Fleet Sustainability: It s not just about alternative fuel vehicles and technology

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1 Fleet Sustainability: It s not just about alternative fuel vehicles and technology NAFA 2012 Institute & Expo St Louis, MO Paul Lauria

2 Q: What do FedEx and government jurisdictions have in common? A: Neither could function without their vehicle fleets

3 What is FedEx doing to increase the sustainability of its fleet? FedEx has a worldwide fleet of roughly 43,000 vehicles Annual expenditures on petroleum-based fuels for its vans, heavy trucks, and planes are $1.5 B Its key fuel cost reduction strategies include: Switching to electric pickup/delivery vans Switching to CNG or LNG for its large trucks Switching to algae-based biofuel for its planes Operating CPM of electric vans is expected to be one-quarter of that of current vans NG trucks are expected to save 40 percent based on current fuel prices

4 Challenges of converting to electric vehicle pickup/delivery van fleet Vehicle range 100 miles per charge with 3,300 lbs. of cargo Charging time eight hours Energy consumption a single van consumes as much energy as a suburban house Lack of charging infrastructure charging the 100 to 200 vans at a typical FedEx delivery center would likely cause black outs Lack of pricing structure power companies don t know how much an electric vehicle fleet would increase power demand and how to price the required electricity

infrastructure charging the 100 to 200 vans at a typical FedEx delivery center would likely cause black outs Lack of pricing

5 What other challenges are there with adding alternative fuel vehicles (AFVs) to a fleet? Cost FedEx electric vans cost two to three times as much as gas/diesel-powered ones For FY 2012 (ends 5/31/12), FedEx expects to make a profit of $2.04 B How s your government doing this fiscal year? In short, the Number 1 challenge most governments face in significantly increasing the sustainability of their fleets through the acquisition of AFVs is money

FedEx expects to make a profit of $2.04 B How s your government doing this fiscal year?

6 Mercury Associates AFV Acquisition Feasibility Study for City of San Antonio Study objectives: Identify conventionally fueled vehicles that could be replaced with AFVs that are readily available today and do not require significant investments, if any, in new fueling infrastructure (i.e., the cheapest AFVs available) Determine the incremental costs of making the switch

are readily available today and do not require significant investments, if any, in new

7 Sample Study Findings Vehicle Type Current Sample Model AFV Replacement Model Acquisition Cost Difference $ Acquisition Cost Difference % Sedan Chevy Impala Ford Focus Hybrid $ 5,185 23% SUV Dodge Durango Chevy Tahoe Hybrid $ 12,632 50% MD Truck Ford F350 Super Duty Ford F350 Propane Option $ 9,895 27%

Chevy Impala Ford Focus Hybrid $ 5,185 23% SUV Dodge Durango Chevy Tahoe

8 Vehicle Replacement Cost Reality Countless government jurisdictions are not devoting sufficient funds to replacing their conventionally fueled vehicles appropriately Securing the additional funds needed to buy even the cheapest AFVs is a stretch Many jurisdictions are making symbolic purchases of AFVs to satisfy elected officials, to the further detriment of the timely replacement of conventionally fueled vehicles and overall fleet sustainability

the cheapest AFVs is a stretch Many jurisdictions are making symbolic purchases of AFVs to satisfy elected

9 Fleet Replacement Challenges in Some Large US Cities 9

10 Gross Fleet Rep Cost (Millions) Salt Lake City All Funds (2,040 units) / 7.0 yrs wghtd avg rep cycle / $40.1k avg rep cost $80 $70 $60 $50 $40 $30 $20 $10 $ Fiscal Year 10

1k avg rep cost $80 $70 $60 $50 $40 $30 $20 $10 $0 2010 2011 2012

11 Gross Fleet Rep Cost (Millions) City of Tampa All Funds (3,110 units) / 6.8 yrs wghtd avg rep cycle / $36.7 avg rep cost $80 $70 $60 $50 $40 $30 $20 $10 $ Fiscal Year 11

7 avg rep cost $80 $70 $60 $50 $40 $30 $20 $10 $0 2010 2011 2012

12 Gross Fleet Rep Cost (Millions) City of San Antonio All Funds (3,356 units) / 7.3 yrs wghtd avg rep cycle / $58.3k avg rep cost $80 $70 $60 $50 $40 $30 $20 $10 $ Fiscal Year 12

3k avg rep cost $80 $70 $60 $50 $40 $30 $20 $10 $- 2009 2010 2011

14 Gross Fleet Rep Cost (Millions) City of Philadelphia All Funds (5,811 units) / 8.8 yrs wghtd avg rep cycle / $54.3k avg rep cost $140 $120 $100 $80 $60 $40 $20 $ Fiscal Year 14

3k avg rep cost $140 $120 $100 $80 $60 $40 $20 $- 2004 2005 2006 2007

16 Gross Fleet Rep Cost (Millions) City of San Francisco All Funds (6,319 units) / 7.7 yrs wghtd avg rep cycle / $46.2k avg rep cost $220 $200 $180 $160 $140 $120 $100 $80 $60 $40 $20 $ Fiscal Year 16

2k avg rep cost $220 $200 $180 $160 $140 $120 $100 $80 $60 $40 $20 $0 2010

17 Gross Fleet Rep Cost (Millions) City of Houston General Fund (7,400 units) / 6.2 yrs wghtd avg rep cycle / $48.5k avg rep cost $240 $220 $200 $180 $160 $140 $120 $100 $80 $60 $40 $20 $ Fiscal Year 17

5k avg rep cost $240 $220 $200 $180 $160 $140 $120 $100 $80 $60 $40 $20 $0

18 Strategies for Increasing Fleet Sustainability 1. Renew/replace your fleet 2. Rightsize your fleet 3. Rightsize your vehicles and equipment 4. Right type the vehicles and equipment in your fleet 5. Improve vehicle allocation, utilization, operation, maintenance, and other fleet management practices Note: Difficult to do 2, 3, or 4, if you don t have the funds to do 1.

Right type the vehicles and equipment in your fleet 5.

19 Changes in vehicle fuel efficiency ratings and standards over time Annualized change in EPA MPG ratings, : 0.5 percent Annualized change in EPA MPG ratings, : 4.1 percent Annualized change in CAFE standards, : 6.0 percent Annualized change in heavy duty truck fuel economy standards, : 2.4 percent (for vocational trucks) to 5.3 percent (for semis)

1 percent Annualized change in CAFE standards, 2011-2025: 6.

20 How fleet renewal can affect fleet fuel consumption and sustainability Suppose: A fleet of 1,000 light-duty vehicles Average annual usage of 8,000 miles Average fuel efficiency rate of 14 MPG Average cost per gallon of fuel of $3.50 Baseline fuel cost of $2,000,000 per year

annual usage of 8,000 miles Average fuel efficiency rate of 14 MPG

21 Reduction in Annual Fuel Costs as a Function of Reduction in Vehicle Age Annualized Increase in Avg MPG Reduction in Average Vehicle Age (years) % $1,995,365 $1,990,741 $1,986,127 $1,981,524 $1,976,932 $1,972,350 $1,967,779 $1,963,219 $ 4,635 $ 9,259 $ 13,873 $ 18,476 $ 23,068 $ 27,650 $ 32,221 $ 36, % $1,960,072 $,920,942 $1,882,593 $1,845,009 $1,808,175 $1,772,077 $1,736,700 $1,702,029 $ 39,928 $ 79,058 $ 117,407 $ 154,991 $ 191,825 $ 227,923 $ 263,300 $ 297, % $1,942,556 $1,886,762 $1,832,571 $1,779,936 $1,728,813 $1,679,158 $1,630,929 $1,584,086 $ 57,444 $ 113,238 $ 167,429 $ 220,064 $ 271,187 $ 320,842 $ 369,071 $ 415,914 Baseline fuel cost is $2,000,000 per year

22 Reduction in Annual Fuel Consumption and GHG Emissions Annualized Increase in Avg MPG Reduction in Average Vehicle Age (years) % Gals 1,324 2,646 3,964 5,279 6,591 7,900 9,206 10,509 GHG* % Gals 11,408 22,588 33,545 44,283 54,807 65,121 75,229 85,135 GHG* % Gals 16,413 32,354 47,837 62,875 77,482 91, , ,833 GHG* ,069 1,230 1,386 * Metric tons

23 How fleet renewal can affect fleet fuel consumption and sustainability Suppose: A fleet of 100 work trucks Average annual usage of 6,000 miles Average fuel efficiency rate of 4 MPG Average cost per gallon of fuel of $3.75 Baseline fuel cost of $563,000 per year

24 Reduction in Annual Fuel Costs as a Function of Reduction in Truck Age Annualized Increase in Avg MPG Reduction in Average Vehicle Age (years) % $555,838 $549,255 $542,751 $536,323 $529,971 $523,695 $517,492 $511,364 $ 6,662 $ 13,245 $ 19,749 $ 26,177 $ 32,529 $ 38,805 $ 45,008 $ 51,136 Baseline fuel cost is $563,000 per year

25 Reducing vehicle age: A case study Pinellas County, FL Fleet of 1,005 vehicles and pieces of equipment Current average vehicle age: 6.5 years Current de facto replacement cycle: 13 years Weighted average recommended replacement cycle: 8.2 years Average annual replacement cost: $3.2 M Current replacement backlog: $7 M Current replacement reserve fund balance: $8.6M

26 Baseline Fleet Replacement Plan $10 Gross Replacement Costs $9 $8 $7 (Millions) $6 $5 $4 $3 $2 $1 $ Fiscal Year

27 Smoothed Replacement Plan $10 Gross Replacement Costs $9 $8 $7 (Millions) $6 $5 $4 $3 $2 $1 $ Fiscal Year

28 Impact of smoothed replacement plan on vehicle age

29 Financing Fleet Replacement Costs with (current) Reserve Fund Reserve Fund Financing $10 $9 $8 $7 (Millions) $6 $5 $4 $3 $2 $1 $ Reserve Fund Balance Replacement Equipment Expenditures Reserve Fund Revenues Cash Infusion Fiscal Year

30 Financing Fleet Replacement Costs with Loans

31 Comparison of Fiscal Impacts of Alternative Financing Approaches Purchase v. Reserve Fund v. Loan v. Lease (Net of Vehicle Remarketing Proceeds) $6 $5 $4 (Millions) $3 $2 $1 $ $1 Fiscal Year AD HOC CASH PURCHASES RESERVE FUND CONTRIBUTIONS LOAN PAYMENTS LEASE PAYMENTS

32 Net Replacement Funding Requirements by Financing Approach Financing Approach Year 1 Years 1-2 Years 1-5 Years 1-10 Reserve Fund* $ 2.7 M $ 5.6 M $ 14.3 M $ 31.0 M Outright Cash Purchase $ 2.8 M $ 6.0 M $ 15.7 M $ 30.3 M Loans $ (0.5 M) $ 0.1 M $ 4.7 M $ 20.2 M Operating Lease $ (0.3 M) $ 0.5 M $ 6.5 M $ 23.9 M Budget Savings from Switching to Loans $ 11.8 M $ 14.1 M $ 18.2 M $ 19.4 M * Amounts assume no reduction in current fund balance. Negative amounts result from used vehicle sale proceeds exceeding debt service costs. Savings amounts include elimination of current fund balance.

33 Loan Financing Fiscal Break-Even Analysis $14 Loan-Related Budget Savings $12 $10 $8 (Millions) $6 $4 $2 $ $2 -$4 Fiscal Year LOAN PAYMENTS ANNUAL BUDGET SAVINGS CUMMULATIVE BUDGET SAVINGS Note: Savings amounts exclude elimination of current fund balance.

Loan Financing Economic Break-Even Analysis Financing Approach Net Present Value Costs/Savings* Years 1-5 Years 1-10 Years 1-20 Reserve Fund Purchase $ 21.7 M $ 34.9 M $ 61.4 M Loans $ 4.1 M $ 16.

34 Loan Financing Economic Break-Even Analysis Financing Approach Net Present Value Costs/Savings* Years 1-5 Years 1-10 Years 1-20 Reserve Fund Purchase $ 21.7 M $ 34.9 M $ 61.4 M Loans $ 4.1 M $ 16.3 M $ 43.9 M Cumulative Savings from Switching to Loans $ 17.6 M $ 18.6 M $ 17.5 M Average Annual Savings $ 3.5 M $ 1.8 M $ 0.9 M *Discount rate is 3 percent Savings amounts include elimination of reserve fund balance.

Recap Improving fleet sustainability through the acquisition of AFVs is sexy but expensive AFV purchases are ok as long as they don t undermine the timely replacement of conventionally fueled

35 Recap Improving fleet sustainability through the acquisition of AFVs is sexy but expensive AFV purchases are ok as long as they don t undermine the timely replacement of conventionally fueled vehicles The best path to a more sustainable fleet is an effective replacement program Although the Great Recession wrecked a lot of fleet replacement programs, alternative financing methods may offer a cost-effective path to fleet renewal and increased sustainability

36 For further information or a copy of this presentation Paul Lauria Mercury Associates, Inc. Gaithersburg, MD plauria@mercury-assoc.com

Developing an Effective Fleet Replacement Program Indianapolis, IN March 6, 2013

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