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Andy Allen's blog: The impact of fuel price volatility on fleets

Date: 25 April 2017

When it comes to fuel prices, market forces, global events and new technology can all cause price volatility at the pump. This unpredictability can leave businesses vulnerable - particularly when forecasting profitability and expenses for the year.

On a day-to-day level, the price of petrol and diesel is linked to the price of oil. In June 2008, US light crude rose to US$139.89 a barrel. By the end of the year, it had fallen to under US$50. While the consumer was protected from the worst of these fluctuations, the knock-on effect was noticeable on the forecourt.

In the UK, petrol prices also include a significant amount of tax - from fuel duty to VAT (see diagram below).

Screen Shot 2017-04-25 At 16.35.48

The only element in petrol prices to be affected by changes in the price of oil is actually only the Platts ULSD Element. However, because oil is traded in dollars, any foreign exchange fluctuations that affect the strength of sterling will affect the price of oil.

Unpredictable fuel prices leaves fleets with two options:  either lower the volume of usage or manage price.

Telematics that monitor vehicle usage, driver behaviour and route optimisation can all help lower volume. So for instance, to manage price, fleets might try to always ensure they use the cheapest forecourts.

But this can mean time-consuming research. Another option for fleets to consider is fleet renewal, because newer vehicles use fuel more efficiently. But this is time consuming and needs significant capital expenditure upfront. Ultimately, neither option protects a fleet from changes in oil prices or foreign exchange fluctuations.

What can we learn from other industries? The aviation industry faces annual fuel costs of 15-36% of its total operating costs. When fuel contributes to such a huge proportion of costs, businesses can live on knife-edge. In the first half of 2008, 25 airlines went bust.

Nine years later, the surviving airlines have turned fuel hedging into a fine art. Airlines who hedge their fuel can mitigate high fuel prices. They are also rewarded with a 12-16% premium on their stock price as a reward for having a stable cashflow and income.

With a tough economic environment predicated as the UK negotiates Brexit, fleet managers should be looking at all possible avenues for managing costs.

Hedging is a relatively new concept for road vehicle fleets, but the lessons from the aviation industry are clear to see.