacement have proved to be critical differentiators,” said Feist.
One area of concern for fleet maintenance is with hybrid vehicles.
“Hybrid maintenance repairs are an issue as many large non-dealership groups are unwilling to provide nontire related repairs because of the training and safety concerns over the high-voltage electrical propulsion system,” said Lange.
“Green” vehicles are more expensive to operate than conventional gasoline- or diesel-powered vehicles.
“A fleet must determine its commitment to being ‘green’ as many of the choices will increase overall operating costs. Careful attention must be placed on proper lifecycle analysis to make the best selection for a given fleet,” said White.
However, some fleet managers make the erroneous assumption that a “green” vehicle has to be a hybrid. “A ‘green’ vehicle is not necessarily a hybrid,” said Corrigan. “Pursuing a greener fleet can lower costs associated with fuel, but at the same time, greener vehicles are in higher demand in the resale market, which helps lower depreciation expense. A green fleet and cost-effectiveness can go hand-in-hand.”
The forecast for fleet maintenance and repair costs is that they will increase slightly in 2008.
“In terms of the actual cost of maintenance, we expect a minor 3- percent increase in overall maintenance costs. However, there are savings to be generated by proper cycling of fleet vehicles. Taking advantage of up-front vehicle discounts and improved warranty coverage, combined with selecting the proper vehicle and lifecycle for the application, fleets have an excellent opportunity to reduce their overall maintenance expenditures,” said White.
Warranty Recovery Remains Flat
Warranty recovery among fleets in 2007 remained flat compared to 2006.
The improved powertrain warranty coverages provided by OEMs will cause further declines in warranty recovery. “More specifically, Chrysler has approved its lifetime powertrain warranty for certain fleet vehicles, GM has gone to a 5-year/100,000-mile powertrain warranty, and Ford provides a 5-year/60,000-mile powertrain coverage, all as a part of the standard warranty coverage. Therefore, many of the powertrain-related failures that would have been considered for warranty recovery are now covered under the standard terms of the warranty. Other factors beyond increased warranty coverage must include the overall improvement in initial quality,” said White.
Strom concurs. “There has been no significant difference in the volume of claims. The OEMs are adament about having the repairs performed at their dealerships. The OEMs are also reporting fewer consumer warranty claims,” he said.
Jozwiak of Wheels seconds this view. “We have seen lower levels with respect to what the manufacturers provide in warranty recovery,” he said.