Fleets and inflation

From the October 2023 print edition

Economic conditions and inflationary pressures now impact almost every aspect of fleet operations.

Whether it’s rising interest rates, inconsistent supply chain performance, increasing maintenance costs, or fuel price fluctuations, these trends influence operating expenses and understanding their implications is crucial.

Holman’s Consulting Services team has developed an Economic Trends report with in-depth analysis of how these pressures affect fleet operations. Our consulting services team offers a view of these economic headwinds. The report examines inflation in 2023 and highlights how these factors influence each stage of the vehicle’s lifecycle – buy, drive, service, and sell. Here’s a look at the challenges in each stage and how to navigate them.

Buy
Inflation and unreliable supply still make buying fleet vehicles difficult. Driven by vehicle price increases and surging interest rates, monthly lease payments have increased by nearly 40 percent since 2020. For perspective, a fleet with an annual acquisition budget of $1 million could finance about 135 vehicles in 2020. Today, that budget could accommodate roughly 95 vehicles, reducing the number of new vehicle orders by 40 units. To maintain the same order volume, you’d need to increase your acquisition budget by nearly $400,000. Vocational units with extensive upfitting are subject to additional cost drivers. Since 2020, vehicle upfitting costs have spiked by over 20 percent due to parts shortages, higher labour rates, and raw materials cost increases. Upfitting costs are stabilizing.

Drive
Luckily, pump prices have dropped 27 percent since the peak in the summer of 2022. In June 2022, gasoline prices peaked at $4.96 per gallon on average in the US, then dipped to $3.60 nearly a year later. Fuel prices followed a similar, yet slightly more volatile, trajectory in Canada. Fleet operators could therefore see fuel expenses reduced by as much as $1,800 per vehicle in 2023.

There has been a small uptick in fuel prices, but 2024 signals more declines. Still, multiple factors influence fuel prices – production levels, the seasonality of travel, macroeconomics, and so on – and these variables can shift quickly.

Service
Since 2020, disruptions have propelled maintenance costs to near-record highs. Fleet maintenance costs have increased by as much as 30 percent in some regions due to factors including parts shortages, higher commodity costs, and rising labour rates. For example, the cost of brake pads has increased by 17 percent since 2020; tire prices are up as much as 30 percent; and labour rates by over 20 percent.

Limited new vehicle inventory is extending lifecycles beyond initial forecasts. As vehicles log more miles and wear, they need more maintenance while awaiting replacement units. To mitigate this, adhere to the recommended preventative maintenance (PM) schedules.
Minimizing PM variability improves reliability, maximizes productivity, and controls operating costs. Minor PMs reduce more significant component failures. When a fleet has high PM variability, maintenance costs and downtime rise as the vehicle ages.
Reconsider what maintenance services are required as vehicles remain in service longer. For example, if you cycle vehicles out at 60,000 miles, your PM schedule may not include a transmission service, but add this if your vehicle must remain on the road longer. The industry is stabilizing and price increases are leveling off. Maintenance and repair expenses are likely to increase in certain areas. Tire prices are unlikely to climb at the same rate as the last few years.

Sell
Rising costs present challenges but also create opportunities in selling used vehicles. Due to new vehicle supply constraints, the used vehicle resale market remains strong.
In early 2022, the secondary market peaked with used vehicle values nearly 50 per cent higher than pre-pandemic. While this secondary market has waned since April, used vehicle values are up about
35 percent compared to 2020. Forecasts show the market will stay favorable for 2023 and into 2024. You may be able to take advantage of this by liquidating excess vehicles or underutilized assets.

Rising costs driven by inflationary headwinds are a challenge for fleet operators. Although some industry segments have improved marginally, macroeconomic trends will likely fuel uncertainty for the year ahead (and perhaps beyond). For the latest analysis or to download Holman’s Economic Trends report, visit Holman.com.