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Friday, February 03, 2006 

Vol. 2 No. 6

“Automakers Jan sales up, fleet sales surge” (Reuters)

There is fleet and then there is fleet and remember, “Of the 6.63 million commercial vehicles in operation, 52 percent belong to non-fleets” (Automotive Fleet Annual Fact Book)*

I planned to write something else for today’s entry, but when I saw the above headlined story just the other day by Reuters it sparked one of my favorite topics which is indeed the general confusion and/or lumping together of many sectors of the vehicle market that make up the term “fleet.”

Unfortunately or fortunately (depending on how you look at it), I can’t just say that journalists or car layman are the only ones that cause the confusion on this issue as many, many of my fellow car dealers (and I dare say even vendors and manufacturer folks not directly in this sector of the business) confound the issue all of the time.

What makes it doubly bad is that the three main sectors is normally defined in the term “fleet” have very different characteristics, although usually all are described as identical or equally bad for manufacturers. One good example of a clearly defined "fleet" can be found in Dee Ann Durbin’s article for the Associated Press on November 4, 2005, titled “Fleet sales give automakers a boost in October, but at a price”).

The closest thing I can think of in describing this kind of misnomer is with the term cholesterol… Up until very recently most everyone defined the term as a bad thing to have roaming around in your body, when, in fact, there are two types and one is beneficial…I’ll explain before you think I’m more off my rocker than usual…

The “fleet” business for the car industry, as popularly defined, consists of three broad types of vehicles. – Commercial, Government and Daily Rental.

Commercial Fleets
First, there are commercial vehicles, which are defined as both cars and light trucks (class 1-5)used by the nation's largest and smallest companies, registered in the company's name – anywhere from the 10,000 vehicle fleet of Sprint, to the dozen cars and trucks your local neighborhood flower shop may have in service. For larger companies, these vehicles are owned or typically on open-ended corporate leases, kept in service on average three and a half years and replaced at about 60-70,000 miles. In fact, commercial fleet vehicles are one-owner, one-driver cars that look and act remarkably like your normal retail vehicle, except maintained a little better and more regularly, as a corporate fleet manager oversees the driver to perform regular maintenance and routine safety checks.

The large commercial fleet sector is defined as those companies with at least 15 vehicles in operation, which totals roughly 3.2 million vehicles as of June 1, 2005 [Special Note: all of my statistics come from the fleet industry “bible” Bobit Business Media’s Automotive Fleet Annual “Fact Book”]

* Explanation of the quote at the top, from the Automotive Fleet, “Fact Book” - the commercial fleet sector of the market that operates 14 or fewer vehicles in operation represent another roughly 3.4 million additional units – which is where I get my intentionally “strange at first glance” phrase above. And, of course, the first time I paraphrased that quote in an office filled with non-car folks, and said that “the majority of the fleet market was made up of “non-fleet,” it raised even more eyebrows than usual.

Again, in terms of purchase frequency, single driver usage, etc., even the smallest fleet portfolios normally share retail vehicle characteristics.

Government Fleets
The second big sector of the fleet market is those vehicles used by the government – federal, state, county and local municipalities. This sector represents about 4.6 million units in operation and usually run in service a much longer time than normal commercial vehicles. To some extent, they also mimic retail type purchased vehicles, although in most cases they run a whole lot longer, and many times run to the end of the vehicle's useful life.

Daily Rental Fleets
The third big slice of the fleet business refers to daily rental car vehicles. Now although this slice of the market represents a lot less vehicles in operation than corporate fleet or government fleet, about 2.2 million vehicles (unlike retail purchased cars) of these units turn very, very frequently.

For instance, in 2004 rental companies registered (purchased) almost two million vehicles, while with almost three times the total number of vehicles in operation, commercial fleets only registered a little under 700,000 new units, and with more than two times the number of vehicles in operation, government fleet registered only 220,000 new units.

So the above stats tell you daily rental companies turn their cars a lot more frequently than any other sector of the fleet market, (on average once a year) but in total operating units are only 20 percent of the fleet market.

Why do they do this, and why do manufacturers complain that it is a “low profit” business? Because, as you may have guessed, Detroit gives daily rental operators strong incentives to turn vehicles quickly - the vast majority of rental cars are sold to rental companies with a guaranteed buy back provision, defined as “program” cars, where they are effectively leased out for a four to nine month period at a monthly rate and then turned back into the manufacturer. If that sounds like just another form of rebate for businesses to use and help manufacturers churn a lot of cars, it should, because that’s exactly what it is.

Now there are some residual benefits, particularly for a new model introduction. Putting a vehicle in daily rental operation exposes the new vehicle to a lot people who may not ordinarily visit a dealership for a test drive. However, that isn’t exactly the main reason why these “churn” programs flourish.

So, when you hear Detroit or a lot of the press complain that manufacturers lose a lot of money or made no margin selling “fleet” vehicles and/or are stimulating the market with these sales, what it usually means is that they are losing on daily rental sales. And, with the churn factor and “almost new” cars hitting the market from daily rental service at the same time new vehicles become available, you can see how that could be the case (and it doesn’t do much for resale values either, our little area of expertise).

The Impact of Rebates
Can’t really get too upset at the rental companies for this “money losing business” from Detroit any more than you can get mad at a retail buyer for accepting the latest rebate or “employee discount.” The fact is the rental folks didn’t create these “program” car guaranteed buy backs. Detroit willingly offered them (and continues to do so up to last month at least, as the headline above defines, even when they are already losing a whole lot of cash in operations).

The commercial end of the fleet business has always been a good, solid, loyal business where, year in and year out, in good times and in bad, corporate customers buy or lease vehicles in quantity on a regular basis and keep them just about as long as your average retail consumer.

Yep, the commercial guys get the equivalent of rebates as well. But it may be telling to note that even way back when I was a car dealer, the rule was that fleet (a.k.a. volume buyers) would get the higher of either the fleet or retail rebate. In many cases, the extra rebates for retail sales turned out to be more than the fleet rebate, which is usually established once at the beginning of each model year on a national basis and doesn’t change.

The “Natural” Bottomline
So, here at the end of my soapbox, I think the distinction in fleet sales is important to clearly understand its impact on the auto industry. But the fact is new vehicle sales bounced off a record high 17 million annually for more than two years running and that’s probably too high a “natural” number without “unnatural” market stimulation (rebates, program cars, employee pricing, etc.).

Rebates, etc. pump up the market then cause the leaders in the rebate game to be the same folks who are leaders in financial losses. That’s just a fact of the new car sales game today…

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