We meet again, high gas prices. You seem to show up and eat my operating margins just when they pick up. And I always seem to forget how painful you are after you leave.
There are more than 10 million vehicles in business fleets in the U.S. Yet American businesses seem to exercise a selective amnesia about the pain of high fuel prices, time and again. We forget to act before the next oil crunch.
McKinsey & Co. released a study outlining realistic scenarios in which an oil price spike could be much worse and last longer this time, right as our economy’s growth accelerates from a crawl. If your business operates vehicles in a fleet to deliver goods or services, there are solutions to reduce your exposure to volatile fuel prices, and at the same time, create strategic advantages versus competitors who wait to act.
Many efficiency options are in-the-money today, so the time to act is now. Here are four steps to take:
It’s hard to modify what you don’t measure, so gather data and arm yourself with facts. If your business doesn’t track fuel use, fuel economy averages, idling time, daily mileage and fuel spend down to the individual vehicle or even to the driver, this is your first step. Baseline your vehicles so you can examine alternatives and create the financial case to adopt the most cost-effective efficiency improvements.
2. Test all options
Try new things and put a yardstick against your baseline so you can sell your chief financial officer or board with the data. The benefits of many alternative vehicle technologies, such as hybrid powertrains, are greatly affected by the drive cycle or real-world use of the vehicle. Find out from the manufacturer the best applications for the technology and create data-intensive pilot tests to examine real-world financial cases for the technology. While electronic vehicles (EVs) are sexy and offer low operating costs, they may not be appropriate for many applications, including high daily mileage routes. The spread between natural gas and gasoline prices has also widened, but be sure to account for the cost of fueling and charging infrastructure in your analysis.
3. Use financing
Over the past couple of years, solar leasing startups have been touted for marketing lease financing mechanisms that reduce up-front costs of solar panels on homes. Guess what? Lease financing has been available in the transportation sector for 100 years. If capital budgets are tight in your company, even for attractive investments, consider leasing more efficient vehicles. Talk to the vehicle leasing companies and tell them you want to consider leasing greener options. Evaluate the lease of a more efficient vehicle in terms of monthly cash flow, rather than simple payback.
4. Start with the worst MPG vehicles
Once you baseline your vehicle fleet’s fuel economy and mileage, consider replacing the least efficient vehicles first, even before their end of life. If a 10-mpg-average delivery van is replaced with a 13-mpg-average option, you have just reduced your fuel consumption by 23 gallons per 1,000 miles driven. You will see quickly diminishing fuel and cost savings once you start replacing 30+ mpg vehicles (click here for an explanation from Duke University professors).
Creating cost advantages
Higher fuel prices can eat into your margins, but all competitors face the same problem. By making your business fleet more efficient, you reduce your exposure to volatile fuel prices. Even better, you can create a cost advantage versus competitors who do nothing. Every dollar you save from vehicle efficiency improvements takes money from oil companies to be reinvested in further efficiency improvements, new products, better warranties, or enhanced customer service. And while laggards’ margins continue to suffer, you’re investing for the future.
High fuel prices increase the financial case for many efficiency improvements, many of which already exceed corporate hurdle rates. The key to success is finding cost-effective options and then deploying at scale.
Justin Ashton is co-founder and vice president of business development for XL Hybrids. He leads market strategy and serves as the head of sales and marketing. Justin enjoys finding ways to take money away from oil companies in his spare time.