Deferring Vehicle Replacements is Counter-Productive to the Intended Goal

By Mike Antich

Many corporations held off ordering new vehicles in the 2009 model-year (and 2008-MY) due to uncertainties facing their businesses and the overall economy. This was particularly true for companies in the construction, healthcare, and automotive supplier markets, which implemented deep spend reductions. One strategy has been to downsize the fleet by not ordering replacement vehicles. Many fleets abandoned their second order cycle or spring buy. Other fleets adopted temporary "freezes" on new-vehicle orders. These measures were usually coupled with a decision to extend replacement cycling. More and more fleets are moving to a 75K- to 85K-mileage replacement parameter.

Calendar years 2008-2009 were awash in corporate headcount reductions and the downsizing of sales forces and territory realignments. Many of these laid off workers were assigned company vehicles. Companies redeployed the lower-mileage vehicles, in lieu of ordering new vehicles, and remarketed the older, higher-mileage units. In addition, a number of fleets have negotiated one-year acquisition deals instead of their traditional inclination toward multiyear commitments, which minimizes the need to maintain order volume to meet incentive tiers.

The corporate watchword for 2009 has been cost containment, which gives every indication of continuing into first quarter 2010. As with most of corporate America (and public sector America), fleet managers are challenged to do more with less. Management is placing increased pressure on fleet managers to control acquisition and operating expenses. Fleet managers, in turn, are dialing up the pressure on their fleet management companies and suppliers by scrutinizing fleet costs, often to the minutest details.

Another factor contributing to the deferral of new vehicle acquisitions has been a soft secondary market, especially when remarketing specialty vehicles. Some fleets opted to defer replacements until the secondary market strengthens and to continue operating existing equipment an additional year.

Deferring Replacements Increases Fleet Costs

In a recessionary economy, it is normal for management to demand expense reductions and limit capital expenditures. Since fleet is usually among the top 10 corporate capital expenditures, there is pressure to defer vehicle replacements. However, there are dangers to arbitrarily extending fleet vehicle replacement parameters that could be counterproductive to the intended goal. Nearly all fleet-related expenses, both fixed and operating, are influenced by when a vehicle is replaced. For instance, deferring replacements and/or extending service lives increase the percentage of the fleet operating outside of its warranty period. As a result, maintenance costs and driver downtime increases. Also, the older the fleet, the higher the likelihood catastrophic failures will occur, which increases the percentage of out-of-stock purchases, the most expensive way to replace fleet vehicles.

Keeping older vehicles in service adversely affects a company's fuel spend. There is an almost universal consensus that when the global economy begins growing again, fuel prices will increase due to greater demand for a finite product, which is what we saw happen in 2007 up through the first half of 2008. Today's vehicles have the highest average fleet mpg ever, and an ongoing replacement strategy winnows the lower mpg vehicles with higher mpg replacements, which helps minimize future fuel budgets. In the final analysis, the best fleet replacement cycle is identifying the point in time when a vehicle's combined holding and operating costs per mile are at their lowest. Unfortunately, we seem to be moving away from this truism.

2012-2013: A 'Sweet Spot' for Resale Values

Today's new-vehicle market will ultimately create the used-vehicle market of tomorrow. Consequently, the decrease in new-vehicle sales for the past two years will result in a corresponding decrease in the future number of used vehicles in the marketplace.

There is a lag time in the "used-vehicle manufacturing" process. For instance, the 2009- and 2010-model vehicles that fleets acquire will not enter the wholesale used-vehicle market until 2012 or 2013. Once the economy begins its inevitable cyclical upswing, the secondary fleet market traditionally returns to historical purchasing levels. The forecast is for a tight supply of used vehicles in 2012-2013. This will be especially true for trucks, due to the pent-up needs of the construction industry, which has deferred the replacement purchases. A lower supply of used vehicles means demand (especially in a recovering economy) will exceed supply, resulting in a supply-demand imbalance. This will create a "rising tide effect" of stronger demand for all used vehicles, resulting in higher resale prices. By deferring today's vehicle replacements, many fleets will miss the boat by having insufficient product to sell in a strong used-vehicle market.