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Upward Pressure on Fleet Costs Threatens to Increase TCO

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The conclusion of calendar-year 2017 marked the fifth consecutive year that fleet costs remained flat, primarily due to the ongoing stability of fuel prices, which next to depreciation is the second largest fleet expense category. Stable fuel prices have helped to offset inflationary pressures fleets have been experiencing in a number of areas ranging from maintenance labor costs to price increases for replacement tires driven by higher commodity prices.

Recently, I conducted a survey of several hundred fleet managers to identify emerging industry trends. One recurrent theme expressed by fleet managers was the concern that fleet costs are starting to experience upward pricing pressures. “Costs are on the rise – raw material pricing is affecting tire pricing, fuel pricing is on the rise, as well as interest rates. How do we mitigate what might appear to be uncontrollable expenses,” said Brenda Davis, strategic sourcing commodity manager at Baker Hughes, a GE company.

These inflationary forces are being felt in a variety of areas, ranging from higher vehicle acquisition to compensate for the proliferation of onboard safety equipment, to increased material costs being passed on to end-users in higher pricing for replacement parts and upfits. Below are other commonly cited cost pressures,

More Fleet Transaction Fees: One cost factor challenging fleets is the increase in fleet transaction fees. “Many FMCs are using third-party vendors to manage certain programs, such as tolls, registrations, and MVRs, whose additional transaction fees get passed on to customers,” said Brett Switzky, fleet, trucking, & records retention manager for American Family Mutual Insurance.

Higher Replacement Tire Costs: The primary factor putting upward pressure on tire costs is the increase in raw material costs. The cost of commodities used to manufacture tires, such as the price of oil and rubber, continue to be the key factors driving the price of replacement tires for passenger cars. “Like-for-like replacement tire prices for passenger cars increased 5-10% in calendar-year 2017 compared to CY-2016. We could see another 5-10% increase in 2018 if raw materials continue to increase at the same rate as they did in 2017,” said Chad Christensen, senior strategic consultant for Element Fleet Management.

Increased Cost of Replacement Parts. Higher commodity prices are causing the price of replacement parts to increase. Also, individual parts are increasingly being aggregated into more expensive modules. For instance, fuel pumps, which used to be replaced as an individual item, are now part of an entire module. Another example is wheel bearings and replacement seals, which used to be replaced individually, are now are part of an entire wheel-hub assembly complete with electronics and sensors.

Increase in Repair Costs: Vehicle complexity is increasing the cost to repair an accident-damaged vehicle. When a vehicle sustains damage in an accident, the additional amount of electronics and components in a vehicle drives repairs up dramatically. “In addition, with the demands for increased fuel-efficiency and safety, vehicles have become lighter, thus more susceptible to additional damages. Add the safety components, such as airbags, sensors, and additional structural supports, the cost adds thousands of dollars to the repair costs. How does a fleet manager go to management with cost projections that are uncontrollable?” said Bob Martines, president and CEO of Corporate Claims Management. 

Higher Labor Rates: During calendar-year 2017, maintenance expenses increased year-over-year compared to CY-2016. “The increase in maintenance expenses was primarily driven by a 5-7% increase in labor rates and parts costs,” said Christensen. Labor rates are increasing in high-cost-of-living metro areas. In addition, the shortages of service technicians is forcing providers to offer market-competitive wages to both attract and retain talent.

Acquisition Costs: Upfront acquisition costs

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