Wholesale Prices Fall Again in November - Wholesale used vehicle prices (on a mix-, mileage-, and seasonally adjusted basis) declined one percent in November. This brought the Manheim Used Vehicle Value Index to 124.7 for November, a decrease of 0.3 percent from a year ago.
Although the growing wholesale supply of used vehicles has been the most discussed story of the year (and rightly so), the weakness in November wholesale pricing was probably more related to new vehicle market activity – channel stuffing and higher incentives. To compete, the used vehicle market needed to adjust prices quickly as inventory turn remains paramount. If our theory for the price movement is correct, manufacturers may have more control over future residuals than currently believed. They will, however, need to better balance new vehicle volume objectives with already assumed end-of-term residual projections.
New Vehicle Fleet Purchases Increase for Seventh Consecutive Year - Total new vehicle purchases by commercial and government fleets will grow by nearly six percent in 2016 to 945,000 units, according to preliminary estimates. It will be the seventh consecutive yearly increase and push total purchases 61 percent higher than during the 2009 recession. New vehicle purchases by commercial fleets are estimated to totaled 665,000 (+2 percent), while government agencies will purchase 280,000 new vehicles (+16 percent). In 2016, non-rental fleet purchases of cars will fall by an estimated seven percent, while truck purchases will rise 11 percent.
Although commercial fleet purchases will continue to be supported by higher employment levels, further significant increases will be difficult to achieve given that earlier sales were also boosted by both pent-up demand and the desire to "short-cycle" some of the fleet to take advantage of exceptionally high wholesale prices. Over the longer term, we see new vehicle sales into fleet constrained by employment shifts between industries, changed occupational distributions within industries, continued tight reins on both private and public fleet budgets, concerted efforts to improve the utilization of the existing fleet, and the shift to employee reimbursement as opposed to company-provided cars. As such, future fleet sales will be driven more by the replacement cycle created by the nearly seven million vehicles currently operated by commercial entities and government agencies, rather than a growth in fleet size.
Fleet Operating Costs Remain Low - Fleet managers have enjoyed stable or declining operating costs, primarily as a result of low energy prices (fuel accounts for approximately 60 percent of the average fleet’s budget) in 2016. Operating costs were also helped by stable maintenance and repair expenses and depreciation costs. These savings were partially offset by recalls that increased rental outlays for supplemental units. Keeping operating expenses in check is important for the future health and growth of the fleet industry since budget outlays to the fleet department remain constrained. Lower operating expenses better enable fleet managers to grow units in operation and provide higher service levels to fleet drivers.
Today’s higher-quality vehicles and, in some cases, extended powertrain warranties have kept fleet expenses in check by reducing maintenance and repair costs on a per-mile basis. When repairs do occur, however, they are significantly more expensive than in the past as the diagnosis is often more complex and the parts and labor costs higher. Similarly, the prevalence of synthetics has made oil changes more expensive, but it has lengthened service intervals. Additionally, fleet operators, like retail consumers, have benefited from manufacturer programs that cover early oil changes and tire rotation. But it remains important that fleet managers and fleet management companies ensure that all required fluid changes and scheduled service is actually performed and documented. Otherwise, warranty claims will be denied.
After years of significant increases, tire prices have been stable the past three years as a result of low input commodity prices, e.g., oil, rubber, and steel. The shift toward more expensive, larger-diameter tires appears to be a trend that has mostly played out; but there is a continuing increased use of special sized tires for which there is not a lot of price competition, or availability, in the replacement market.
One area of fleet operating expense that is bound to rise in coming years is funding costs. The benchmark 10-year Treasury yield rose from under 1.5 percent in July to 2.5 percent by mid-December. The two-year yield rose from less than 0.6 percent to more than one percent during the same period. It is unlikely that we will see another summer swoon in interest rates in 2017.
Tom Webb is chief economist for Cox Automotive. Contact him at Tom.Webb@coxautoinc.com or follow him on Twitter at @TomWebb_Manheim.
NAFA Fleet Management Association
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