Americans (and fleet managers) love their trucks. Occasional spikes in oil prices aside, in most cases the American consumer and the American fleet driver want the biggest possible vehicle they can get their hands on.
The OEMs are happy to play along with, and even encourage, this behavior as they tend to make $10,000-$20,000 in gross profit on SUVs and full-size trucks, while they struggle to break even on small cars. It’s capitalism at its finest. Supply and demand, just like they teach it at the Harvard Business School.
While the market is functioning quite well today, the looming increase in CAFE standards is going to throw a real monkey wrench into the works in the not too distant future. In 2016, the CAFE standard is set to jump to 24.1 mpg. In 2025, it’s set to increase to a staggering 54 mpg.
If you are curious about the formula for calculating each manufacturer’s CAFE requirement, this is what it looks like:
We have made some great strides in recent years to increase fuel economy and reduce carbon output, but we’re not going to hit 54 mpg with start-stop technology, lightweighting technology, or low-rolling resistance tires. Barring a breakthrough in internal combustion technology or battery power, 54 mpg is only going to be achievable with a radical shift in purchasing trends.
To a small extent in 2016, and a much larger extent in 2025, OEMs are going to build vehicles not because their customers asked for them, but because the government told them to. Those vehicles are going to be loaded with (expensive) fuel-saving technologies, such as hybrid powertrains, which will save greatly in fuel costs.
Unfortunately for the fleet market, manufacturers, and consumers, the relentless and steady increase in the cost of oil has stopped. In fact, the price of a barrel of oil has steadily declined for a while now, and the experts are not predicting any real increases in the near-future.
Those expensive fuel-saving technologies won’t pay for themselves. We’ll see manufacturers and the government coming up with all kinds of incentives to get people to buy the new, smaller, CAFE friendly vehicles, and we’ll see more disincentivizing tactics, such as “gas guzzler” taxes, to drive people away from big vehicles. And, that’s fine for the consumer market. The soccer moms and their families can weigh the economic realities of spending more for fuel, more for a vehicle, and make a rational decision about how much that extra space is worth to them.
Fleets, on the other hand, aren’t so fortunate. Most fleet purchasing decisions are based on need, rather than want. They are based on job suitability. Your drivers may need that larger vehicle to accommodate a ladder, product samples, or other tools of the trade. That means you may be limited in your selection. And, it also means that you’ll be getting disincentivized by the manufacturers, the federal government, and most likely your state government to purchase those vehicles. So, they are going to cost more to purchase and operate, and they’ll be worth less at the end of their fleet life, too.
Managing a fleet in the next decade is going to be about managing expectations as much as it is about managing vehicles. That 500 mpg fuel-cell vehicle is still 20 years away from mass production. So, you need to either prepare your drivers to do their jobs with much different vehicles, or prepare your senior management for a much larger bill for operating your fleet.
On a positive note, when 2025 gets here and you are driving your $500,000 carbon fiber pickup truck with helium tires and anti-gravity suspension, at least you’ll be saving a few dollars at the fuel pump.