By Mike Antich Predicting the future has been likened to a billiard game. The cue ball is the catalyst – representing a seminal event – that upon crashing into a racked set of balls triggers not only the initial reaction, but numerous unanticipated secondary and tertiary reactions. When the cue ball strikes its target, it unleashes unanticipated dynamics of balls deflecting off other careening balls, ultimately changing all of their trajectories. Let’s expand the pool table analogy by inserting “fleet” as one of the billiard balls within the rack. Although it may be unaffected by the initial catalytic event (being hit by the cue ball), it will most likely be affected by the secondary and tertiary events unleashed by this catalyst.

My point is that the future direction of the fleet market may very well be influenced by a seemingly unrelated event that we never saw coming. For instance, who predicted the impact of today’s housing crisis on the fleet market? The bursting of the housing bubble has rippled through fleet all the way from the securitization of leases to the resale value of pickups. Likewise, who predicted the fleet market consequences of a terrorist attack on the World Trade Center and the Pentagon? No one, but the impact was substantial. The 9-11 attack essentially shut down the daily rental industry, flooded the wholesale market with downfleeted rental cars, collapsing resale values for everyone, including commercial fleets. It took the resale market four years to recover from this calamity. Are there other unanticipated (seemingly unrelated) events waiting to occur that will rock the fleet world?

$9.5 Trillion and Growing

As of April 2008, the total U.S. federal debt was more than $9.5 trillion and growing. Although the annual U.S. budget deficit declined from $318 billion in 2005 to $162 billion in 2007 there is still $162 billion in new debt that will ultimately have to be repaid, with interest I might add. However, this decline in the deficit is short lived. On July 29, the government issued a statement that the deficit will increase to $482 billion in the 2009 budget year, which would surpass the record deficit of $413 billion in 2004.

The government has accumulated debt over time by running budget deficits, spending more than it collects in revenues. Add up all the deficits (and subtract those few budget surpluses), and you get the current national debt. Independent of the national debt, the U.S. is also running a separate Social Security funding shortfall that, depending on who you read, is between $3 trillion and $11 trillion. Compounding this problem is the percentage of the population over 65 that will increase from less than 13 percent today to 20 percent by 2030.

If, in addition to the unfunded Social Security obligations, you add projected Medicaid and Medicare shortfalls, this figure rises to $59.1 trillion.

To make up for our perennial budgetary shortfalls, the government borrows money. The amount borrowed (and now owed) is added to the national debt. As a country, we pay interest on this debt. There does not seem to be any plan to manage this debt other than attempting to grow the economy faster than the growth of the debt. Currently, 11 percent of the federal budget is spent paying interest on the national debt. Interest was the fourth largest expense item in the federal budget, after defense, Social Security, and Medicare. In FY 2006, the U. S. government spent $406 billion on interest payments to holders of the national debt. Unless this spending pattern ends, eventually interest payment on the debt will become the largest expense item in the federal budget. Everyone knows this level of deficit spending is unsustainable and cannot continue ad infintum; some liken it to a train wreck waiting to happen. Either federal spending must be curbed or taxes increased. I don’t know about you, but I foresee a future of much higher taxation, paid mostly likely by our children. What impact will this new reality have on the macro economy or, at the micro level, on the fleet market? To answer this question, it is necessary to look outside the
U.S. fleet market.

A High-Taxation Environment

If you think fleet is big in the U.S., it is even bigger in the United Kingdom, where the company car reigns supreme. In fact, almost 60 percent of the new cars sold in the UK are company cars. One reason for the high market share of company-provided vehicles is tax avoidance. Starting in the 1970s, the number of fleet vehicles in the UK increased dramatically to circumvent the government’s taxes and income policies. Rather than offer employees higher wages, which would be heavily taxed, employers offered fringe benefits such as company-provided vehicles. This approach has worked well for the UK economy.

If this was the reaction in the UK market, could the same occur in a future U.S. market operating in a similar high-tax environment? In my mind, it’s not a far-fetched scenario. I can envision internal and external political and economic pressures that could prompt the U.S. fleet market to migrate to a UK business model.

The bigger point I’m hoping to convey is that change may be forced upon the fleet industry by factors not yet on anyone’s radar screen or subjects of current concern.

Let me know what you think.

Originally posted on Automotive Fleet


Mike Antich
Mike Antich

Editor and Associate Publisher

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.

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