Understatement of Auto Operation Costs by AAA

To: webmaster©aaa-calif.com

July 15th, 2002

Dear AAA:
Thanks for posting valuable information on car costs at http://aaa-calif.com/members/corpinfo/costbrch.asp

I have a suggestion/ correction.

Depreciation has both a use and ownership component. Including all depreciation under ownership understates the usage cost and overstates ownership cost.

This could lead consumers of your information to drive more than they would if the cost of marginal miles driven were not understated, costing them more money, increasing congestion, etc.

For a 2001 Honda Accord, the difference in resale value between a car with 10,000 miles and 20,000 miles is 18 cents per mile (according to Kelly Blue Book--see info at end of message for specs used and calcs). This is greater than the sum of all other operating costs and certainly warrants mention.

If the condition also drops (which is a pretty much inevitable consequence of greater use, the only question is how much) the per mile depreciation is more. In the case of the 2001 Honda, if the condition drops one Kelly Blue Book increment, from excellent to good, the depreciation per mile is 29 cents per mile; twice the total of all other per mile costs.

Thus, the true cost of operating this vehicle is about two and a half times what an owner would conclude from the AAA table, and the cost of letting it just sit is less by an equal amount.

In the case of 1996 cars the understatement is less severe, but still significant; I estimate that it is about 40%.

Your information is very widely disseminated and respected. If distributing accurate information about operating costs resulted in one-one hundredth percent reduction in driving nationwide, that's nearly a hundred million miles less per year driven and many millions of dollars saved by your membership and others who encounter your information reprinted by third parties.

Thank you again for helping educate the public about driving costs.

Yours,

Art Ludwig

Sample calculation of depreciation per mile:

Deprecia-tion per mile	AAA "total operation costs"	Corrected total operation costs	Error	Private party resale value	Year, Make, Model of car	Features	mileage	condition
				$21,175	2001 Honda Accord EX Sedan 4D	kbb defaults	10,000	excellent
$0.183	$0.144	$0.327	227%	$19,350	2001 Honda Accord EX Sedan 4D	kbb defaults	20,000	excellent
$0.295	$0.144	$0.439	305%	$18,230	2001 Honda Accord EX Sedan 4D	kbb defaults	20,000	good
				$10,985	1996 Honda Accord EX Sedan 4D	kbb defaults	50,000	excellent
$0.043	$0.146	$0.189	129%	$8,860	1996 Honda Accord EX Sedan 4D	kbb defaults	100,000	excellent
$0.056	$0.146	$0.202	139%	$8,165	1996 Honda Accord EX Sedan 4D	kbb defaults	100,000	good
$0.074	$0.146	$0.220	151%	$7,270	1996 Honda Accord EX Sedan 4D	kbb defaults	100,000	fair

Notes:

AAA total operation costs are from http://aaa-calif.com/
Resale values are from Kelly Blue Book, http://kbb.com.
I used my zip code, 93105 for the location of sale. This is in Santa Barbara, California.
Honda Accord EX Sedan 4D was chosen at random because it seemed like a fairly typical car and was available both model years the AAA considered, 1996 & 2001 mileage ranges were based on AAA's range of miles driven from 10,000 to 20,000 annually.
Condition deteriorates partly from the simple passage of time, partly from use. It is reasonable to assume that the condition of a car which is driven twice as much will deteriorate more rapidly, maybe 1.5x as rapidly. The actual drop in condition (thus resale value) from extra driving could be debated as there is no guidance on this from KBB.
I'm estimating that the actual 2001 error is 250%, and the actual 1996 error is 140%. Hopefully the AAA will look into this in some more detail and adjust their numbers.

For the old junkers we drive, the difference is much less:

Depreciation per mile	AAA "total operation costs"	Corrected total operation costs	Error	Private party resale value	Year, Make, Model of car	Features	mileage	condition
				$3,095	1990 • Honda • Civic Hatchback 2D	kbb defaults	150,000	good
$0.028	$0.146	$0.174	119%	$1,700	1990 • Honda • Civic Hatchback 2D	kbb defaults	200,000	fair

Notes:

Those who know us know that the condition of Lynn's Honda could not credibly be described as "good" due significant body damage. I fudged the condition up in order to not fall off the bottom of the KBB scale; it refuses to estimate a value for a car in "poor" condition.
My 1978 Toyota truck fails to register on two counts; KBB only goes back to 1982, and the condition is "poor," also due body damage.
While depreciation per mile plummets with age, I think that maintenance costs per mile skyrocket, so that the understatement of operation costs probably remains somewhat constant for vehicles older than the five years contemplated by the AAA.

AAA car costs

From <http://aaa-calif.com/members/corpinfo/costbrch.asp>
Southern California Average Costs
Details of Car Costs*
OPERATING COSTS
COST PER MILE
1996
2001
Gasoline and Oil
7.7
cents
7.9 cents
Maintenance
5.1
cents
4.7 cents
Tires
1.8
cents
1.8 cents
14.6
cents 14.4 cents
**************
From <http://www.kbb.com>
I picked the Honda Accord EX Sedan 4d because it seemed like a pretty
middle of the road car and was available in 1996 and 2001.
I used the defaults for everything but mileage and condition.
Engine: 4-Cyl. 2.3L VTEC
Trans: Automatic
Drive: Front Wheel Drive
Mileage: 20,000 Equipment
Air Conditioning
Power Steering
Power Windows
Power Door Locks
Tilt Wheel
Cruise Control
AM/FM Stereo
Cassette
Compact Disc
CD Changer/Stacker
Dual Front Air Bags
Moon Roof
Alloy Wheels

Consumer Rated Condition:
Excellent Private Party Value
$19,350
With 10,000 miles it's worth $21,175
Same car with 25,000 miles and good (instead of excellent) condition is
$18,230
***********
1996 numbers
10,000 miles, excellent condition: 11,185

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