Article

Are Hybrid-Electric Vehicles a Good Buy for Fleet?

September 2006, Government Fleet - Feature

by Christopher D. Amos, CAFM

Low bid is the mantra of most public procurement managers — and rightly so. However, “low bid” may not mean what you think it means. The question is: are you skilled enough to structure a bid specification and analyze the responses so that they consider lifecycle costs rather than just net acquisition cost?

Lifecycle cost analysis is a growing trend in procurement decision-making across the U.S. Based on research conducted by Caterpillar, Inc., 44 of the 50 U.S. states allow procurement awards based on lifecycle cost factors. Of the remaining six — Alabama, Michigan,Missouri, South Dakota,West Virginia, and Wyoming, some are known to use lifecycle cost purchasing in practice. A quick verification of the facts in your state(s) should be enough to get your procurement folks on board.

Lifecycle Cost Analysis is a Tool for Every Fleet Manager’s Skill Set
Lifecycle cost analysis (LCA) is a tool that should be in every fleet manager’s professional skill set. The model’s use forces a systematic look at the fixed and operating costs of a vehicle from cradle to grave. Even if you intuitively come to the right decision without lifecycle cost analysis, its use is an excellent means to quantify your intuition, back up your decision, and explain it and your assumptions to executives and the finance department.

NAFA Training Provides Lesson in Analyzing Lifecycle Costs
Table 1, a lifecycle spreadsheet drawn from the National Association of Fleet Administrators’ (NAFA) chapter training course on hybrid-electric vehicles, serves as illustration for this article. The model contains variable data cells for user value entry. With this information, the model calculates lifecycle costs and other useful values pertinent to fleet decision-making.

As with any model, the result is only as valid as the data input and assumptions made about the future. It is important to research multiple sources and document those used. This example representsvalid data about the conventional and hybrid versions of the Ford Escape 4x4 SUV as of February 2006.

(CAUTION: The spreadsheet is not supplied as a basis for decision-making, but rather to illustrate how to properly use a LCA model to build your own decision tools. In your cost analysis, you will supplyup-to-date data acquired for your organization and area of operation.)

Fuel Cost. Note that fuel cost is one user-supplied data element in the model’s heading section (Table 2). Looking at the body of the model in Table 1, you’ll note that the combined miles-pergallonrating is also a user-supplied value.

The decades-old controversy over the inaccuracy of U.S. Environmental Protection Agency fuel-efficiency ratings hit the proverbial fan when consumers buying or leasing hybrids specifically to get fuel savings learned the hard way that “your mileage will vary.”While the EPA maintains that its results are valid for comparing vehicles within a given class, hybrid results certainly deviated more than those of conventional vehicles when tested under more realistic conditions by the Consumers Union, publisher of Consumer Report magazine, as a comparison graph shows (Table 3). Note that the largest discrepancy between the two ratings is in the city mileage — precisely where singlemode full hybrids improve fuel economythe most because the electric motor is used most.

Acquisition Cost. The acquisition cost portion of Table 1 details the net acquisition cost of each vehicle. Fleets typicallybuy conventional vehicles below the factory invoice price, well below the manufacturer’s suggested retail price (MSRP).Most hybrids are currently so popular in the retail sales market that they more often sell at or near MSRP.

In a public bid setting, the LCA model may simply show the MSRP or invoice price for comparison to an actual or anticipated bid price with additional incentives or tax credits that lower the price. The hybrid vehicle tax credit is unique in that even tax-exempt buyerscan benefit from it.

Fixed Cost. The fixed costs section shows the projected resale price and calculated effective depreciation (i.e., that portion of the vehicle’s value actually consumed in use). These costs exist even if the vehicle sits in a parking lot and rusts.

This section also calculates interest paid or lost each year to account for the cost of money based on declining book value. Lest those of you who buy vehicles rather than lease are drifting off about now, remember that all organizations have a cost-of-money or return-on-investment target representing the opportunity cost of investing in depreciating vehicles rather than other means of production, services to the public, or just earning a pittance of interest from the bank.

Note that the fixed costs of the hybrid SUV are considerably higher than the conventional SUV despite having a better projected resale value (lower depreciation) and the tax credit.

Operating Costs. As vehicle use increases, operating costs increase. They include fuel and maintenance costs as shown, but can also include expenses such as insurance premiums or averaged self-insurance assessments and fees for tax and license for organizations subject to those.

Note that operating costs for the hybrid SUV are considerably less than the conventional SUV due to much better fuel efficiency, even when using the Consumer Reports combined mileage rating rather than EPA’s inflated values.

Total Lifecycle Cost. Adding fixed and operating costs and deducting the value of personal use actually collected from employees results in the total lifecycle cost, also shown on a per-mile basis.

Clearly, given this set of variable data and assumptions, the hybrid SUV is the best choice based on cost alone. Still, assumptions used in this analysis may not prove correct, so performing some sensitivity analysis to gauge risk is a good idea before making a purchasing decision.

Sensitivity Analysis Helps Test Assumptions in Lifecycle Costing
All lifecycle cost analyses require making assumptions about the future, a tricky proposition even with tried-and true technology. Who really knows what the price of fuel will be in a few years, what government regulations will be implemented, or how the economy and public taste may impact vehicle resale values?

Hybrids offer less historical data upon which to base such predictions as how long the battery pack will actually last and will new, hi-tech drivetrain components hold up as well as their conventional vehicle counterparts. Performing the analysis is still worthwhile, but increased use of sensitivity analysis is wise to test the limits of assumptions’ impact on the final acquisition decision.

For a hybrid-electric vehicle selection analysis, a sensitivity analysis for the varying costs of fuel definitely must be performed.You’ll note from Table 4 that as the price of fuel increases from the $2.50/gallon value used in the example, the lifecycle cost advantage for the hybrid model improves. All other things being equal, the hybrid remains the best choice even if fuel should drop to $1.75/gallon. This result makes a decision to buy the hybrid model fairly riskfree relative to the changing prices of fuel alone.

Of course, the price of fuel is not the only variable. The $1,050 hybrid tax credit estimated for the model used in this article can be taken by the selling dealership and passed along to the fleet customer, even if that customer is a taxexempt entity. However, the tax credit is only available until 2010 and will diminish gradually prior to that year as a manufacturer sells more hybrids. It is also possible that the sellers in an area will be unable to take and pass along the tax credit because they don’t have enough tax liability to do so.

Table 5 illustrates the same gasoline price sensitivity analysis as Table 4, but without benefit of the tax credit reducing the hybrid model’s net acquisition cost. You’ll note that the hybrid is still awise choice for fuel costs of $2/gallon and higher but becomes the poorer choice at $1.75/gallon. As part of the acquisition decision, therefore, it is necessary to assess the risk of fuel dropping below $2/gallon and being unable to reap the benefits of the tax credit.

A related sensitivity analysis (not shown here) that examined the annual mileage variable found the break-even mileage at 6,420 miles with all other factors the same. That is, if the vehicle were driven only 6,420 miles per year instead of 13,800 miles, the hybrid’s lifecycle cost advantage of $1,865 would be completely lost (see Table 4, $2.50/gallon line).

By constructing a table similar to those depicted for the fuel cost variable, the savings or loss from selecting a hybrid over conventional model for different annual mileages can be demonstrated.This may point to some uses in a fleet for which hybrids are well suited due to high city driving and other uses for which conventional models are best.

Balancing the Pros and Cons of Intangible Factors
While LCA modeling is important in making acquisition decisions, other, often intangible factors must be considered. These factors are harder to account for in a bid specification, but they may be the basis for a “go, no-go” decision.With hybrid vehicles, as most everything else in fleet management, there are both pros and cons.

Pros:

  • Some states allow hybrids to use high-occupancy vehicle (HOV) lanes to hasten travel on crowded highways. A few communities provide reserved parking spaces or free/reduced parking rates to encourage hybrid ownership.
  • The fuel-efficiency improvement reducesfuel costs and emissions. Reducing fuel burned is the surest way to reduce CO2 and other harmful greenhouse gas emissions. There may be a significant public relations benefit to organizations that choose environmentally friendly vehicles — particularly if they are also a fiscally responsible choice.
  • To date, hybrids have been in such great demand that they hold value well in the resale market. With depreciation the highest single cost of vehicle ownership, above-average resale values help offset higher purchase prices.
  • A hybrid’s “coolness factor” may positively impact employee morale and retention and organizational image.
  • Finally, at least temporarily, attractive tax incentives are available for most hybrids.

    Cons:

  • Light-duty hybrids typically cost $2,500 to $5,000 more than comparable conventional vehicles. This creates a risk that the vehicle may be lost in a crash before the added incremental cost is paid back.
  • Hybrids are advanced technology vehicles, but not alternative-fuel vehicles because they run predominantly on petroleum-based fuel.
  • Hybrids are generally only available in higher-end option packages. You will pay for options demanded in the retail sector, which your fleet may not need or want.
  • There are long waiting lists for some hybrid vehicle models. It may be difficult to get delivery when needed to take advantage of top early-fall resale values for the vehicles being replaced.
  • Current data is insufficient regarding maintenance and repair costs. Greater mechanical and electronic complexity may increase breakdown rates as vehicles age.Warranties on hybrid drivetrain components are often better than conventional drivetrains, reducing this risk. For the time being, the knowledge and tools to repair unique hybrid systems are almost exclusively available in dealership repair facilities. This may drive up costs in the short term.
  • Hybrids have relatively high voltage and amperage electrical systems compared to other vehicles (300+ compared to 12-volts). This may present a hazard to both maintenance personnel and rescuers at the scene of a crash. Widespread safety training is needed on this issue.
  • There is concern for pedestrians who may inadvertently walk in the path of a hybrid running on battery power because it is nearly silent. The National Federation of the Blind has raised concernsthat electric cars and hybrids pose special dangers to people who rely on their sense of hearing to cross a street.
  • Finally and oddly enough, HOV lane use by single-occupancy hybridscompetes with and may discourage use of carpools and mass transit by slowing the commute. Some transportation officials worry that this hybrid incentive could actually backfire and result in more vehicles on the road and greater congestion, fuel consumption, and harmful emissions.

    Advanced Hybrid Technologies Promise a Brighter Future<>
    On balance, current hybrid vehicles appear a good fleet acquisition choice for applications involving urban travel. Looking ahead, “the future’s so bright, I gotta wear shades.” Two-mode, full-hybrid technology available in the 2007- model year promises to provide fuelsavings at all speeds and assist with towing power in light trucks. Increased availability of hybrid medium- and heavy-work trucks that can eliminate much of the fuel wasted idling to operate the power take-off should be a real boon to government and utility fleets — if the lifecycle cost is right.

    The key to successfully implementing lifecycle cost-based acquisition is to clearly define the decision parametersup front.Make bid response forms succinct, but specific, to allow a valid comparison of multiple vendor offers.

    Want to know more? The National Association of Fleet Administrators(www.nafa.org) offers a variety of instructor-led training and reference materials to help fleet managers learn how to effectivelyimplement lifecycle cost analysis.

    So,why do so many fleets still get stuck buying more costly vehicles based on low bid? Most likely it is either ignorance or laziness on someone’s part. Let’s fix that — shall we?

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