By Mike Antich Predicting the future has been likened to a billiard game. The cueball is the catalyst – representing a seminal event – that upon crashing into aracked set of balls triggers not only the initial reaction, but numerous unanticipatedsecondary and tertiary reactions. When the cue ball strikes its target, itunleashes unanticipated dynamics of balls deflecting off other careening balls,ultimately changing all of their trajectories. Let’s expand the pool table analogyby inserting “fleet” as one of the billiard balls within the rack. Although it maybe unaffected by the initial catalytic event (being hit by the cue ball), itwill most likely be affected by the secondary and tertiary events unleashed bythis catalyst.
My point is that the future direction of the fleet market may verywell be influenced by a seemingly unrelated event that we never saw coming. Forinstance, who predicted the impact of today’s housing crisis on the fleetmarket? The bursting of the housing bubble has rippled through fleet all theway from the securitization of leases to the resale value of pickups. Likewise,who predicted the fleet market consequences of a terrorist attack on the World Trade Center and the Pentagon?No one, but the impact was substantial. The 9-11 attack essentially shut down thedaily rental industry, flooded the wholesale market with downfleeted rentalcars, collapsing resale values for everyone, including commercial fleets. Ittook the resale market four years to recover from this calamity. Are thereother unanticipated (seemingly unrelated) events waiting to occur that willrock the fleet world?
$9.5 Trillion and Growing
As of April 2008, the total U.S. federal debt was more than$9.5 trillion and growing. Although the annual U.S. budget deficit declined from$318 billion in 2005 to $162 billion in 2007 there is still $162 billion in newdebt that will ultimately have to be repaid, with interest I might add. However, this decline in the deficit is short lived. On July 29, the government issued a statement that the deficit will increase to $482 billion in the 2009 budget year, which would surpass the record deficit of $413 billion in 2004.
Thegovernment has accumulated debt over time by running budget deficits, spendingmore than it collects in revenues. Add up all the deficits (and subtract thosefew budget surpluses), and you get the current national debt. Independent ofthe national debt, the U.S. is also running a separate Social Security funding shortfall that, depending onwho you read, is between $3 trillion and $11 trillion. Compounding this problemis the percentage of the population over 65 that will increase from less than13 percent today to 20 percent by 2030.
If,in addition to the unfunded Social Security obligations, you add projected Medicaidand Medicare shortfalls, this figure rises to $59.1 trillion.
To make up for our perennial budgetary shortfalls, the governmentborrows money. The amount borrowed (and now owed) is added to the nationaldebt. As a country, we pay interest on this debt. There does not seem to be anyplan to manage this debt other than attempting to grow the economy faster thanthe growth of the debt. Currently, 11 percent of the federal budget is spentpaying interest on the national debt. Interest was the fourth largest expenseitem in the federal budget, after defense, Social Security, and Medicare. In FY 2006,the U. S. government spent $406 billion on interest payments to holders of the national debt.Unless this spending pattern ends, eventually interest payment on the debt willbecome the largest expense item in the federal budget. Everyone knows this levelof deficit spending is unsustainable and cannot continue ad infintum; someliken it to a train wreck waiting to happen. Either federal spending must becurbed or taxes increased. I don’t know about you, but I foresee a future ofmuch higher taxation, paid mostly likely by our children. What impact will thisnew reality have on the macro economy or, at the micro level, on the fleetmarket? To answer this question, it is necessary to look outside the
U.S. fleet market.
A High-Taxation Environment
If you think fleet is big in the U.S.,it is even bigger in the United Kingdom, where the company car reigns supreme.In fact, almost 60 percent of the new cars sold in the UK are companycars. One reason for the high market share of company-provided vehicles is taxavoidance. Starting in the 1970s, the number of fleet vehicles in the UK increaseddramatically to circumvent the government’s taxes and income policies. Ratherthan offer employees higher wages, which would be heavily taxed, employersoffered fringe benefits such as company-provided vehicles. This approach hasworked well for the UK economy.
If this was the reaction in the UKmarket, could the same occur in a future U.S. market operating in a similar high-taxenvironment? In my mind, it’s not a far-fetched scenario. I can envision internaland external political and economic pressures that could prompt the U.S. fleet market to migrate to a UK businessmodel.
The bigger point I’m hoping to convey is that change may be forcedupon the fleet industry by factors not yet on anyone’s radar screen or subjectsof current concern.
Let me know what you think.