Miles to go
Alan Kies always plans for truck prices to increase. It is pretty much a fact of life when you run a fleet for a living, he will tell you. But what is catching him and many other city and county fleet managers by surprise is how fast truck prices are climbing — at almost triple the typical rate.
For the $70,000 medium-duty truck chassis his fleet buys, Kies says prices are up about $8,500. “I usually plan for about a 4 percent increase in chassis prices — that’s my rule of thumb,” says Kies, division manager for Pierce County, Wash., equipment services. “But now we’re seeing some pretty significant jumps, due to higher steel prices — which took off two years ago — and mandated emission control technology. Altogether, I’m looking at a 12 percent chassis price increase in one year.”
Dick Weston, fleet manager for Thurston County, Wash., is seeing a 20 percent increase in medium- and heavy-duty truck prices, pushing the average cost of the twin-axle dump trucks he buys from $106,000 to around $120,000 per unit. “This is all because of the new emission rules and the rise in raw material costs,” he says.
The increases caught many fleet managers off guard, and they are now figuring out how to alter vehicle life cycle strategies to compensate for higher costs. “We planned as well as we could financially, figuring that trucks would go up about $5,000 for light-duty [models] with diesel engines and about $10,000 for medium and heavy-duty [models] with new [low]-emissions diesel engines,” says Doug Weichman, director of the fleet management division for Palm Beach County, Fla. “The steel issue was not as easy to forecast.”
Reasons for the spike
According to New York-based Lehman Brothers, steel prices increased steadily over the last few years because of spikes in the cost of iron ore, a key ingredient in the steel-making process. Prices for iron ore tripled over the past five years and are poised to jump another 25 percent in 2008 because of worldwide demand for steel, especially from China. As a result, Lehman Brothers projects steel prices to increase 6 percent to 9 percent in 2008.
The rapid rise in oil prices last year also is pushing up truck prices. The 45.3 percent jump in oil prices from January to December 2007, according to the International Energy Agency, pushed up costs for a variety of petroleum-derived products, including tires, hoses and other products that use petroleum in their manufacturing.
In addition to oil, the market price for natural rubber continues to be high, and the price of petrochemical materials, such as synthetic rubber and carbon black, remain at high levels, forcing up the price of truck tires. Bridgestone/Firestone of Nashville, Tenn., for example, is raising its truck tire prices 7 percent in 2008.
Then, there are the Environmental Protection Agency emission rules for medium- and heavy-duty trucks that went into effect Jan. 1, 2007, targeting nitrogen oxides (NOx) and particulate matter (PM). Allowable levels of both are being reduced in three gradual phases — the first occurred in 2002, followed by 2007, and the last will be in effect in 2010 — to the point where NOx and PM will be almost non-existent in trucks’ exhaust streams.
To meet the requirements, engine manufacturers need to use diesel particulate filters (DPF), which cost $5,000 to $8,000 each. Crankcase emissions now are regulated as exhaust emissions, so they must be filtered, as well. And, engine manufacturers must monitor the performance of the engine’s emissions system, so most are using Engine Manufacturer Diagnostics to detect issues within the emissions control system.
Planning it out
To cope with increased truck prices, Weston is expanding the life cycle of Thurston County’s dump trucks from 10 years to 15 years. “That includes pushing out our maintenance intervals, as well,” he says. “And we don’t expect to see too much impact in doing that, because one thing we’ve noticed fleet-wide is that we’re getting a higher-quality vehicle than we used to.”
To plan for a longer truck life span, fleet managers must review their operational costs, says William DeRousse, fleet manager for Everett, Wash. “The question of price increases for new equipment is not new to our industry. There is always a price increase, because of advancements in technology, federal regulatory requirements, raw material or whatever,” he says. “The question we have to answer for each of our individual agencies or companies is, ‘What would it cost us if we do not replace our equipment in a reasonable amount of time?’ Basically, at what point is the operation of our equipment not cost-effective?”
At some point, that economical evaluation of equipment — including maintenance costs, resale value, fuel costs, downtime and new equipment capital costs — will indicate when replacement is necessary. “We track our costs, for each class of equipment we operate, by costs per mile, repair hours per 1,000 miles of operation, annual usage, miles per gallon and age,” DeRousse says. “This provides a sound basis for making most of my decisions.”
In recent years, DeRousse has found that while equipment is increasing in age, the cost of maintaining it is not increasing enough to justify the capital cost of new equipment. “That’s because equipment today is far superior in construction and durability than it was even five years ago,” he says. “We can see this in how manufacturers have extended warranties and service intervals to what would have been unbelievable just a few years ago. If you have not looked at the life cycle of your equipment in the last few years, you should.”
Palm Beach County’s Weichman has been crunching the numbers on his fleet’s life-cycle costs and also has been able to hold on to vehicles a bit longer than expected. “Last year, we extended our replacement policy cycles to try and be as cost effective as possible, offset pricing increases and [deal with] current tax reform going on in Florida,” he says. “Seven years used to be the time factor we used in our funding formula for trucks over 10,000 [gross vehicle weight rating] to be replaced. Back then, even if it hadn’t reached our mileage guideline or close to it, we would have replaced it. But now, we are adding a year or two before replacing it.”
Repair, refurbish and retire
One of the keys to Palm Beach County’s life-cycle extension plan for its vehicles is to consider making major repairs and even wholesale refurbishing older equipment — trucks as well as other items such as excavators — instead of buying new units. “We are looking at and doing a limited basis refurbishment of large, expensive vehicles and equipment,” Weichman says. “I had a 1997 International cab and chassis with an Aspen under-bridge bucket truck body on a 10-year replacement cycle. But, when we looked at the cost to replace it, the price tag was over $400,000. So, we went with refurbishment, which came in at $268,000.”
In addition, Palm Beach County is revising its specifications for new vehicles to eliminate unnecessary, costly features. Because of the warm climate and drivers’ limited off-road needs, for example, Weichman no longer buys trucks with limited slip differentials and four-wheel drive. “We are also doing all that we can to help reduce capital cost of the vehicle, like downsizing the vehicle if possible [or] transferring things like tool boxes if they are still in good shape,” he says.
DeRousse adds another factor to consider as well: the safety of vehicle operators. “That’s first and foremost the most important factor in how long we keep our equipment,” he says. “Our life-cycle costs are based first on usage — [that] could be severity of use or miles or hours of operation — and you must also consider your operational area (hot, cold, rainy, snow) as that can impact operator safety as well.”
Focusing more closely on operating conditions helped Weichman cut costs when writing specifications for new equipment. He also looks at vehicle use, plotting out where various county departments can share vehicles to reduce fleet size. “We are monitoring vehicle usage and seeing [whether] there is a justified reason to have it,” he says. “We compile annual reports on any vehicle that goes less than 5,000 miles per year and have the departments justify having these vehicles.”
By doing that, Weichman says Palm Beach County departments turned in about 175 vehicles and pieces of equipment last year, and he created vehicle “pools” they can borrow equipment from as needed. “We reduced our vehicle purchase [costs] by $2 million this year,” he says. “This is giving us a good amount of help to absorb the rapid increase in truck prices.”
Sean Kilcarr is senior editor for American City & County’s sister publication Fleet Owner.