January 2009, Business Fleet - Feature

A Lifecycle Analysis:New Versus CPO Vehicles

Certified pre-owned vehicles (CPO) are pristine used units that offer the peace of mind of extended manufacturers' warranties. But will they save money for your fleet over buying new?

By Chris Brown

It takes a down economy to rethink your business processes, though it's a healthy analysis in any economic climate. This evaluation should include your fleet: where in the acquisition, upkeep, routing and remarketing equation can you eke out extra savings?

In this issue we consider the value of used vehicles in your fleet. One article deals with leasing used vehicles. For this discussion the lifecycle cost experts at Vincentric performed a lifecycle analysis of new models versus certified pre-owned (CPO) models.

What Is CPO?

CPO vehicles are used vehicles that have been thoroughly inspected prior to sale and are backed by warranties that extend beyond the initial coverage. Manufacturer CPO vehicles are extra clean and are sold only at franchised dealers of that particular make. Therefore, they cost more than a non-CPO car of the same model and specifications. (The average additional cost per vehicle is around $1,100, according to a study by J.D. Power & Associates.)

Not all CPO programs are the same and will differ according to the inspection lists, warranties, title verification, availability of special financing, roadside assistance benefits and return/exchange policies.

With the service backing of your preferred fleet dealer and the peace of mind that a CPO warranty brings, is acquiring a CPO vehicle or two for fleet a smart investment?

Part 1 of chart

Part 2 of chart

Assumptions

Vincentric analyzed currently available 2009-model year passenger cars and their 2006-model year counterparts. While model changes between new and used can't allow for an exact apples-to-apples comparison, specs were paired as closely as possible.

CPO values used here take into account the top condition and cleanliness of a CPO vehicle along with the extended warranty. Both the CPO cars and new cars analyzed were assumed to have been acquired in December 2008 with 45,000 miles on them using retail acquisition costs. Both sets of vehicles—new and used—are then driven for a fleet-appropriate 20,000 miles per year.

To achieve the totals, Vincentric measured eight cost factors: depreciation, fuel, insurance, opportunity cost, financing, maintenance, taxes and state fees and repairs. These costs were integrated with the Vincentric Fleet Price, which estimates the acquisition cost, including fleet incentives for the new vehicles. Maintenance and repair costs on CPO vehicles were adjusted to account for the extended warranties.

Analysis

One might think that CPO vehicles with their lower cap costs are cheaper to run than new vehicles. This is true for the most part, though digging into the numbers reveals a more complicated story. Let's look at the numbers for running CPO vehicles for five, three and two years in service and compare them to vehicles acquired new.

In looking at the costs per mile of CPO vehicles after five years versus their new counterparts after five years, most CPO vehicles come out cheaper per mile—but not all. The Ford Focus, Toyota Corolla and Pontiac Vibe are all cheaper per mile after five years when acquired new.

After a comparison of three years in service, even more new vehicles are added to the list of cheaper per mile: not only the Focus, Corolla and Vibe, but the Toyota Camry, Dodge Charger, Honda Civic, Ford Fusion and Pontiac G6. The same vehicles are cheaper per mile after two years as well.

Note that the troubled economy has prompted automakers to offer hefty discounts on some new vehicles to get them off dealer lots. Those rebates help to lower new vehicle residuals and have already been accounted for before they become used units.

In general, the longer the CPO unit is run, the cheaper the cost per mile compared to its new model counterpart. This has to be considered carefully after five years, as the used units in this analysis would have 145,000 miles on them!

Odd Year Comparisons

A realistic scenario for fleets would be to consider running used vehicles for shorter periods than new vehicles, knowing that as mileage increases, so do maintenance and repair issues.

CPO vehicles offer the peace of mind that many unforeseen maintenance issues would be covered under the extended warranty. Nonetheless, scheduled replacement of parts can get expensive. In year five of new vehicle ownership and year three of CPO vehicle ownership (80,000-100,000 miles) parts replacements are incurred such as front brakes, rear brakes, shocks, timing belts and tires.

For this reason, maintenance costs in these years show a dramatic spike for both new and used vehicles. This certainly gives credence to fleet wisdom that says to retire fleet vehicles well before these parts are due to be replaced.

Therefore, a worthy analysis is to look at costs per mile for two- and three-year-old CPO units versus three- and five-year-old new units.

 The findings:

• All vehicles in this analysis are cheaper per mile after five years new versus two years CPO.  
• All vehicles in this analysis are cheaper to run per mile after three years new versus two years CPO, except in the case of the Chevy Impala.  
• In a five-years-new versus three-years-CPO analysis, our same list—Focus, Corolla, Vibe, Camry, Charger, Civic, Fusion and G6—comes up cheaper per mile for the new units.  
• Playing with the numbers further, the two vehicles with the highest capitalized costs—the Chevy Tahoe and Lexus LS 430—generate the most savings as CPO vehicles in a two-, three- or five-year analysis.

Conclusions

This study is simply an overview of possibilities. Obviously, each fleet purchase is dependent on many different factors not incorporated here. And, outside of the numbers, certain intangibles are not readily apparent, such as the availability of used models that meet your specs. Those cars may not be obtainable at a moment's notice, and you'll never be able to buy 10 of the same vehicle.

Model changeovers will make a difference in residual values and fleet driver perceptions—the completely redesigned Chevy Malibu is a good example. In that vein, which of your drivers will get the new, redesigned car and which ones the used?

The main thesis here may be that the used, CPO option may work well in many circumstances, though there are times when it's more economical to buy new. BF