The value of a used vehicle hinges on three basic points: supply, demand and the vehicle’s popularity with the retail-buying public. Recent data from Automotive Lease Guide forecasting values of two-year-old intermediate sedans and two-year-old mid-size and compact SUVs show that on average a two-year-old mid-size/compact SUV will have a resale value $2,700 more than an intermediate sedan.
The Rising Popularity of the SUV
The popularity of the sports utility vehicle has risen dramatically over the past few years. Concurrently, the popularity of the intermediate sedan has dropped significantly.
We analyzed new vehicle registration data from Automotive Fleet Fact Book & Buyer’s Guide to illustrate this point.
In 1995 13.4 million new vehicles of all types were registered. Of that 13.4 million, 1.6 million, or 11.9 percent, were SUVs. Eight short years later in 2003 over 16 million new vehicles of all types were registered in the United States. Of those, over four million, about 25 percent, were SUVs–an increase of almost 13 percent of total vehicles registered.
Intermediate Sedans Lose Popularity
Of the 13.4 million new vehicles registered in 1995, 2.7 million were intermediates, comprising 20 percent of the total. By 2003 the number of new intermediates registered had dropped to 2.54 million, making up 15.9 percent of the total.
What is popular with the new vehicle buyer is equally popular with the used vehicle buyer. For that reason used SUV prices today are superior to used prices for intermediate sedans.
The “Gas Guzzler” Reputation
SUVs are often portrayed, particularly by the media, as being gas-guzzling hogs. While this may be true concerning large SUVs equipped with V8 engines, mid-size and compact SUVs equipped with V6 and four-cylinder engines have fuel mileage that is often comparable to intermediate sedans. This is another reason to consider using mid-size or compact SUVs as an alternative to intermediate sedans.
The Current Rebate Situation
The gas-guzzling reputation combined with the spike in gasoline prices have caused a slowing in sales of SUVs. A recent report by Power Information Network showed luxury SUV transaction prices down five percent in July 2004 from a year earlier.
Consumer incentives on SUVs averaged $3,440 in July, the report said, up nearly 12 percent from June and nearly double the overall industry increase for new cars and trucks. That makes some SUVs an even more attractive alternative to using the traditional intermediate sedan.
The Difference in Cost
In order to show the difference in cost we analyzed the two-year depreciation costs on several SUVs and intermediate sedans. (Click here for chart "2004 Model Compact/Mid-size SUVs and Intermediate Sedans Costs at a Glance."
) We used 2004-model base new vehicle factory invoice pricing, including current rebates, and the current Automotive Lease Guide (ALG) forecasted values on two-year-old 2004 models. To that total we added the cost of fuel at $2.00 a gallon for 60,000 miles using the 2004 EPA city mile-per-gallon ratings as a guide.
We then combined the net depreciation and fuel cost to arrive at total forecasted combined costs for several intermediate sedans and compact and mid-size SUVs.
Analyzing one manufacturer’s model line, we found that Intermediate Sedan A forecasts to a combined cost of $16,390 compared to the combined cost of SUV A at $15,800. That would make SUV A about $600 less expensive than Intermediate Sedan A. For a fleet of 25 the savings would be $15,000.
Another manufacturer’s line produced similar results. Intermediate Sedan H forecasts to a cost of $13,924 while its mid-size SUV H model forecasts to $13,647.
We then looked at an automaker with an intermediate sedan that had a long-standing record of particularly high resale value. (Call it Sedan E.) The combined net depreciation and fuel cost for Sedan E forecasts to $12,448. The same automaker’s SUV E model produced a cost of $12,078. A small business owner operating 25 SUV Es could expect an expense of about $10,000 less than 25 Intermediate Sedan E models.
Getting Closer in Expense
The gap closes when we compared expense of some other manufacturers’ SUVs and intermediate sedans.
For instance, Intermediate Sedan D forecasts to a combined cost of $16,515, while SUV D forecasts to $16,385. In this case the intermediate sedan had a heavier rebate than the SUV, and the SUV had a capitalized cost of over $3,000 more than the sedan.
Nonetheless, even with the capitalized cost handicap, the SUV D model had an ALG forecasted resale that still put it at $130 less in expense than Intermediate Sedan D.
The cost difference is even closer comparing models Intermediate Sedan G ($13,505) and SUV G ($13,484). In this case the capitalized cost of SUV G was almost $2,000 less than the sedan, but the ALG forecasted resale value was over $1,600 less on the SUV.
Additionally, the EPA mile-per-gallon rating on SUV G is less than on the sedan. Those differences make the total combined expense of the two almost a wash.
Sometimes Intermediate Sedans Prevailed
The small business owner must be very selective in his choice of SUV, as not every mid-size or compact SUV is automatically less expensive than its intermediate sedan counterpart. In a few instances the intermediate sedan prevailed in total combined cost.
We looked at two mid-sized SUVs from the same automaker and compared them to its intermediate sedan model using the same two-year depreciation/ 60,000-mile fuel cost forecast. The cost for Intermediate Sedan B was $14,514 compared to $15,580 for SUV B and $17,110 for SUV B1. For a small business owner operating a fleet of 25 vehicles, that’s about $27,500 more in expense using SUV B and $37,500 more with SUV B1 compared to the sedan.
Several factors contribute to the higher cost of these SUVs compared to the intermediate sedan. First, even with the higher SUV rebate, the SUVs’ capitalized cost ranges from $2,000 to $4,000 higher. Second, while ALG did forecast higher two-year values on both SUVs, the two-year depreciation cost of SUV B1 exceeds that of Intermediate Sedan B by over $800. Third, the EPA mile-per-gallon ratings on both SUVs are only about 75 percent of Intermediate Sedan B, causing both SUVs’ fuel cost over 60,000 miles to exceed the sedan by almost $1,800.
A look at another automaker’s mid-size SUV and intermediate sedans produce similar results. Intermediate Sedan C combined cost forecasts to $15,339, compared to SUV C model at $16,554—an additional expense of $30,000 for a fleet of 25. Here again we found a wide difference in capitalized cost; SUV C is almost $6,000 more than the intermediate sedan. Moreover, the EPA mileage rating on SUV C is only 75 percent of the sedan.
Comparing another automaker’s Intermediate Sedan F to its mid-size SUV F produced the most glaring discrepancy in favor of the sedan. The cost of Sedan F is $13,883 while SUV F is $16,668, almost $2,800 more. Although SUV F has a rebate of $1,000 more, the difference in capitalized cost for the SUV is still almost $2,400 more than Intermediate Sedan F. Additionally, ALG forecasts a two-year value of only $775 more on SUV F than on Intermediate Sedan F. The result was that the two-year depreciation cost was $1,600 less on the intermediate sedan. Finally, SUV F’s EPA mile-per-gallon rating was only 84 percent of the sedan’s.
The foregoing indicates that it is indeed possible to save money through the use of some compact and mid-size SUVs over the traditional intermediate sedan. However, the small business owner should study the capitalized cost of various automakers’ SUVs and intermediate sedans, as well as the forecasted used vehicle values of both as determined by companies such as Automotive Lease Guide. Moreover, while some SUVs attain fuel mileage close to that of their intermediate sedan counterparts with similar engines, others do not, mandating that EPA fuel mileage ratings be a part of the determining formula.
Another possible advantage for SUVs over intermediate sedans is utility value. Most mid-size SUVs provide passenger-seating capacity at least equal to intermediate sedans, and most come in four-door models for easy access. Some SUVs provide even greater load space for carrying sales samples, sales catalogs and other such essentials.
The SUV as a Recruiting Tool
Companies have long used a company vehicle as a recruiting tool and a way to retain valued employees. Employees and prospective employees have always rated a company vehicle as high on their list of perks to consider when deciding on a company.
Offering an SUV as a company vehicle can be an advantage in recruiting and retaining sales people. It is a pretty sure bet that your sales people would prefer to be assigned an SUV over an intermediate sedan.
“Short Cycling”: Another Approach to Using SUVs
An editorial by Mike Antich appearing in the July/August Fleet Financials, a sister publication to Business Fleet, took the approach to using SUVs versus intermediate sedans a step further by suggesting that it might be a smart financial move to short cycle SUVs.
“The opportunity exists today for fleets to think out of the box,” says Gary Rappeport, CEO and president of Donlen Corp., a fleet management company headquartered in Northbrook, IL. “Today’s high incentives change the dynamics for fleets and present the opportunity to not only migrate to a more upscale vehicle, but to operate them within a shorter 24-month replacement cycle.”
In the editorial, Donlen goes on to provide data comparing the lifecycle costs of three intermediate sedans kept in service for 36 months against three compact SUVs in service for 24 months. Normally, in comparing a three-year versus a two-year cycle on almost any same-mileage vehicles, the three-year cycle will produce the lowest average monthly cost.
However, the Donlen data shows the reverse is true in the SUV/intermediate sedan comparison due to lower depreciation and maintenance costs on the SUVs. Average monthly cost provides a common denominator for a comparison between the two groups. The SUV group at 24 months and 50,000 miles had an average monthly cost ranging from $286 to $343. The intermediate sedan group at 36 months and 75,000 miles had an average monthly cost ranging from $365 to $378.
Rappeport also addresses the SUV gas-hog reputation. “Although SUVs traditionally have had a reputation for poor fuel economy, the smaller engines in compact SUVs often have comparable miles-per-gallon ratings to those of intermediate-size sedans” he says.
On driver morale Rappeport says: “By short cycling, you dramatically reduce the age of your fleet vehicles. Driving a newer vehicle will raise driver morale. Anecdotally, most fleet managers will tell you that if a driver had a choice, most would select a compact SUV instead of a standard fleet sedan.”