By Mike Antich

When looking ahead to the next 12 months, I foresee reduced operating costs for fleets offset by increased depreciation expense caused by anemic resale values and decreased incentive monies. Here's why I believe this will be the case, along with other predictions for 2009.


Fuel prices to remain below 2008 levels

Fuel is a volatile commodity, susceptible to unpredictable price swings due to large-scale natural calamities or geopolitical events, as demonstrated by the recent uptick in oil prices in reaction to the military actions in the Gaza Strip. These wild-card events make fuel pricing very volatile. But, barring an unforeseen disruption in supply, I predict fuel prices will remain significantly below 2008 price levels for the 2009 calendar-year.

There are a number of reasons why fuel prices will remain low. First, the dramatic slowdown in the economy is resulting in fewer miles driven, which is decreasing overall demand for fuel. For instance, gasoline consumption in the U.S. declined approximately 320,000 barrels per day (bbl/d) or 3.4 percent in 2008. In 2009, gasoline demand is projected to decrease an additional 50,000 barrels per day, according to the Energy Information Agency (EIA). In addition, the economic slowdown is global in scope, which will temper fuel demand in countries such as China. One indicator this will be the case is China's manufacturing volume shrank for a third month in December as export demand fell, according to data reported Jan. 4. The increasing likelihood the global economic downturn will be prolonged will put increased downward pressure on oil prices. In 2008, global oil consumption declined by 50,000 bbl/d and is projected to decline by 450,000 bbl/d in 2009, marking the first time in three decades that world consumption would have declined two consecutive years.

The EIA is projecting U.S. gasoline prices will average $2.03 per gallon in 2009.

Resale prices to remain soft

I foresee nothing on the horizon to indicate wholesale resale values will turn around anytime soon. Wholesale auction inventories are at all-time highs and resale values in fourth quarter 2008 were abysmal. The fundamental problem is that dealers are not buying. Conversion rates (percentage of vehicles sold) at auction have plummeted. Today, a 30-35 percent conversion rate looks good, while in the past, the norm was 40-50 percent. Nowadays, it is not uncommon to witness auction sales with only 20-percent conversions. Dealers are not taking as many trade-ins and demand for used-vehicles softened as it has become harder to fund credit-impaired buyers.

Long-term, I am very bullish on the wholesale market and predict a used-vehicle shortage in the next several years. If the new-vehicle market generates the used vehicles of tomorrow, then it appears there will be fewer used vehicles in the future. If new-vehicle sales decrease, especially over a multiyear period, then it stands to reason there will be a corresponding decrease in the future number of used vehicles available in the wholesale market.

New hidden taxes target private fleets

Most states and localities are experiencing budgetary shortfalls, and will be targeting private fleets for tax revenue generation. As budgets are squeezed, a common response is to increase vehicle-related taxes, such as higher vehicle registration fees, additional taxes on tires and batteries, new environmental fees and surcharges, etc. Another hidden tax is increased fines for traffic and parking tickets.

Downward pressure on tire prices

The demand for replacement tires is decreasing, according to the Rubber Manufacturers Association (RMA). Passenger car replacement tire shipments dropped 2.7 percent (5.5 million units) in 2008. The RMA anticipates no growth in passenger car replacement tire shipments in 2009. Likewise, replacement light-truck tire shipments fell 4.5 million units (13 percent) in 2008. The RMA predicts these shipments will decrease another 4 percent in 2009. Decreased demand will make it difficult for tire retailers and national accounts to raise prices. Also, the decreased cost of oil, a key ingredient in tire manufacturing, will reduce overall production costs.

Green fleet initiatives gain more momentum

I predict green fleet initiatives will increase in intensity in 2009, especially in response to massive government expenditures in green technology anticipated in the Obama administration's upcoming near-trillion dollar stimulus program. Companies such as Wal-Mart, UPS, PepsiCo, FedEx, and Coca-Cola will continue to lead the way with corporate green fleet initiatives.

Softer fleet sales volumes in 2009

Since September 2008, commercial fleet purchases have declined significantly. One reason is that some fleets were unable to order replacement vehicles because their fleet management company was not taking new orders. Another reason is that some companies increased fleet vehicle service lives in response to the uncertain economy. (Frankly, I was surprised by the number of fleets that have placed moratoriums on ordering new vehicles for the 2009-MY.) In addition, corporate layoffs (along with anticipated future layoffs) are prompting reassignment of lower-mileage units to employees in lieu of ordering new replacement units.

Commercial truck sales volume is very soft. For example, Navistar International is forecasting ongoing weak demand in North America with sales volumes near 30-year lows in the 2009 calendar-year. One unknown is the new round of more stringent diesel engine emission standards that will be implemented in the 2010 model-year. As was the case with the 2007 emission standard, a significant pre-buy was anticipated since the cost of the new engines is expected to increase. However, the current economic environment may dampen the level of pre-buy.

Thawing of credit availability

On Dec. 30, GMAC Financial Services loosened its lending policies after receiving $6 billion from the U.S. Treasury. Two months after restricting financing to customers with a minimum 700 FICO score, GMAC is now accepting applications from buyers with scores of 621 or higher. This is an important first step in freeing up credit to would-be buyers of both new and used vehicles. CNW Market Research reported in its December newsletter that the decline in new-car loan approval rates may have bottomed out. In the opening half of December, 81 percent of prime, 76 percent of near prime, and 16 percent of subprime new-vehicle loan contracts were approved. Although still below 2008 levels, it bodes well for a slow, but incremental return of credit to the new- and used-vehicle markets.

Wild Card -- Industry Consolidation: Fleet suppliers face tremendous cost pressures brought on by reduced sales volumes and higher cost of funds. It is not inconceivable to foresee consolidation (either through merger or acquisition) between major industry players. If the cost of funds does not decrease, it is not inconceivable for some fleet management companies to discontinue funding leases and only provide fleet management services.

Wild Card – Government-Mandated Direction in Product Development: General Motors, Chrysler, and Ford will be required to present to Congress their viability plans by March 31. Although it is anticipated Congress will be sympathetic, there is concern that "strings" will be attached to future loans. It is not inconceivable to see Congress mandate a set percentage of future production vehicles be hybrids or "green" vehicles.

Let me know what you think will happen in 2009.

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 and inducted in the Global Fleet of Hal in 2022. He also won the Industry Icon Award presented jointly by the IARA and NAAA industry associations.

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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 and inducted in the Global Fleet of Hal in 2022. He also won the Industry Icon Award presented jointly by the IARA and NAAA industry associations.

View Bio