High fuel prices are back and are slowing our economy’s growth, eating into businesses’ profit margins and sapping household discretionary budgets. Today, consumers have a range of options for buying hybrid or even electric vehicles to help reduce their fuel costs. But businesses are far behind consumers in their adoption rate of hybrid vehicles. However, high fuel prices have created conditions in which hybrids are now sound business investments. Those businesses that take action now will outperform their competitors.
Commercial vehicle market
Excluding long-haul tractor trailers and passenger cars, there are more than 10 million vehicles in business fleets in the U.S. comprised mostly of delivery trucks, cargo vans and pickups. Due in part to a lack of government regulation of commercial vehicle fuel economy standards (at least until President Obama’s new regulations go into effect in 2014), most of these vehicles have a combined fuel economy well below 15 mpg. Many Fortune 1000 businesses operate hundreds or even thousands of vehicles in their fleets and watch rising fuel costs eat their margins. So why have hybrids seen little adoption in the commercial vehicle segment, where fuel savings for each vehicle can range from $2,000 to more than $4,000 per year at current fuel costs?
Businesses make rational investments
Businesses use their vehicles as tools to deliver goods or services. Managers have been reluctant to pay more for efficient vehicles, such as hybrid trucks, because they could not justify the investment based on the fuel savings available during periods of lower fuel prices.
Higher fuel prices, improved technology, and an increasing number of hybrid commercial vehicle models at different price points have created the right conditions to spur adoption. Hybrid commercial vehicles are now affordable for an increasing percentage of fleet vehicles, and the purchase of hybrids can provide an adequate return to justify the investment.
Hybrids create tangible savings
To see the state of commercial hybrids today, evaluate the decision many fleet managers face in buying a hybrid. A typical delivery truck operating in and around a major city may average 8 mpg. If the truck averages 25,000 miles per year (mpy), which is quite common, the vehicle consumes (25,000 mpy / 8 mpg) 3,125 gallons of fuel per year. At $4 per gallon, the annual fuel cost to operate this truck is $12,500.
Hybrid trucks boost fuel economy by 25 percent across routes, so a hybrid delivery truck achieves 10 mpg. Using the same numbers as above, a hybrid truck consumes (25,000 mpy / 10 mpg) 2,500 gallons per year at a cost of $10,000. This represents a reduction of 625 gallons per year or a savings of $2,500. Many conventional delivery trucks drive even more miles annually and have lower fuel economy, creating the opportunity for greater fuel savings.
Furthermore, hybrid trucks can reduce brake replacement costs by up to 50 percent over the life of the vehicle by extending the interval between replacements. Brake maintenance savings can range from $150 to $750 annually depending on the size and annual mileage of the vehicle and should be accounted for in the investment decision.
Commercial hybrid powertrains add $8,000 to $25,000 or more to the conventional model base price. If the hybrid vehicle replaces the most inefficient and highest annual mileage vehicles in fleet service, the fuel savings can provide a justifiable payback of three to six years, and for an increasing percentage of vehicles, meet or exceed corporate hurdle rates that are used to evaluate investments.
Fuel savings create cost advantages
The above numbers show that small increases to a commercial truck’s fuel economy can provide real value. Fuel savings can be invested in new growth areas or services for the business to differentiate itself from competitors, such as more hybrid vehicle purchases, lower prices for customers, enhanced customer service, better product warranty, longer service hours, or expanded geographic market, to name a few. Businesses that do not take action have no fuel savings to invest.
Furthermore, businesses that reduce fuel consumption reduce their company’s exposure to volatile fuel prices and reduce uncertainty about fuel costs in the future. While it may at first seem counter-intuitive for managers to think about investing because fuel prices are rising, remember that all companies face the same prices at the pump and that companies that adopt efficient vehicles are in a position to invest cost savings in growing the business, while others are sending that money to oil companies.
Many hybrid vehicles are cost-effective today. By deploying hybrids to replace the least efficient, highest mileage vehicles, managers create strategic cost advantages over competitors who fail to act. Reducing fuel consumption is a great business strategy, and those who take action today will reap the rewards.
Article by Justin Ashton, co-founder and vice president of business development for XL Hybrids. He leads market strategy and serves as the head of sales and marketing. In his spare time, Justin enjoys finding ways to take money away from oil companies. He holds a master’s degree in business administration from MIT.