Do the Math: Older Vehicles Cost More Than You Think
Editor's Note: The following article was contributed by Dave Shoop, Assistant Vice President for Enterprise Fleet Management. TAUC has partnered with Enterprise to provide its members with significant savings on their vehicle operational expenses, as well as personalized plans to help make their operations leaner and more efficient and competitive in the bid process. For more information, click here.
The most common reason companies use to justify a "buy and hold' replacement strategy is that maintenance costs do not justify the expense of a new vehicle. While there's no doubt that vehicle engines and transmissions are designed to last much longer than ever before, there are a number of other factors that have to be considered. By working with a professional fleet management company on a true holding cost analysis all of the vehicle expenses can be taken into account. Once you see the numbers, you may be shocked to realize the hidden expenses in a traditional "buy and hold" strategy.
Holding costs are determined by calculating costs over the life of a vehicle for depreciation and taxes, downtime and administration, maintenance, insurance and fuel. Most companies make the mistake of placing a priority on depreciation when it only accounts for 18.4 percent of the cost of running the vehicle. Many would be surprised to know that 52 percent is fuel, but few are managing fuel expenses beyond ensuring all fuel charges fall within company guidelines.
There are two factors at work in managing fuel expense. First, the price at the pump has increased nearly 12 percent each year from 2005 to 2012. In addition, buying fuel for an older vehicle can be like throwing good money out the window. For example, based on a pump price of $3.85/gallon, an older vehicle that is only two miles per gallon less fuel efficient than it used to be will require more than $1,350/year in additional fuel to travel the same 25,000 miles as its late model counterpart. New vehicles also get significantly better mileage than a vehicle that is now six to eight years old got when it was purchased, adding to the additional fuel expense. The higher the price at the pump, the more money is lost.
Maintenance expenses also are higher for older vehicles, but not in the way you may think. As the vehicles start to age, maintenance expenses can mount quickly. This is especially true in years four, five and beyond when the frequency of small expenses begin to accumulate and the manufacturer's warranty expires. Once the cycle begins, a single repair can cost as much as $600 to $900, and maintenance expenses are never ending. An older vehicle not only becomes a constant drain on expenses, it also contributes to a loss of productivity due to increased downtime.
For those who believe it is more cost effective to spend up to $5,000/year in additional expenses for maintenance and fuel on an older vehicle rather than buying a new vehicle, the numbers for overall costs tell a far different story. Each business is unique, and there is no universal approach to developing a replacement cycle for a fleet of vehicles. To ensure that vehicles are replaced at appropriate intervals for optimum performance and resale value, a comprehensive cost and replacement analysis will demonstrate conclusively how older vehicles can cost a business a lot more than they're worth.
Dave Shoop is Assistant Vice President, Enterprise Fleet Management. He can be reached at 314-512-2795 or email@example.com.