By Mike Antich
On the eve of the 2009 calendar-year, fleet managers are bracing for a new year filled with uncertainty about the economy and the long-term viability of the Detroit Three.
"This is a very unstable and challenging time for fleet right now," said Brett Switzky, fleet services administrator for American Family Mutual Insurance Co. "I have a feeling next year will be filled with daily challenges we have never dealt with before."
A Litany of Concerns
There is a long litany of uncertainties voiced by commercial fleet managers about what may unfold in the 2009 calendar-year.
Downsizing: In the past three months, there have been significant corporate layoffs around the country, many involving employees assigned company vehicles. These layoffs are creating large volumes of surplus, low-mileage fleet vehicles. Drivers, who normally would place a new-vehicle order in the spring, are instead assigned a lower-mileage surplus vehicle. What impact will this have on the spring buy in 2009-CY, especially if layoffs accelerate after the first of the year? As some fleet managers describe it, they are playing "musical cars" reassigning surplus units from layed-off employees to other employee drivers. The prediction is fleet downsizing will continue in 2009.
Extended Cycling: There is ample evidence corporate capital spending is contracting. One consequence is that fleets are keeping vehicles longer as part of a corporate-wide cost-containment strategy. For instance, one fleet (whose replacement parameter is already four-years/90,000 miles) is looking to extend its replacement cycle even further. Some fleets are seriously looking at 100,000-mile replacement parameters.
Dealership Closings: The credit crisis (both floorplanning and retail buyer funding), along with the decision by some OEMs to reduce the size of their dealer body, is causing many dealers to go out of business. This will have a direct impact on fleet operations. With fewer dealers, the forecast is that employees will have to travel significantly further distances to get replacement vehicles. Fleet managers complain it is already getting harder to find dealerships at a convenient distance for drivers to pick up new vehicles. One study predicts 3,800 dealerships are "at risk" of closing down in 2009. One fleet manager told me: "We have had a few instances already where we have had a drop-ship set up and we get a phone call telling us the dealership is closing its doors." Other fleet managers are concerned about having their vehicles tied up in a dealer bankruptcy proceeding. One fleet manager asked: "Could my car awaiting driver pickup be impounded due to a dealership filing Chapter 11?" In addition, fewer dealer locations will invariably make it less convenient and more time-consuming for some drivers to get warranty work done on their vehicles.
Fleet Incentives: If an "auto czar" is appointed to oversee the Detroit Three, could they influence the amount of off-street fleet incentives offered? Similarly, how will a weak economy impact OEM fleet rebates and incentives? Fleet managers are already anticipating automakers will be less aggressive with rifleshot monies as they restructure to regain profitability. In a time of fiscal belt-tightening at the automakers, there is also a concern about their willingness to provide post-warranty goodwill reimbursements.
Product Availability: Will model lines popular with fleets be eliminated as automakers restructure their businesses? "Even though I am submitting orders to OEMs, I am not sure if I will get them and if I do, when it will be?" said one fleet manager. Besides product availability, there are also concerns about order-to-delivery times as a result of anticipated plant closures.
Alternate Sourcing Strategies: The prospect of one or more of the Detroit Three entering bankruptcy was a cold splash of water in the faces of many fleet managers. Such a prospect was unthinkable six months ago, but in the past month, it became a real possibility. This caused many corporations (especially those sole-sourcing) to reassess sourcing strategies. One fleet manager told me that corporate sentiment is changing from "Buy American" to "Bye American." Many fleet managers are developing contingency plans in case one or more of the Detroit Three should enter bankruptcy protection. This is not a lack of loyalty; it is exercising due diligence. "We need to be ready to roll our fleet to one or more of the foreign manufacturers," said one fleet manager whose company sole sources and wanted to remain anonymous. However, changing OEMs is not an easy task. "Unfortunately, none of the foreign nameplates have the range of product to handle all our fleet needs. Their fleet-minded dealer network does not cover all of the areas where we have offices; and the vehicles themselves are not sized the way we need for our specific operations. If we had to change everything over to one of the foreign manufacturers, it's quite possible we would have to completely change our routing operations and increase the size of the fleet in order to deal with the different – most often smaller – vehicles."
Cost Reduction Pressures: Most fleet budgets will very likely decrease in 2009. Fleet managers are reporting intense pressure from finance departments to reduce fleet cost. This pressure runs the gamut from outright cost reduction mandates to senior management telling fleet managers to be "frugal." Even companies anticipating a good year in 2009 say they are erring on the side of caution. In a time of worsening economic conditions, there is increasing pressure to reduce operating expenses across the board. For instance, cost-cutting pressures are beginning to be exerted in green fleet initiative funding. Although fleet safety is a strong corporate concern, it likewise is not immune to cost-cutting mandates, especially expenditures involving third-party service providers.
Residual Values: Resale values are in the dumpster due to weak used-vehicle demand caused by a weakening economy and difficulty in funding subprime buyers. What impact will the crisis affecting the Detroit Three have on further softening of the residual values of their products? Some fleet managers are hoping resale values will pick up again in the second half of 2009. Among some companies, this is one reason to extend vehicle lifecycles. They hope to avoid the current wholesale market and postpone resale in hopes of finding a better resale market in fall 2009.
Fuel Prices: The only "sweet spot" in today's fleet market is the dramatically lower cost of fuel. However, lower fuel costs promise to be somewhat offset by increased financing costs and higher maintenance costs because vehicles are being kept in service longer. The questions on the minds of fleet managers are: when will fuel prices bottom out and when will they start increasing again? When fuel prices rebound, how close to $4.00 per gallon will fuel climb? How much should fleet managers budget for fuel? Are the current price levels sustainable or will we once again escalate rapidly, perhaps caused by an unanticipated supply shock? An interesting byproduct of declining fuel prices is that fleet managers are beginning to hear grumblings from drivers asking for a corresponding decline in personal use charges. In recent years, personal use charges were increased to compensate for the then-higher cost of fuel.
Credit Markets: When will credit begin flowing more easily? What will lease interest rates be in 2009? Most fleet managers are anticipating higher interest rates for leases. As one fleet manager told me, "With leasing companies increasing prices, it was time to test the market and put out an RFP." It is anticipated there will a spike in the number of RFPs issued in 2009. Many fleet managers are looking closely at how lessors handle interest rates, the spreads, and available benchmarks. One RFP criterion gaining increased scrutiny is the financial strength of a lessor. What is the leasing companies' ability to fund vehicle purchases on a fleet's behalf? There are concerns about lessors asking for adjustments in finance rates despite being under contract. Another fleet manager related to me the following. "The fleet management and equipment leasing firms are having great difficulty in stabilizing their cost-of-funds, which means the cost and availability of funding is a bit of a question mark – making budgeting more difficult."
Potential Fleet Service Degradation: There is a concern that if one or more of the Detroit Three enters bankruptcy, a dramatic degradation will ensue in fleet service levels if fleets are required to source from non-traditional fleet OEMs. These concerns extend to fleet ordering capabilities, inadequate dealer networks, inadequate courtesy delivery network, longer order-to-delivery times, and limited product options. Another concern is pricing. "Will commercial fleets be held hostage if there are a limited number of fleet players in the market?" asked one fleet manager.
Possible Industry Consolidation: There concern not only about consolidation among OEMs, but throughout the supply chain as well. A number of fleet managers have been posing these questions to me: "Which of my upfitters will survive this economy is big question. Will there be any consolidation in the vehicle leasing arena? Leasing companies, by nature, are highly leveraged companies – how many can survive this credit crunch? How many dealers will be in business once this is over."
Job Security: There is a growing concern among fleet managers about the security of their jobs and whether they may be layed off or their position eliminated. In the last months of 2008, we have seen a growing number of high-profile, veteran fleet manager positions eliminated. However, these actions were taken by short-sighted companies exercising superficial "penny-wise, pound-foolish" asset management strategies. Mark my words, you don't know what you have until it's gone.
Many fleet managers view the changes currently roiling the industry as "tectonic shifts" in how commercial fleets will be run in the future. "The entire industry will change, and possibly the way fleet business is run as well," said one fleet manager. One unknown is whether the volatility and uncertainty of the markets fuel greater corporate interest in reimbursement programs.
"I think 2009 will bring challenges we've never faced before. In my 25 years in this industry, I do not recall a period in which you could not predict what will happen to an entire industry," said Phil Schrieber, fleet manager, North America for OTIS Service Center.
I communicate with hundreds of fleet managers each and every month. I'm often asked my opinion of what's ahead. I give an honest answer – I don't know. None of us have ever been down this road before.
Let me know what you think.