Fleet Predictions for the 2010 Calendar-Year

By Mike Antich

Industry predictions are often based on continuations of existing trend lines, whose trajectories are projected forward for the next 12 months. However, as witnessed in 4Q 2008 and 1Q 2009, outside macroeconomic events beyond our control can exert sudden and inexorable forces that can totally disrupt the fleet management industry. Barring the occurrence of unforeseen calamities beyond our control, here are my predictions as to how current industry trend lines will play out in the next 12 months.

Short- and Long-Term Fuel Price Trends: The U.S. government's Energy Information Administration (EIA) predicts fuel prices will increase in the 2010 calendar-year. The EIA forecasts gasoline prices to average $2.83 a gallon in 2010, up from $2.35 a gallon for 2009. Diesel prices are projected to jump to an average $2.96 per gallon in 2010, compared to $2.46 in 2009. The long-term forecast calls for prices to trend even further upward. How long fuel prices will stay low (relative to 2008 prices) is contingent on the strength of the global recovery, in particular China and India, both major oil-consuming nations. Greater global demand for a finite product exerts upward price pressures, as witnessed in 2007-2008.

Also, the EIA says new regulatory requirements, such as the possibility of mandated CO2 reductions related to climate change legislation, can potentially increase fuel prices. Last summer, the U.S. House of Representatives passed the Waxman-Markey bill (HR 2454), which includes a cap and trade provision. If such legislation ultimately becomes law, one energy analyst predicts the measure could add 77 cents per gallon to the cost of fuel.

Short- and Long-Term Depreciation Trends: Most vehicle segments in the wholesale used-vehicle market improved in 2009. This resale price stability promises to carry over into the spring market, when used-vehicle sales traditionally have been stimulated by consumer income tax refunds and milder weather. One exception is medium-duty trucks. The ongoing sluggish business environment has caused the wholesale inventory of used medium-duties to remain higher than buyer demand. The consensus is medium-duty truck resale values will strengthen only when a rebound occurs in new-construction and other vocational markets.

The decrease in new car, light-truck, and medium-duty sales will result in fewer used vehicles in future years. There is a lag time in the "used-vehicle manufacturing" process. For instance, the 2009- and 2010-model vehicles fleets acquire will not enter the wholesale used-vehicle market until 2012 or 2013. The forecast is for a tight supply of used vehicles in calendar-years 2012-2013. This will be especially true for trucks, due to the pent-up needs of the construction industry, which deferred replacement purchases. A lower supply of used vehicles means demand (especially in a rebounding 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 prices.

Increased Taxes Target Commercial Fleets: Most states and local governments have budget shortfalls due to a decline in tax revenues. Commercial fleets are a key target for new tax revenue generation with vehicle-related taxes. These may include an in-creased sales/rental tax rate for leased fleets in many states, higher fuel taxes, new environmental fees and surcharges, and new taxes on automotive aftermarket components, such as tires and batteries. A hidden fleet tax has already occurred at many localities with increased fines for traffic and parking tickets.

Maintenance Costs to Trend Upward: The economic down-turn helped reduce maintenance expenses due to lower vehicle utilization rates (fewer miles driven), especially for delivery and service fleets. In addition, high unemployment has kept a lid on labor rates. However, the future trend will be higher maintenance costs as fleet vehicles are kept in service for longer periods.

Increased maintenance costs due to the new diesel emissions standards will not be felt in the near-term, but will impact 2010-compliant trucks with the accumulation of more miles. Another truck maintenance trend is costs associated with new technologies, such as auxiliary power units and more complex transmissions.

Replacement Tire Costs to Remain Stable: Prices for replacement tires are forecast to have nominal increases in 2010 that will track the rate of inflation. National accounts are expected to hold prices on replacement tires. Replacement tire prices will be primarily influenced by the future cost of crude oil and steel, key ingredients in tire manufacturing. The decision by many companies to extend vehicle service lives creates the additional expense of a new set of tires, previously not required.

Wild Card Prediction: A future increase in interest rates could dramatically impact fleets. In an era of $1 trillion federal deficits, forecast to continue for years, there will be inflationary pressures to increase interest rates to fund these deficits. This could add substantial costs to fund fleet vehicles in the future.

Let me know what you think will happen in 2010.

mike.antich@bobit.com

Originally posted on Automotive Fleet