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Commercial Fleet Buying Intentions Remain Cautious for 2011-MY

June 28, 2010, by Mike Antich - Also by this author

By Mike Antich

Commercial fleets continue to remain cautious about 2011 model-year ordering, according to a survey conducted by Automotive Fleet of 300 major corporate fleets. Many companies continue to be uncertain as to whether the economic recovery is sustainable and are hesitant to recommence hiring. As a result, most companies anticipate fleet orders comparable to 2010-MY ordering, which is still below 2008-MY levels. Many are only ordering vehicles on an "as-needed" basis. In addition, delayed 2011 introductions are prompting fleets to shift some of their orders from fall fleet buys to spring fleet orders.

However, some companies are increasing 2011 fleet buys above 2010-MY volumes. One company is Kraft Foods. "We will be acquiring more vehicles compared to last model-year because we had extended our replacement parameters in 2009, which carried over into 2010, due to the volatility in the economy," said John Dmochowsky, CAFM, sales fleet manager for Kraft Foods. "Starting with 2011 model-year, Kraft Foods will revert back to its normal replacement parameters. Additionally, we will be looking at fuel-efficient SUVs for directors and above."

In many cases, companies increasing fleet ordering in 2011 purchased few to no new vehicles in the past year or two.

"We had two slow years because of the recession. I am expecting we will begin turning in older models in quantity for 2011," said Ginny Liddle, CAFM, corporate fleet administrator for Terracon.

Similar comments were made by Keith Scolan, manager, global fleet for Illinois Tool Works. "We expect an increase over last year due to holding off on ordering many vehicles scheduled for replacements," said Scolan. This comment was echoed by Maria Williams, fleet operations supervisor for USG Corp. "We will be replacing more vehicles in the 2011 model-year. For the 2010 model-year, we replaced only what was absolutely necessary."

However, despite cautious acquisition plans, most fleet managers view market conditions as improved compared to the past several years. "This ordering year will be easier than last year because we have a better idea of where all the manufacturers stand financially," said Donna Bibbo, CAFM, manager, fleet and travel for Novo Nordisk. "While there are always model introduction timing issues to overcome, a lot will depend on incentives offered on vehicles that suit the needs of my sales fleet, along with fuel-efficiency numbers, which we look to increase annually."

Although many companies will be acquiring vehicles in quantities similar to the 2010-MY, in many cases, this continues to be below their traditional fleet order volume in 2008 and 2009.

"During the 2011 model-year, our acquisition numbers will be slightly less, but similar to the 2010 model-year," said Dick Malcom, fleet administrator for State Farm Insurance. "Our 2010 model-year acquisitions were down approximately 15 percent compared to 2009."

Another fleet manager expressing similar comments is Phil Schreiber, fleet manager, North America for OTIS Service Centers. "I will acquire at least the same amount of vehicles in 2011 as we acquired in 2010. However, we acquired only 70 percent of the normal-year replacements in 2010, due to business conditions, shrinking the fleet, and extending the usage of some units with either low mileage or high capitalization costs," said Schreiber.

Some companies have not ordered new vehicles for multiple model-years.
"We have not ordered in the past two model-years, but plan on ordering for MY 2011, which will be more than the last time we ordered in MY 2008," said Kim Brown, manager, fleet & insurance for Heidelberg USA, Inc.

Other companies are acquiring only what is needed. "We are cautious about acquiring vehicles because of the economy, so we are only replacing vehicles and not expanding the fleet," said Ruth Alfson, CAFM, fleet manager, fleet center of excellence for Serco Group.

Especially hard-hit are fleets in the construction industry. "Until the construction business picks up, we do not anticipate ordering a large number of vehicles," said Kirk Herniman, manager, equipment & leasing for Integrated Electrical Services. "That being said, I do feel we will order more than last year due to the extended age and mechanical repair costs that will arise."

Companies in the construction industry continue to operate in a difficult economic environment and are focusing on cost containment, which is impacting new-vehicle acquisitions. "Since cost control continues to be our main focus, while the selector remains the same, we may downgrade or eliminate some options," said Williams of USG.

Some companies are rehiring, but are not acquiring new vehicles for new personnel. "We will fill the new positions with surplus vehicles before we order new vehicles," said Mary Pat Crabtree, fleet & relocation specialist for Brown-Forman Corp.

Another area of emphasis in 2011 acquisition plans is right-sizing. "My focus in the next several months will be on 'thinning the herd,' " said Alicia Hammond, fleet administrator for Ambius in Buffalo Grove, Ill. "This means getting rid of those excess vehicles that people love to hold onto 'just in case we need one.' "

Other fleet managers cite concerns about funding. "The cost of funding has increased, and we'll be looking for the best bang-for-our-buck," said Rita Knoll, corporate fleet and safety manager for Andersen Corp.
One bright spot is the strength of the used-vehicle market, which will positively influence 2011 model-year purchasing decisions. "The secondary market continues to strengthen, and this plays a significant factor in my cycle strategy," said Jim Collins, manager, support services for Royal Cup Inc.

Most fleet managers foresee strong resale values for the near-term. "Resale on late models should remain good due to manufacturer production cuts in the past years and current demand," said
Randy Burwell, fleet administrator for Valero.

Making a similar observation was Mark Leuenberger, fleet director for Cox Enterprises. "We are paying closer attention to our ordering cycles to leverage better resale values on the back end. We will also be flexible in our plans to adjust with the ebbs and flows of the economy."

Ongoing Trend to Extend Vehicle Replacement Cycles

Many corporate fleets are keeping vehicles in service for longer periods. One reason is that OEM extended powertrain warranties have given "peace of mind" assurance to some fleets to extend cycling periods.

"As the OEMs extend powertrain warranties, we are looking at lengthening our vehicle cycles," said Malcom of State Farm Insurance.
National Gypsum is another company that extended vehicle service lives.

"Due to the economic situation, we decided to extend our replacement mileage to 100,000 miles," said Don Woloszynek, manager, fleet services for National Gypsum. "Previously, we turned in vehicles at 80,000 miles. The fact that we now have more solid powertrain warranties, coupled with servicing vehicles when required, convinced us that in the future, we will keep the replacement mileage at 100,000 miles."

Another example of extended cycling is American Family Mutual Insurance. "We may be acquiring fewer vehicles due to changing our replacement schedule from 60,000 miles/36 months to 75,000 miles/42 months," said Brett Switzky, fleet services administrator for American Family Mutual Insurance.  

Some companies that extended service lives report they have not experienced the anticipated sharp upturn in maintenance expenses. "We continue to increase mileage amounts slightly before replacing vehicles with fewer than three years in service and do not seem to be experiencing notable increases in maintenance costs," said Richard Corsetti, manager, purchasing/car plan for FM Global.

Most companies extending vehicle service life are doing so as part of a broader corporate-wide cost containment strategy.

"We will extend the life of our trucks due to the high cost of replacements," said Gregg Hodgdon, CAFM, director of fleet operations for Deli Express/E.A. Sween Company. "We pre-bought enough small trucks to last until mid-2011 and will re-evaluate many factors in early 2011," said Hodgdon.

Another company extending replacement cycling to reduce costs is GEICO. "We will acquire fewer vehicles for the MY 2011," said Jerome Hoes, director, fleet & travel for GEICO. "We, like many companies, are still trying to minimize our corporate expenses. This could mean more dollars in maintenance for brakes or another set of tires, but senior management is willing to absorb these expenses versus purchasing a new vehicle."

However, a few fleet managers do not foresee longer lifecycles as a long-term trend. "I believe the lengthening of lifecycles will be a short-lived phenomenon, as too many new safety features and more economical driveline improvements are introduced each year. The introduction of these features will be delayed when lifecycle planning is extended. Give it time, and I believe lifecycles will once again decrease," said one fleet manager who wished to remain anonymous.

Downsizing Engine Displacement and Right-Sizing Vehicles

One ongoing trend manifested in 2011 model-year ordering is vehicle right-sizing and the shift to smaller displacement engines, in particular switching from six- to four-cylinder models.

Many companies have already gone through multiple replacement cycles converting their fleets to four-cylinder vehicles. One such fleet is Valspar. "We are currently in year three of moving our fleet to four-cylinder engines," said Virginia Kodet, fleet manager for Valspar.

Similar comments were made by Robert Yelk, fleet manager for AkzoNobel. "Our sedan fleet should be at nearly 90 percent four-cylinder this year," said Yelk.

Yet another example is Safeway. "We moved to four-cylinder vehicles whenever possible in the 2009 model-year and this will continue," said Jann Stapleton, manager, corporate fleet for Safeway. The same is true with GEICO. For 2010, GEICO made an effort to purchase four-cylinder vehicles. "We will continue that approach with 2011. Mid-year 2010, GEICO also decided to downsize our vehicles. I see us continuing to purchase mid-size sedans and compacts where available," said Hoes.

Some companies made the decision to transition to four-cylinder engines starting with 2010 ordering. One example is Benjamin Moore & Co. "We started ordering four-cylinder vehicles in the U.S. for 2010 model-year and will do so in Canada for 2011. We will go to all four-cylinder engines in the U.S. and Canada, with a few exceptions for terrain or heavy snow areas, which may require 4x4 and/or six-cylinder engines," said Rosalie Falato, SG&A procurement agent for Benjamin Moore & Co.

Other companies are downsizing from eight-cylinder engines to six-cylinders. "We are now purchasing six-cylinder G1500 Express vans instead of the eight-cylinder G2500," said Frank Felicetta, director - fleet operations for Cablevision. "We are ordering our passenger vehicles with four- rather than six-cylinder engines."

To expedite the transition to smaller displacement engines, fleet managers are designing selectors to encourage driver selection of models with four-cylinder engines.

"We made a shift a couple of years ago to increase use of four-cylinder vehicles in our fleet," said Jeffrey Hurrell, CAFM, North American fleet program manager for Hewlett-Packard Co. "This emphasis is continuing as we continually look at the vehicle selector to drive fleet participants into more fuel-efficient vehicles."

Another company downsizing its fleet is OTIS. "Downsizing and right-sizing are the key words. Whenever and wherever we can, about 50 percent of the vehicles ordered are right-sized vehicles with lower TCO (total cost of ownership)," said Schreiber.

Downsizing is also occurring among fleets using SUVs. "We are in our third year of downsizing our fleet from SUVs with six-cylinders to a fleet comprised of smaller crossover-type vehicles and sedans with four-cylinder engines. We are focusing on vehicles that are job-specific, rather than one vehicle for all drivers," said Crabtree of Brown-Forman.

"We are looking forward to the future for more fuel-efficient engines. We have a corporate goal of being more sustainable in all aspects of our business, including our fleet, to reduce our CO2 impact and reduce overall fuel expenses."

Truck fleets report difficulty in downsizing their fleets. "As a pickup truck fleet, it is not easy to get smaller vehicles. We are interested in the newer truck engines that give improved fuel economy and will monitor their performance," said Peg Nicholson, CAFM, fleet manager for Monsanto Company. "We expect a slight increase in the number of diesel pickups we order in 2011."

Some companies reversed earlier decisions to downsize their fleets. One such fleet is Integrated Electrical Services. "Downsizing to lighter vehicles was tried several years ago and proved disastrous," said Herniman. "The repair costs went through the roof. We were replacing brakes and front-end parts almost every 25,000 miles."

Other companies are also beginning to reassess earlier decisions to switch to four-cylinder engines. One example is 3M. "The use of four-cylinder models is somewhat in question because of a lack of power when vehicles are fully loaded with product samples. We are actually seeing the same mpg on the same models with both four- and six-cylinder engines," said David Haslerud, fleet manager, administrative services for 3M.

Fleet Sustainability Initiatives Continue to Remain Strong

Fleet downsizing initiatives are often tied to a company's sustainability program, such as the case with Johnson Controls Inc. (JCI).

"JCI changed its vehicle selector as part of our fleet sustainability plan," said Christy Coyte, corporate global fleet manager. "As a first step, we standardized to smaller engines, hybrids, and smaller pickup trucks."

A few companies are incorporating CO2 emissions as a criterion in vehicle selector decisions. One company is Philips Electronics North America. "CO2 emissions must have independent weight beyond fuel economy inclusions within TCO," said Gage Wagoner, senior manager NA fleet for Philips Electronics North America. "Large incentives can overcome TCO deficits (fuel economy), and I will be incorporating a factor for CO2 emissions within our Pugh matrix for the current RFQ," said Wagoner. Philips began the transition to a four-cylinder sedan fleet in the 2010-MY.

Corporate sustainability and green fleet initiatives continue to be supported by senior management at many companies despite the dramatic economic downturn. Many fleets report intentions to increase hybrid purchases.

"Green initiatives seem to be sticking in corporate America so I see continued downsizing of vehicles occurring," said Bret Watson, CAFM, national fleet manager for Sprint Nextel Corp. "I think the Fusion and Malibu-size vehicles will be seen as the large fleet car."

This sentiment was reinforced by comments from other commercial fleet managers.

"SECURA went 'green' with vehicles about three years ago," said Jean Ayotte, fleet administrator for SECURA. "We will be ordering Ford Escape Hybrids and Ford Fusion Hybrids. Even though the price tag on hybrids increased, we are committed to staying the course with our green initiative."

Corporate sustainability is especially strong among multinational fleets.
"Our fleet sustainability plan and commitments to our corporate leaders help drive changes in the vehicle selectors," said Gayle Pratt, director, global fleet for Ecolab.  

This approach is echoed by Wendy Dymkowski, fleet manager for Bristol-Myers Squibb. "We continue to place emphasis on vehicles that will help us meet our corporate sustainability goals without sacrificing utility and safety."

A similar comment was made by another Fortune 100 fleet whose fleet manager asked to remain anonymous. "Our environmental goals have once again been raised so we plan to order even more hybrids."

However, some fleet managers are finding it difficult to meet corporate sustainability goals. "The 2011 model-year ordering will be a challenging year due to the limited number of vehicles available that meet our company's sustainability goals," said another fleet manager who also wished to remain anonymous.

Other fleets are meeting sustainability goals by switching from full-size trucks to compact trucks and, when applicable, from SUVs to crossovers.
The downsizing trend appears to be accepted by drivers as few fleets report complaints or morale issues.

"We have had zero driver complaints. The new four-cylinder Fusions have more horsepower than the old Taurus V-6," said Burwell of Valero.  

Some fleets express openness to examining all green technologies. "As with most companies that continue to define and evolve their 'green' vehicle replacement strategies, activities to evaluate all types of vehicle transportation technologies, which include CNG, hybrid, electric, and ePTO (for engine-off applications) will continue to increase," said Tony Orta, asset management manager for Sempra Energy utilities.

Sole Sourcing versus Sourcing from Multiple OEMs

Another acquisition trend is some fleets are migrating away from a sole sourcing philosophy as a result of the inability to order vehicles in fourth-quarter 2008 and the first half of the 2009 calendar-year, when problems arose with their sole-source suppliers.

"Starting with the 2010 model-year, we added a second manufacturer and plan to continue that for 2011," said Nicholson of Monsanto.
Another example of multisourcing is Boehringer Ingelheim. "We feel it is important to sign agreements with all manufacturers to protect us in the event any adverse events occur," said Lee Miller, manager, fleet services for Boehringer Ingelheim. "It does not mean we will use all makes/models with each OEM, but we will have the option to jump on board and order if necessary."

However, other companies are moving to reduce the number of OEMs to streamline fleet acquisitions. "We currently use many OEMs. For example, in 2010, we had five vehicles on the rep selector from four OEMs. I am planning to look at reducing this number," said Theresa Belding, senior manager - fleet services for Forest Pharmaceuticals. All models acquired by Forest Pharmaceuticals in 2011 will be four-cylinder mid-sized sedans and small SUVs.

One wildcard in 2011-model purchases has been the void created by the discontinuation of such brands as Pontiac and Mercury. These OEM decisions are prompting some fleets to consider sourcing from other OEMs.

"Due to the discontinuations in some OEM lines, we will be purchasing from different OEMs this year," said Kimberly Fisher, fleet administrator Nuclear Pharmacy Services for Cardinal Healthcare. "As a result of the discontinuations of some vehicle lines, we will be shifting some of our buying. For example, we bought 100 wagons last year; some of that will shift to the new Ford Transit Connect. While we will buy the same amount, we will shift how many of each type of vehicle we purchase."

For other fleets, the discontinuation of brands helped expedite selector development. "With the reductions in models, in a way, it is making it easier to build a selector, although this may have an adverse effect for some fleets," said Josie Sharp, CAFM, fleet manager for Shire US Inc.

Some companies are reducing the number of models offered on their selectors. "We are moving to more fuel-efficient vehicles and reducing our vehicle categories from seven to four," said Patsy Brownson, CAFM, manager, fleet, relocation and travel for UCB, Inc.

Many fleets will not change OEMs as they are in the middle of an existing multiyear sourcing agreement. Ecolab is one such fleet. "We signed a three-year agreement for vehicles, which runs through the 2011 program-year," said Pratt.

2011-MY Truck Acquisition Trends

The increasing cost of diesel-powered equipment was also cited by J.J. Keig, CAFM, fleet manager for the oil and gas services division of NCH, who manages approximately 300 vehicles ranging from passenger cars and Class 2-8 trucks and trailers.

"The balance of 2010 for the 2011 medium- and heavy-duty-truck markets will see a significant spike in the cost of a base truck chassis due to the stringent emissions requirements that must be met," said Keig.

Another concern Keig cited is CSA 2010. The Federal Motor Carrier Safety Administration (FMCSA) has developed the Comprehensive Safety Analysis (CSA) 2010 to create more effective and efficient ways to reduce commercial motor vehicle accidents. CSA 2010 will help FMCSA and its state partners contact more fleets and drivers, use improved data to better identify high-risk fleets and drivers, and apply a wider range of interventions to correct high-risk behavior.

"This has the attention of many industry experts, as over time, this may have a significant impact on the availability of qualified CDL drivers. If projections hold true, CSA 2010 will further constrain the already diminishing pool of CDL drivers, and those holding specialized endorsements," said Keig.

Another key initiative among many fleet managers is to increase the fuel-efficiency of the truck segments of their fleets. "We will continue to drive towards more fuel-efficient vehicles, especially trucks," said Jim McCarthy, director, vehicle management services for Siemens.

Regulatory issues are influencing purchasing decisions, especially with diesel-powered medium-duty trucks.

"The mandated ultra-low sulfur diesel fuel created significant reliability issues and added cost to the operation of our medium-duty truck fleet," said Collins of Royal Cup. "This fuel change, combined with the diesel particulate filter requirement, is pushing us to look for alternatives to diesel-powered equipment, which is a shame. The diesel engine was once the most efficient solution to power just about any commercial vehicle. Now, the added cost of emissions equipment and reduced reliability are making less-efficient gasoline-powered equipment competitive."

Other truck fleets are also contemplating the decision to switch from diesel to gasoline engines.

"We switched from diesel to gasoline for our lighter classes in the past year. The purchase costs for the 2010 diesel engines is outrageous, and the unfavorable variance in the cost of gasoline versus diesel fuel appears to be both permanent and non-seasonal, offsetting many of the lifecycle cost gains association with the better mpg from diesel plants," said one fleet manager who wished to remain anonymous.

Uptick in Reimbursement Activity

The re-emergence of reimbursement activity, especially among sales and executive fleets, is another factor impacting 2011-MY acquisitions.
"Most of our lines of business have gone to a reimbursement program for sales and management employees, so our car and pickup orders will decrease from 2010," said Gene Kendall, fleet operations manager for HD Supply.

Other reimbursement trends include scrutinizing eligibility to receive a company-provided vehicle and switching ineligible drivers to reimbursement.

"We have a minimum annual business-mile requirement, and are placing more focus and scrutiny on data to ensure all employees assigned a company car are meeting that qualification," said Greg Asadoorian, global fleet manager for Invensys.

One major technology company, wishing to remain anonymous, is phasing out its executive fleet. "My executive fleet is being phased out over a three-year period," said the fleet manager who wished not to be identified. "It started last year, so we have another two years to go."

Another fleet transitioning part of its mobile workforce to reimbursement is Coinmach Corporation & Appliance Warehouse. "We are eliminating sales and management company cars altogether and moving those positions to an allowance," said Lisa Kneggs, fleet manager.

Concerns About 2011 OTD

One concern voiced by Integrated Electrical Services is the ability to acquire vehicles once an upturn in economic activity occurs, in particular in the new-construction industry.

"Once the construction business increases, we will need to add hundreds of vehicles quickly, probably acquired from dealer stock or upfitter pools. The OEMs' plan to build-to-order versus build-to-capacity is making me a little nervous. We may not be able to obtain the vehicles as quickly as we would need them," said Herniman of Integrated Electrical Services.

The concern about 2011-model order-to-delivery (OTD) times was also cited by several other commercial fleets.

"Given downsizing at domestic and long lead times from Japan, we are concerned about lead times," said Pete Silva, director - fleet FLNA OGS procurement for PepsiCo Global Procurement. "I believe the industry needs to figure out a better way of getting a vehicle out of stock without significant penalty to a factory order and thus keeping dealer inventory moving and the supply chain more efficient."

A number of fleets said they will place 2011 orders early to minimize any disruption in OTD. "We will try to place our orders earlier this year to avoid the OEM delays in production and deliveries we experienced this year," said Scolan of Illinois Tool Works.

Ongoing Uncertainty

Most fleet managers see 2011 continuing to be a difficult year for commercial fleets.

"This will continue to be a challenging year to stay on budget and meet vehicle requirements," said one fleet manager who wished to remain  anonymous.

Many of the fleet managers participating in this survey reported a longing for a return to normal fleet ordering conditions.

"I just hope 2011 will be a relatively normal year," said Schreiber of OTIS. "Gasoline prices are fluctuating up and down, and are very hard to predict. Interest rates, for now, look like they will stay low, at least until end of 2010. Everything else we can control, and we intend to do so. We can drive mileage down and take out excess to run a lean mean fleet."

One recurrent theme voiced by commercial fleet managers is the continuing uncertainty regarding the macro-economic environment and the state of the automotive industry.

"It's almost 'hold your breath and see what happens,' " said Michael Donahue, manager, transportation and construction equipment for Omaha Public Power District. "There is so much going on in the industry, it is getting really hard to point your finger in the direction it is going."

Let me know what you think.

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Mike Antich

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Mike has covered fleet management and remarketing for more than 20 years and entered the Fleet Hall of Fame in 2010.

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