While there never has been a clear answer to the question of when to trade an auto, the question is now more bothersome for the fleet man than ever before. The villain, of course, is depreciation.

Depreciation in single terms is the difference be­tween what a car cost and what it can be sold for.

However, the value varies widely, depending on how and when the ear is disposed. Also, there are two types of depreciation-real and book. Many business firms depreciate their ears at 25 per cent a year for tax purposes. Sometimes, this differs greatly from a car's actual value at trade-in time.

Fleet users use a myriad of ways to determine de­preciation costs. One method that is gaining favor is to deduct the price received in sale of the car from its original cost, dividing the figure by the total num­ber of months that the car was operated. Not only does this give an accurate monthly depreciation, but if multiplied by 12, an annual depreciation of the cost of the car.

One rule of thumb on depreciation provides that a ear loses slightly less than one-third of its value each year for the first four or five years, if it lost exactly one third, a $3,000 car would be worth $2,000 wholesale after one model year; $1,333 after two mod­el years; $890 after three model years and $593 after four model years. This method also is popular with fleet users since there is almost universal agreement that two-thirds of fleet costs art; operating costs, one-third depreciation.

The depreciation picture has improved somewhat in recent months, an Automotive Fleet survey finds.

For example, after the Big Three compacts were in­troduced, the average price of a 1959 model dropped 37 per cent in one year-from February, 1960 to February, 1961. The average price of a 1958 model dropped 36 per cent during the same period. A check of leading automotive auction centers reveals that the average wholesale price of 1961 and 1960 models is holding at a steady rate of just below 30 per cent.

The Compact Factor

It is not coincidental that depreciation rose with the introduction of the Big Three compacts. It takes less cash to buy a brand new compact than a late medium price model-and often the monthly pay­ments are less.

The compact is not the only culprit in the trend to­ward "it will cost you more to trade." Paradoxically, the American way of life has influenced used ear prices. Long-term financing-36 months and up- generally can slow the car business. Car buyers who don't have the equity to trade run their cars longer, This in turn means it costs the dealers more to recondition the trade-in for resale.

As a Chicago banker told Automotive Fleet "a man can find himself owing more on a car than the car is worth, and that's bad."

The long-term financing arrangements probably are. a major reason why the auto industry has never again reached the sales heights that it did in 1955 when it experienced its first and only 7,000,000-plus sales year.

Several other factors influence the trend toward lower used car prices. Among them are increased competition for the customer's discretionary dollar. Another is the increased average mileage being driven. A two year old car used to have 20,000 miles on it at trade-in time. Now the figure is around 24,000 miles.

While the car buying habits of the general public are different than those of fleet users, these buying habits still have a direct influence on fleet purchasing procedures. The way the public buys can raise or low­er the price a fleet user receives for his car at trade-in time.

As previously noted, the used car market has firmed up in recent months. One reason was that the im­mediate effect of the compact cars was to depress used car prices. The big jolt has already come and in some cases the luster of a used compact has worn off.

A yet undeterminable factor is the recently intro­duced so-called "in-between" or intermediate cars. They could have the same effect on used ear prices as the compacts had, but most auto experts interviewed by Automotive Fleet feel they won't.

Trading Guides

If you're interested in trading your present vehicles, here are some guide-posts gathered by Automotive Fleet from the nation's top fleet users:

The economic status of your area goes a long way in determining the amount you will receive on a trade-in. The sale of cars in areas which are depressed by unemployment, strikes or an overabundance of used cars obviously means a lower trade-in price. Con­versely, areas with full employment and a healthy economy mean good prices at trade-in time.

A vivid example of how the economic condition of a particular area can affect replacement prices comes from Peterson, Heather & Howell, Baltimore-based fleet management and fleet leasing firm. The company recently delivered a car to a customer in Tulsa, Okla., that was purchased, not in Oklahoma, but in a Texas City 500 miles away. The reason: a $240 gain in net used car credit.

"The reason that our client's car-which had 76,000 miles on the speedometer-was worth less in Okla­homa than in Texas was a prolonged slump in the Oklahoma used car market," PHH said, "At the same time the Texas market was in good shape with used car values holding firm. So it was just good business to spend a little extra on transportation in order to make a much more favorable transaction."

Another factor in the business of buying, selling and trading ears is whether it is worthwhile to spend extra money to repair the car or to trade "as is."

Naturally, much depends on the actual condition of the car and the amount of repair work that is neces­sary. Generally speaking, a few extra dollars spent on reconditioning will go a long way in obtaining the highest possible dollar when the car is traded or sold.

Automotive Fleet recommends the following mini­mum reconditioning program:

Shampoo the headliner and upholstery and repair any sagging or broken springs. Chrome and other bright work should be cleaned. Worn trunk mats should be replaced. Steam cleaning the engine is an­other way to guarantee a higher trade-in dollar.

H. F. Brey, vice president of Lease Plan Inter­national Corp., reports that 80 per cent of the com­pany's ears undergo a thorough reconditioning before they are traded. And it pays off.

"We find on the average that for every dollar we put into reconditioning we receive two dollars in return," Brey explained.

Brey said the Lease Plan has set up a series of re­conditioning depots across the country to carry out its reconditioning program.

Also, reconditioning costs can be held to a mini­mum by volume purchases of such equipment as used bumpers, windshields, glass and floor mats. The "de­tailing" expenses are thus amortized over the entire fleet.

The Time Factor

Time is another important factor in car replace­ment. The best time to trade is usually during the new model introduction period or in the spring. Used car prices generally are good at introduction time and remain so until the beginning of winter. Prices gen­erally decline during the winter months and pick up again in the spring. Trade-in allowances in the spring will be less than at model introduction time, but the decline in value is offset by the additional use of the car.

The proper time of licensing should also be con­sidered as part of the replacement picture.

Finally, with all the variables influencing replace­ment, fleet operators protect resale values of their trade-in cars by not turning them all in at the same time in the same market.

The tough part of fleet administration comes after the decision has been made to trade-vehicle selection.

The successful fleet operator has only one ultimate goal-to make his cars work for him effectively at a minimum of cost. Therefore, the selection of the right vehicle is a matter of combining technical and eco­nomic considerations in equal parts.

William J. Bird, director of fleet sales for Chrysler Corp., has this to say about fleet vehicle selection:

"The proper selection of fleet vehicles is a very im­portant subject because several factors must be care fully evaluated to insure maximum savings. Economy in the purchase of fleet vehicles cannot alone be ap­proached on the basis that the purchase price is the primary factor. Maximum economy can only be ac­complished by the selection of proper equipment to insure long life and minimum repairs for each par­ticular operation, and the selection of equipment that will enhance the vehicle's value when it is traded."

Basically, vehicle selection is determined by four factors: operating conditions, fuel and maintenance economy, potential resale value and the importance the employer places on employee morale or car pres­tige.

Fleet cars can be divided into three categories-low price general purpose vehicles, medium price man­agerial cars and high price top executive cars.

Before the advent of the compact and intermedi­ate cars, selection of general purpose vehicles was a fairly simple procedure. All a fleet administrator had to do was choose between three or four competing makes-if that wasn't tough enough. Now, the prob­lem is multiplied by three.

An Automotive Fleet survey of fleet buying pro­cedures indicates that the low price models are still the most popular fleet vehicles, but that they are fast losing ground to the compacts and intermediates.

Of the fleets surveyed, intermediates accounted for 26 per cent of new purchases; compact models made up 20 per cent of new vehicles purchased with low-price models accounting for 45 per cent of the total; medium price and luxury cars accounted for the re­maining 9 per cent.

Typical of the trend toward compacts are the buying procedures of Commonwealth Edison Co., the huge Chicago utility.

Selection Counts

Harold Brissenden, Edison superintendent of trans­portation, said the company has changed over its fleet of nearly 1,200 cars from exclusively standard-size cars two years ago to more than 40 per cent com­pact today. As each standard-size car is traded in, it: is replaced by a compact.

According to Brissenden, Edison saves $90 to $100 a year per car with the compacts. This figures to a savings of $105,000 to $107,000 per year for the fleet.

The company presently has 488 compacts and will have 625 to 650 by the end of the year. By 1964, all but 15 or 20 executive cars will be compacts.

Once the type of vehicle has been selected, the next decision is on equipment. All of the options offered with larger cars are also available with the compacts or intermediates.

The six cylinder engine continues to be most popu­lar for fleet use because of its lower cost, greater fuel savings and economical maintenance. The economy carburetor is suitable for taxicabs, but its restrictions on speed restrict: its use in general vehicles.

From a cost consideration, the manual transmission is more economical for fleet use. However, the auto­matic transmission has the advantage of driver prefer­ence in addition to adding to the car's resale value at trading time.

Such items as heavy duty suspension systems and special rear axle ratios depend upon the type of work­out that the vehicle will be put through.

Convenience items such as an outside rear view mirror and windshield washers also serve a dual func­tion as safety devices. And seat belts should be ordered with every car.

Vehicle selection is more than a matter of simply choosing any car to do the job-just as you wouldn't choose any man to do the job. Probably one of the most important considerations is the human element. A man assigned to a car that he doesn't like is some­thing less than a happy employee. To say nothing of how he will treat the car.

 

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