By Mike Antich

Typically, replacement tires are the third-largest expense category for fleets. In the past three years, this expense category has grown as a result of multiple price increases from all major tire OEMs. In 2008, year-to-date tire replacement costs have increased 4-10 percent. This follows a 3-4 percent price increase in 2007 and an 8-10 percent price increase in 2006.

There are two reasons for the relentless series of price hikes. The first is a reaction to the high cost of oil, a primary ingredient in manufacturing tires. In addition, the high cost of fuel has also increased the expense to transport tires to retailers, whose cost is passed on to consumers. The second reason is the ongoing proliferation to ever-larger tire diameters by new-vehicle manufacturers. The trend to larger diameter tires is broad-based, occurring in many models in the compact, intermediate, and minivan segments.

Will replacement tire prices increase again in 2009? Industry consensus is that they will; however, the degree of increase will be heavily influenced by the cost of oil and the vitality of the overall national economy. Declining oil prices and a slow economy put downward pressure on replacement tire pricing.

 

Trend to Larger Diameter Tires

A key factor causing tire price increases is the trend to larger 17- and 18-inch wheel sizes. Tire sizes have increased for many fleet cars and trucks, resulting in higher replacement costs. "The larger the tire, the more material it takes to make the tire, thus, the more it costs. The rapid reduction of 14-inch and 15-inch tires continues. Even the popular 16-inch tires are on the decline, with 18-inch tires growing in popularity. In addition, speed ratings have increased, which increases the cost of the tire," said Tony Blezien, VP of operations for LeasePlan USA. Currently, only five out of the Top 10 replacement passenger tires are 16-inch sizes.

The end result of this trend is that manufacturers are offering new vehicles with a much broader variety of tire sizes. Years ago, the top 20 tire sizes would satisfy almost 80 percent of the market. Today, those same top 20 tire sizes would satisfy less than 50 percent of the market.

More than ever, manufacturers are developing unique tire sizes for new-model vehicles. The unique tire sizes impacts replacement tire supplies for one to two years, as other aftermarket tire companies may not immediately meet the demand for these tire sizes. This lag time limits selection and availability of replacement tires. These new sizes are driven by retail demand. They are designed to provide desired consumer ride handling matched to the vehicle design. "New tire sizes have been introduced and pose challenges since the manufacturing of replacement tires in those new sizes is limited; hence replacement tires don't always become available as quickly as required by high-mileage fleets.  Demand outstrips supply and prices rise," said John Bauer, manager, fleet analytics for Wheels Inc.

 

Forecast for 2009 Prices

Due to rising materials cost, most major tire manufacturers increased base tire pricing for fleets in 2008. Earlier price increases occurred in 2006 and 2007 for the same reasons. The tire companies make up-and-down pricing adjustments on individual tires, but overall, the trend is increased pricing for replacement tires.

The forecast is for replacement tire prices to increase again in 2009, but at a slower pace. "We anticipate 2009 will continue to see rising tire prices possibly in the range of 4-7 percent, but the percent of increase will depend on the broader economy," said Greg Corrigan, vice president, business analytics for PHH Arval.  An additional factor influencing tire operating expense is the relatively new cost to service tire pressure monitoring systems.

As one way to offset higher tire prices, more fleets have instituted fleet policy changes to authorize the purchase of lower-priced replacement tires and house-brand tires. A silver lining is the ongoing improvement in tire quality has resulted in longer wear life during the past decade. Tire life has been extended by 10 percent in the past 5-10 years. This has helped offset some of the recent price increases.

However, more fleets have extended vehicle replacement cycles, which may increase tire costs for fleets in 2009. "While extended lifecycle lowers depreciation expenses, the additional mileage will require an additional tire replacement on some vehicles," said Bob White, VP of operations for ARI. "If the trend continues, tires will comprise a larger portion of operating expenses."

Let me know what you think.

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Originally posted on Automotive Fleet

Author

Mike Antich
Mike Antich

Mike Antich

Mike Antich has covered fleet management and remarketing for more than 20 years and was inducted in the Fleet Hall of Fame in 2010.

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Mike Antich has covered fleet management and remarketing for more than 20 years and was inducted in the Fleet Hall of Fame in 2010.

View Bio
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