A recent headline from AF’s online news noted some compelling news about vehicle depreciation: Used trucks depreciated at a significantly lower rate than used cars. The driving force for this change is clearly oil prices. You don’t have to look any further than the two worst performing truck sectors (small CUVs and small vans) to see the impact the price of gasoline has on residual values.
While most fleets are still working 24/7 to drive more efficiency in their operations, the focus on mpg isn’t quite as sharp as it once was.
The soccer moms and dads who were willing to jam the family into a smaller SUV, or, gasp, a sedan, are back to buying land yachts at a pace never before seen. It’s a little different in the commercial and government fleet sectors though. Fleets are still looking to downsize wherever possible. The new challenge is that fleets are looking to downsize at the same time retail buyers are looking to upsize. This puts fleet managers in the unenviable position of having to buy and spec vehicles that might not be very popular in the used market.
The talking heads in the business world seem quite convinced that oil prices are going to stay low for the foreseeable future. I’m still trying to figure out how that went from being a good thing to a bad thing. But, meanwhile, the U.S. Environmental Protection Agency (EPA) has some looming CAFE requirements that are looking fairly unrealistic with $20 per barrel of oil. The OEMs are supposed to be targeting 35 mpg by 2020 and 54.5 mpg by 2025. When gasoline was $4 per gallon, it was a goal everyone could support, including fleets, retail buyers, and elected officials. Now that much of the country is down below $2 per gallon, that target looks a little out of reach.
Used-vehicle prices are responding to market forces as one would expect in a free market. The looming problem is that we are fast approaching a point where market forces and government regulation will be at increasing odds.
The OEMs will have to make some tough choices in the near future. And, those choices are going to impact the fleet market. Missing CAFE targets is expensive. The only way to offset those expenses is to pass the cost along to the end users. Several of the manufacturers are already regularly paying penalties for missing their targets. But, for the most part, the manufacturers that are missing the numbers are those that produce relatively smaller numbers of very expensive vehicles. It’s easier to pass along the cost in that environment.
For fleets and for retail buyers in the near future, those land yachts, and full-size pickups with the duallies in the back are going to have some significant costs attached to them to “incentivize” you to consider a smaller vehicle.
It’s a good time to start planning for the future and start having discussions with your senior management about costs and planning for the future. While it looks like the cost of a gallon of gasoline may be going down, the cost of everything else is going to go up.
Originally posted on Automotive Fleet