Fleet costs have been increasing across the board due to a confluence of multiple market forces, such as supply chain constraints, end-user demand exceeding supply, increasing commodity prices, and overall inflationary pressures, which is currently at the highest rate in the past 40 years.
“Operating costs – fuel, maintenance, downtime, and rental – are all on the increase. And, of course, cap costs and interest rates are poised for continued escalation,” said Joe Pelehach, vice president of Motorlease, a fleet management company headquartered in Farmington, Connecticut.
As a consequence, cost management is uppermost on the minds of fleet managers as senior management demands the implementation of cost mitigation strategies in every aspect of fleet management.
The industry truism is that every major aspect of fleet management revolves around money: asset acquisition, fuel to operate assets, maintenance to keep assets operational, and myriad other miscellaneous incidental expenses ranging from tolls, parking tickets, and waste disposal fees to taxes.
“Parts, tires, and many other products are also increasing in cost and are harder to find, causing significant downtime and added rental costs,” said Jim Petrillo, manager of treasury services/fleet manager for FUJIFILM Holdings America Corp. in Valhalla, New York.
Higher Acquisition Costs
Fixed costs are increasing as acquisition costs escalate and as OEMs reduce fleet incentives monies. “Fleets are losing negotiation power with manufacturers. The law of supply and demand is not working in fleet managers’ favor. Prices are up and rebates are down across all OEMs so my buying power has diminished,” said Peter Belloli, fleet manager for MilliporeSigma.
Agreeing with this assessment is Dave Nagy, senior VP North America for Emkay. “The cost of the vehicle supply constraints and lower fleet incentives have pushed the average capitalized cost from $34,000 to over $39,000 this past year. There is no indication that the rising price of new vehicles is going to slow down in the near-term,” said Nagy.
Also, as the industry transitions to battery-electric vehicles, the concern is that acquisition prices will continue to rise.
“At least initially, the influx of EVs will also drive up the price of new vehicles, as the sticker price and lower or no manufacturer fleet incentives, will have an impact,” added Nagy.
Another factor putting upward pressure on fleet acquisition costs are inflationary pressures in the economy and higher commodity prices.
“Inflation and demand continue to increase for vehicles. It’s costing more and more to acquire vehicles, whether it’s because of dealer inventory or ever-diminishing discounts from the OEMs. Pricing has always been a challenge, but right now, it’s really big,” said Alex May, director of fleet management for the Goldberg Group in Atlanta, Ga.
Historically, fleet incentives are used to stimulate buyer demand, but when demand exceeds supply, then the need for incentives diminishes. This is what has occurred in 2021-MY and 2022-MY.
“OEM supply of vehicles continues to be disrupted to the point where orders cannot be relied upon. This is causing havoc with both our maintenance expenses and our ‘out of lifecycle’ vehicles and equipment. Not only are delivery timelines unreliable, but fleet incentives can and do change on a dime with little or no notice, causing havoc with the legislation process to establish purchase orders, which can easily take 30-60 days. Often we have found ourselves short on a purchase order because incentives had changed without notice, either reduced or completely eliminated,” said Kelly Reagan, fleet administrator for the City of Columbus, Ohio.
The impact of the reduced incentive programs has an immediate impact on fleets. “Even if we do get the vehicles we need, the incentives have been reduced increasing vehicle costs,” said Bob Mossing, director of fleet administration at STERIS.
Many fleet managers believe dealers are using the supply constraints to take advantage of fleet buyers, causing resentment on the part of some fleets.
“Many OEMs have lowered their incentive amounts or removed them altogether. We have come across dealers who are no longer honoring existing incentives. While I understand that the dealers no longer have the volume they had before and need to make money somewhere, it is leaving a sour taste in mouths of many organizations,” said Lars Nielsen, business development manager for Mike Albert Fleet Solutions. “I’ve personally had clients tell us that they will no longer do business with the dealerships that have truly taken advantage of the consumer during these times.”
The Skyrocketing Price of Fuel
The surging price of fuel and other operating costs is making it difficult for the fleet managers to budget for this expense.
“The sharp rise in fuel prices has been a challenge controlling and forecasting variable fleet costs. The uncertainty around future costs of gasoline and diesel pricing must be factored into the overall cost of operation,” said Chad Fay, vice president – fleet for Lewis Tree Service, Inc. “This is driving our fleet supervisors to take another look at how the fleet is being utilized. Reviewing productive versus non-productive (idle) engine run time and leveraging technologies such as telematics to identify assets that are proving to be exceptions related to excessive fuel burn are both opportunities that can assist in identifying action to help mitigate this challenge.”
In addition to inflationary pressures, the war in Ukraine is adding to the unpredictability and volatility in fuel prices.
“Rising crude oil prices due to U.S. inflation, overall global demand, and the recent invasion of Ukraine continues to pinch not only the average consumer but also every fleet operator. As the invasion of Ukraine moves forward and dependency on only limited global resources continues – this will only get more painful,” said Ralf Wessel, manager of fleet services for Wallenius Wilhelmsen.
Some believe higher fuel prices will act as a catalyst for fleets to acquire more hybrids or make a faster transition to EVs if the surrounding infrastructure can accommodate their recharging needs.
Higher Maintenance Costs
One consequence to the difficulty in sourcing replacement vehicles is that the vehicles are being kept in service longer and are experiencing the inevitable maintenance issues found with high-mileage vehicles.
“Increased maintenance cost is really starting to hit our bottom line. We are going on two years without any real replacement vehicles. We are starting to see major failures that we have typically avoided with our normal replacement schedule,” said Jeff Hill, CAFM, CEFS, manager, Construction Equipment & Fleet Services (CEFS) for Black & Veatch Corporation.
A corollary problem to the higher maintenance expense and shortage of spare parts has been trying maintain vehicle uptime, but fleet managers are finding it difficult due to an aging fleet. The shortage of spare automotive parts began to worsen as the pandemic progressed, with parts delayed due to supply chain backups. “We have our own repair facility, so getting parts wasn’t an issue in the beginning of the pandemic, but now it’s wreaking havoc. We have trucks down in some instances for over a month or two waiting for one part to show up, which in the past would have been back on the road in a day or two. Oil filters and air filters are now starting to be hard to come by. And don’t even get me started with all the repair issues that we are having with the re-gen systems on our diesels,” said Bruce Ottogalli, transportation manager for Veolia North America, based in Hackensack, New Jersey.
This was echoed by many other fleet professionals. “Prolonged repair times due to lack of parts, less service personnel. We have seen an increase in repair times, especially for collision repairs simply due to lack of parts availability. New, used, and aftermarket are all affected. Furthermore, many shops, independent and national account stores, are suffering from lack of help, some even closed. This is a serious issue that will not be quickly resolved,” said Bob Martines, CEO of CCM.
In addition to the parts shortages, labor constraints are also impacting repair turnaround times. “There is a longer R&M (repair and maintenance) lead time through shop. This is mostly due to labor and parts shortages, but also a lack of certified technicians and diagnostic equipment and software,” said Jay Massey, corporate fleet vehicle manager for AmeriGas in King of Prussia, Pennsylvania. “The issue with repair parts is mostly due to lack of raw materials, supply chain shortages, overall cost, and available transportation.”
Fleet professionals complain of the dramatic price increases for replacement parts, labor expense, and the price of fuel. “Manufacturers are passing along price increases quicker than ever before. To make matters worse for fleets, used parts prices are equal or higher than new parts in various parts of the country as salvage yards know they can take advantage of the supply and demand issue,” said Martines of CCM. “Labor rates are increasing, even at national account stores, at percentages we have not even seen before. Fuel budgets have to be doubled at least, perhaps adjusted by 75% more than expected.”
For fleets that operate in-house maintenance facilities, the shortage of parts and longer turnaround time on repairs is negatively impacting their customer service reputations with user-groups.
“Rising costs and scarcity of repair parts negatively affects return to service times resulting in perceived poor customer service. This scarcity of available parts also stacks up the ‘down line’ putting undue pressure on technicians as they battle to reduce the workload and keep our customers in service. This can mentally and emotionally overburden the technicians,” said Mark Brochtrup, CAFM, fleet manager at the City of Coppell in The Colony, Texas. “Now more than ever there is a real need for maintenance dollars and with budgets getting tighter and superiors pressing for longer service life, it becomes a vicious circle.”
This concern was echoed by other fleet managers. “These and many other factors resulted in increased prices in supplies we have never seen before in this industry. Not only have the prices increased but the delay in receiving repair parts has been delayed sometimes for months. This affects all our fleet industries and leadership of these organizations has to predict these increased into the final expenses and make better decisions on maintaining the fleet,” said Aaron Alvarado, area fleet director- Pacific Northwest, British Columbia, Alaska for Waste Management. “There is no time like the present to optimize your inventories and understand the reality of what the current on-hand inventory looks like in terms of turns and time on the shelf.”
The longer service lives for vehicles is making it imperative that there is stringent compliance to PM requirements.
“Due to fleets having to hang on to their vehicles longer than normal, increased maintenance and repair costs combined with part supply shortages are adding more pressure to doing things right,” said Grant Chitty, account manager for Foss Leasing, who is based in Vancouver, British Columbia. “Monitoring these costs have become ever more important as a result. Seeking new and innovative ways to keep these expenses in check will be more important than ever before and engaging with a fleet management professional partner that understands this concept and can provide alternate solutions that will provide intelligent strategies to keep vehicles running reliably and safely will prevail.”
What promises to be a growing factor putting upward pressure on fleet costs is inflation. “The supply chain has impacted inflation but it has also been impacted by geopolitical turmoil. The Russian invasion of Ukraine has increased fuel pricing as Russia is the second largest producer of oil,” said Mossing of STERIS.
The impact of inflation and the need for cost control was seconded by other fleet managers. “Costs are increasing globally (fuel, interest rates, maintenance, tires, brakes, etc.) further complicated by the longer replacement parameters resulting in an increase in repairs and routine maintenance,” said Steven Bair, global fleet services senior manager for AbbVie Inc. “In our fiduciary responsibility to try to keep costs level or at a minimal increase, it becomes almost impossible due to this economic increase.”
The concern about inflation was also cited by Rich Nowacki, fleet, environmental, and safety manager for UScellular Business in Chicago. “Inflation, especially around fuel, is affecting everything we do as a supplier. The cost to drive to the customer, to service cell towers, and other locations are increasing,” said Nowacki.
Higher oil prices are impacting the end-user prices for oil-related products. The price of commodity metals has also been dramatically increasing.
“Inflation has also hit the cost of fleet vehicle repairs as repair parts have increased in price and some have long lead times which result in longer vehicle downtime. Inflation has also hit many materials for preordered manufactured equipment and vehicle upfitting. Equipment that was ordered in early 2021 at a set price came with a ‘Raw Material Surcharge’ tacked on which added several thousand dollars to the invoice,” said Rick Sauter, vice president – operations for Allstate Leasing in Towson, Maryland.
The source of much of the fleet price increases is due to the increased cost of the commodities or raw materials that are used to manufacture fleet products.
“Lately, commodity pricing has been skyrocketing. In addition to metals, oil used to create plastic, resin, tires, and many other components have had price increases and keep rising, increasing the cost to operate a vehicle,” said Nagy of Emkay.
Related to pricing pressures on maintenance is the increased costs to repair accident damage that is further impacted by more expensive technology found onboard vehicles that needs to be recalibrated or replaced following a crash.
Fleet managers are finding it increasingly difficult to maintain their budget goals due to these cost pressures, especially when they are budgeting for a year in advance. “With vehicle prices rising, OEM incentives have decreased, and fuel is rising. Today, there are many forces are working against our budgeting goals,” said Petrillo of FUJIFILM Holdings America Corp.
One recommendation is to factor into future budgets anticipated price increases. “Fleet managers should factor in a per-unit increase of minimum 10%, and need to have those discussions with their executive leadership prior to going into model-year negotiations versus after. This will set the stage appropriately and they can be seen as experts. Potentially this will mean factoring an increase for CY-2023 for the remaining of the MY-2022 units that roll through,” said one fleet professional who wanted to remain unidentified.
Accelerated Transition to EVs
One silver lining cited to the increase in fleet operating costs is that it may accelerate the transition to EVs.
“Maintenance and fuel costs usually make up the majority of operating costs and due to the increase in labor rates, automobile parts and fuel prices, companies have had to adjust their operating budgets accordingly. These increases have created a significant uptick in the number of companies considering a move towards EVs,” said Nielsen of Mike Albert Fleet Solutions. “ Clients that have been considering EVs versus ICE vehicles are now seeing the TCO move in favor of EVs. These clients can also take advantage of the $7,500 federal tax credit when acquiring an EV. While there is still a long way to go for the EV market, there are solutions in most segments to meet client needs.”
Strong Resale Offset Other Costs
One offset to increased depreciation expense and higher acquisition costs are the incredibly high resale values for used vehicles.
“Although incentives are very small and it hurts our bottom line. This is somewhat offset by the resale price of vehicles, which is extremely high,” said Nowacki of UScellular Business.
The top two expenses for all fleets is depreciation and operating costs, which is primarily today’s higher cap costs and the increased cost of fuel. Higher resale values are helping to keep depreciation expenses level despite higher acquisition costs and reduced incentive monies.
“All of these factors in today’s market are impacting fleet’s two most expensive spend line items: lease (depreciation) and fuel. The only relief we will get this year is the value of our used vehicles is quite high, but you can only take advantage of that if you were able to get new vehicles delivered,” said Mossing of STERIS.
But to take advantage of the strong used-vehicle market you need to be able to source replacement units. “Used-vehicle prices are the highest they have ever been. Our clients that have heeded our advice, planned properly, and ordered early have actually been able to take advantage of the increased equity in the vehicles they are disposing. This has helped to offset some of the raised acquisition costs they are experiencing now,” said Nielsen of Mike Albert Fleet Solutions.
This was seconded by Nagy of Emkay. “The only real positive today is the historically high used-car marketplace but few fleets can take advantage of it because they can’t replace cars at the normal cycling pace due the manufacturing issues affecting the industry,” said Nagy.
Of course, with challenges comes the opportunity partially offset higher acquisition and operating costs with higher resale values. “A current opportunity in fleet is the crazy high wholesale prices of older worn-out vehicles. These worn-out vehicles in the past were retired and sold for scrap value. Now these high-mileage fleet vehicles are bringing thousands of dollars in the wholesale market. Take advantage of the situation if you are able and offset some of the fleet repair costs of your extended lifecycle fleet vehicles,” said Sauter of Allstate Leasing. “I have ended relationships I had with some commercial fleet dealers due to their vehicle mark-ups and unwillingness to be reasonable. I have taken the opportunity to look for and develop new relationships throughout the commercial fleet community. I have found new dealer contacts that are very professional and look at the future and the big picture in business. I am happy to report some new fleet friends.”
Originally posted on Automotive Fleet