10 November 2011 | Richard Schooling
Petrol prices once again
hit record highs earlier this year and it’s unusual to come across businesses that are not looking for ways to reduce their fleet costs.
This is all about understanding the interplay between key elements in fleet costs: vehicle and fuel prices, fuel efficiency, depreciation and tax.
And as fuel is a major factor in the overall fleet bill, it’s helpful to begin by putting today’s pump prices into context.
Since the mid-1980s, it has cost an average of £1,000 in today’s money to buy sufficient fuel to cover 10,000 miles in a typical new car. In the early 1990s, it cost closer to £900, or 9p per mile.
Vehicles’ fuel efficiency was keeping pace with rising fuel prices. Provided that the trend continued and fuel price increases stayed within ‘acceptable’ limits, people and businesses were generally not worried. Indeed, for nearly two decades, as long as fleet operators replaced vehicles every three years or so, their fuel cost-per-mile remained almost constant in real terms.
But a sudden rise in the price of oil and the introduction of the fuel tax ‘escalator’ at the end of the 1990s temporarily broke the tie between prices and efficiency. Real fuel costs jumped by 20 per cent overnight, sparking the 2000 Fuel Protest. Protesters were upset by fuel costing 12p per mile in real terms. Today, with fuel again costing around
25 per cent higher than the 20-year average, many fleets pay 15p per mile or more.
This time, however, the likelihood that fleet costs will go back to ‘normal’ and stay there is slim. Economic growth is glacial, credit is scarce and inflation-adjusted oil prices are nearly three times above the average for the past two decades.
And although fuel efficiency is still progressing toward the day when the average new car will return about 60mpg, the rate of improvement is not keeping pace with fuel prices.
Fleets can no longer rely on market forces alone. To meet the threat from structurally high fossil fuel prices, managers need to take a proactive approach to controlling fleet costs.
Taking control
The driving forces behind your fleet fuel bill are vehicle choices, journey decisions, driving skills, taxation and the price of fuel itself. Applying the appropriate tools and strategies will make a significant difference.
You can only control your fuel costs when you can measure them. Aim to use fuel cards to buy as much of your fuel as possible. Using pay-and-reclaim expenses means you’re buying fuel from drivers without knowing what they paid or how much they used. A price-led strategy doesn’t address the biggest cost driver – the amount of fuel your business buys – but directing drivers to low-cost sites like supermarkets can save 5p/litre or more.
Bad drivers may burn 20 per cent more fuel, not to mention the extra wear and tear. Training in ‘safe and efficient’ techniques improves consumption by up to 15 per cent, giving a reasonably quick return on the training cost. It is a particularly worthwhile investment for drivers who have little choice over distances or routes, provided it is targeted carefully.
Mileage is the underlying driver for fleet costs, yet many businesses have no means of centrally logging and/or analysing journeys and fuel costs. Online journey reporting (for car drivers) or telematics (for commercial vehicles) are now widely recognised as essential cost management tools. Online mileage capture requires drivers to log in to a system every month and record the length and purpose of every journey. This deters exaggerated claims and unproductive driving and provides useful management information. Telematics uses black box technology to transmit information on fuel use, acceleration, braking and location details to the fleet operator. The initial saving on fuel and mileage costs from implementing mileage capture can be as high as 25 per cent.
In terms of vehicle choice, low-CO2 vehicle policies save money on both fuel and tax. There’s no need to take risks with alternative fuels or electric vehicles at this stage. Work with a vehicle supplier that offers genuine whole-life cost calculations on conventional vehicles. Whole life costs factor-in fuel efficiency, depreciation and national insurance contributions, among other things. They will predict total operating costs over the fleet lifecycle far more accurately than list prices or lease rentals. Along with managing mileage, choosing vehicles on the basis of whole- life costs will have the biggest impact on your fleet running costs.
The decisions that firms make about vehicle and fuel supplies over the next few weeks and months will ‘lock in’ their cost levels over the next three- or four-year fleet cycle. Going for a business-as-usual approach is a gamble that fuel prices will eventually return to normal. But the odds against that happening are getting longer all the time, as shown by the emergency release of 60 million barrels of strategic oil stocks by the International Energy Agency earlier this year in an attempt to hold down oil prices.
It was yet another sign that businesses can no longer rely on laissez faire to keep their fleet fuel costs steady.
☛Richard Schooling is chief executive of Alphabet, the BMW-owned, multi-marque company car leasing and fleet management firm
