There have been many events that have created significant disruptions of the fleet management industry, such as the OPEC oil embargoes of 1973 and 1979, the terrorist attacks of Sept. 11, 2001, and the Great Recession of 2008-2009.
All of these events starkly demonstrated the vulnerability and fragility of the fleet industry. However, today’s COVID-19 pandemic has the dubious distinction of being the greatest-ever disruption of the fleet industry in the history of the profession.
For the first time since the end of World War II, all OEM assembly plants in the U.S., Canada, and Mexico shut down, one after the other, with the first closures starting March 18, 2020, to the closing of the last plant in March 29, 2020.
The shutdown of the entire automotive production ecosystem — comprised of OEM assembly plants and their component supply chain — brought an abrupt halt to new-vehicle build and deliveries. In many instances, assembled vehicles were stranded at the factory or somewhere in the product delivery pipeline.
The halt in OEM new-vehicle production quickly cascaded to upfitters who started to experience chassis shortages, which, in turn, caused the inventories at most bailment pools to be quickly depleted. Even when fleet units were delivered to end-users, they were difficult to register and license since all DMV offices were either closed or operating under-staffed on an appointment-only basis.
The biggest impact on fleet orders was the collapse of car-rental demand triggered by the economic shutdown and the dramatic decrease in airline travel due to contagion fear. Under-utilized rental vehicles by the tens of thousands were idled and parked at vacant venues around the country, such as racetracks and sports stadiums to await remarketing to avoid saturating the market or to free up space at a daily rental operation.
On May 22, 2020, Hertz Global Holdings filed for Chapter 11 bankruptcy protection for its Hertz, Dollar, and Thrifty brands operating in the U.S. and Canada. One week later, Advantage Rent-A-Car, the fourth largest car rental company, also filed for Chapter 11 bankruptcy protection.
The government’s self-induced economic shutdown, which started on March 26, 2020, created a decline in tax revenues resulting in severe budgetary shortfalls at all public sector fleet operations. This decrease of tax revenue for capital expenditures impacted vehicle orders by government fleets, which is expected to be constrained beyond the 2021 calendar-year into 2022.
Similarly, at many companies, commercial fleet spending slowed due to internal cash flow concerns. As a result, a growing number of fleet managers began expressing concern about possible cuts to their fleet budgets and the potential impact on future vehicle acquisition schedules. These cash flow concerns rippled throughout the fleet industry as more corporations and fleet suppliers began to experience a slowdown in revenues as customers requested deferred payment schedules. It was not uncommon for some fleet customers to ask fleet suppliers to provide price concessions. In turn, suppliers pushed back saying they were unable to consider these requests because the pandemic was also severely impacting their businesses.
There were increased inquiries from fleet managers to their lease companies to early-term vehicle leases due to unanticipated layoffs at their companies.
The pandemic also exposed fleet policies to be woefully inadequate in addressing the needs of a health crisis. Fleets were forced to improvise policies and procedures to minimize the risk of contagion. What emerged was the need for new safety protocols to reflect the realities of today’s business environment. Sanitization and disinfectant procedures are now an integral part of fleet safety programs, driver protocols, and pool vehicle operations. In this new era of social distancing, companies started to limit the number of employees per vehicle when transporting work crews to a job site.
Most sales operations at dealerships were closed immediately during the shutdown, impacting courtesy deliveries and out-of-stock vehicle purchases, with only dealership service departments allowed to remain open. When fleet orders did arrive at a dealership, it was often difficult to get drivers to pick up the replacement vehicle due to fear of contagion. To minimize this fear, some dealers offered “no contact delivery,” which involved dealer personnel wearing face masks, gloves, placing seat covers on seats, and the liberal use of disinfectants to wipe down FOBs, owner manuals or anything handled by the dealer staff.
Another fleet dealer function impacted by the pandemic was out-of-stock sales. In the past, a dealer sometimes conducts a dealer-to-dealer vehicle trade to get the vehicle needed by a fleet customer. With dealer inventories tight, it has become harder to consummate a dealer vehicle trades, which limits their choice of out-of-stock vehicles.
Similarly, some drivers refused to pick up replacement vehicles at dealerships or to take their company-provided vehicle to a maintenance facility for scheduled preventive maintenance (PM) out of fear of being exposed to COVID-19. In addition, driver fear delayed telematics installations as drivers did not want strangers working in and around their vehicles out of fear of contagion. Another consequence was an uptick in drivers using corporate credit cards to disinfect their company-provided vehicles or have a complete interior detail cleaning.
Status of 2021-MY Fleet Orders
Fleet sales for the first half of the calendar-year – January 2020 to July 2020 – were depressed, but these numbers were skewed because for the second half of March, all of April, and part of May, all of the OEM factories were closed and no fleet vehicles were being built.
Here is how fleet sales broke down from January 2020 to July 2020 compared to the same time the prior year:
- Commercial fleet sales were down 27%.
- Daily rental fleet sales were down 54%.
- Government fleet sales were down 11%.
These are pretty dismal numbers, but, again, the severity of the decline was primarily because of the collapse of fleet orders from daily rental companies, the suspension of production at automotive assembly plants, and the government-mandated economic shutdown.
Fleet sales numbers look better when you compare the month of July 2020 against the preceding month of June 2020. From this perspective, commercial fleet sales were down 6%. The segments that are dragging down commercial sales are fleets operating in the insurance, oil & gas, and hospitality/airline industries. This is substantiated by the fact that these distressed fleet segments have also experienced the sharpest decrease in fleet miles driven as captured by telematics data. But the biggest sales decline occurred with daily rental fleet sales, which were down a staggering 85%.
The fleet market lookout is better for Class 8 truck sales, which are perhaps a better barometer as to the state of the U.S. macroeconomy. As of Aug. 5, 2020, preliminary Class 8 net orders jumped to around 20,000 units in the month of July, according to ACT Research and FTR. This increase in orders was almost double the amount of trucks sold same time last year in July 2019.
Surge in Last-Mile Deliveries
One positive impact of the COVID-19 pandemic was the surge in last-mile deliveries as entire states implemented shelter-in-place mandates. The term “last-mile” refers to the final stage in the delivery of products and goods from a local distribution center to end-user customers, although the word “mile” is used loosely and can vary from dozens of miles to just a few blocks. Since the start of the pandemic, there has been an unprecedented spike in the volume of online orders.
Prior to the pandemic, last-mile fleets were already the fastest growing fleet segment in the U.S. due to changing customer buying habits and demands, but COVID-19 has been the catalyst triggering an even stronger surge in final-mile deliveries of merchandise orders. In addition, grocery and restaurant home deliveries exploded due to social distancing concerns. In this environment, last-mile fleets offered a lifeline for the delivery of products and goods to those unable or unwilling to leave their homes.
E-commerce sales accounted for 11% of all retail sales in 2019. The tremendous growth in e-commerce has caused a fundamental shift in delivery logistics. Last-mile delivery companies are looking to better utilize their existing fleets with speedier and higher volume deliveries. But this high utilization has increased stress on delivery vehicle maintenance. The last-mile driving patterns, which include stop-and-go driving, extended idling periods, and higher mileage extracts a wear-and-tear toll on the delivery vehicles.
It is reported that about two-fifths of overall logistics costs are associated with the last-mile of operation, which encourage fleets to consider alternative vehicle assets to deliver packages. For instance, the on-the-road demands entailed in last-mile delivery have caused fleets to
investigate smaller, nimbler, and more fuel-efficient vehicle options. These vehicles offer better fuel economy, greater driver comfort, a tighter turning radius, and a variety of upfitting options tailored to specific fleet applications to increase productivity.
Whatever the final impact of the pandemic on fleet management, one legacy will be the emergence of an expanded base of new customers comfortable with e-commerce transactions to be serviced by a growing number of final-mile delivery fleets.
Drivers on the Frontlines
In reaction to the pandemic, last-mile delivery companies implemented “contactless delivery” procedures by adopting new safety rules, supplying drivers with gloves and masks, and giving customers the option not to sign delivery receipts, but instead to have the driver sign on the customer’s behalf.
Many last-mile deliveries are done by independent subcontractors, who may not offer their drivers an adequate supply of sanitary products. Plus, many of these subcontractors employ contract drivers, which further limits what they need to provide not only sanitary supplies, but also health insurance and sick time, which impacts driver morale as they work in environments with a higher risk of exposure to the virus at a time when drivers found it difficult to get sanitizer, gloves, and disinfectant wipes as panicked hoarders scooped up the entire inventories at retail outlets.
As the volume of last-mile deliveries skyrocketed, there was heightened pressure to meet demanding delivery targets. The high volume of deliveries encroached on the time needed to thoroughly deep clean vans before or after a daily delivery cycle. During the shutdown when many retail businesses closed, drivers found it difficult to find places along their routes to frequently wash their hands as recommended by health authorities.
Essential vs. Non-Essential Fleets
COVID-19 was officially declared a pandemic on March 11, 2020, by the World Health Organization (WHO). Shortly thereafter, state governments issued shelter-in-place mandates requiring many employees to work remotely from their homes. This resulted in a dramatic drop in fleet operating costs as many fleet vehicles were idled or parked in storage during the shutdown.
Initially, fuel, tire, and maintenance costs were down because vehicles were driven fewer miles. But more significantly, the shutdown of the economy segregated companies into two segments – essential businesses and non-essential businesses. Depending on which type of fleet managed, the consequences of the COVID-19 pandemic is having differing impacts.
An essential business is a government-defined category of business. According to the federal government, these are businesses that support critical infrastructure in 16 different business sectors. Examples of these sectors include health care, food processing, logistics, financial services, and a catchall category called critical manufacturing which includes aerospace, medical supply chain, and so forth. These essential business operations were exempt from shelter-in-place mandates. Although exempt, most corporate and support employees at these essential businesses are working remotely from their homes to follow social distancing guidelines.
A key differentiation is that many essential fleets are actually thriving during the pandemic, especially those involved in last-mile delivery, logistics, transportation, the food supply chain, and medical supply chain.
All companies that were not deemed essential, fell into the category of non-essential fleets. Most of non-essential businesses idled most of their fleet vehicles or parked them in a storage area. As these vehicles were parked for extended periods, it became more common for drivers to find vehicles with dead batteries or under-inflated tires.
Another consequence was an uptick in part thefts for parked fleet vehicles. Thieves were stealing batteries, sawing off catalytic converters to sell the rare earth minerals within them, removing diesel particulate filters, or siphoning off fuel. As a result, some fleets moved vehicles to more secure storage yards, but this created additional expense to maintain these assets which were not producing revenue.
As overall vehicle mileages dramatically declined, it had a positive impact on fleet budgets, especially from the perspective of fuel cost due to the decreased gallons consumed and lower retail cost per gallon, both of which put downward pressure on fleet’s largest operating cost. In addition to fuel savings, fleet maintenance spend was deferred due to fewer miles driven extending the time between prescribed mileage-based PM intervals, the fewer miles driven also reduced tire tread wear, and there were fewer accidents due to less time on the road and lower traffic congestion; however, there was an uptick in speeding-related accidents.
Another area of concern involves personal use taxation. Since the issuance of the stay-at-home orders, some drivers have only personal miles on their company vehicle for the last four to five months, which are a taxable. They are not driving many business miles and it has created a potential tax headache for them.
When using the annual lease value (ALV) methodology, it has created unintended tax consequences to tens of thousands of employees. With the pandemic shutdown, many companies suspended business operations causing business use of the vehicle to drop to zero. For other companies, many employees were told to work from home and conduct virtual meetings rather than face-to-face contact.
Although miles driven may be minimal, they are 100% personal, which dramatically increases an employee’s tax liability using the annual lease value methodology. Unfortunately, the Internal Revenue Service (IRS) has yet to issue any formal guidelines addressing the fact that a company vehicle cannot be used for business purposes due to the shelter-in-place mandates that are mandated by the government.
Greater Telematics Penetration
As more and more vehicles are equipped with telematic devices, the telematics companies are often the best source of real-time industry data that is very granular.
Fleet is a good barometer for the overall economy and telematics is the new survey tool. Here’s what the telematics data has revealed during the pandemic:
Overall fleet mileage is a good indicator of economic activity and vitality. Although total fleet mileage has been increasing every month since it hit bottom in April 2020, total fleet mileage as of June 2020 is still only 86% of what it was in June 2019.
An unexpected benefit of the economic slowdown and fewer miles driven has been a sharp decline in carbon output by fleets contributing to corporate sustainability goals and objectives.
The industries that are doing good are health care services (which includes pharmaceuticals), food services, biotech, construction, delivery, utilities, utility services, infrastructure. All vocational and revenue-producing fleets are doing good.
Industries that are struggling are oil & gas, home health care, retail, leisure travel, and insurance. In the case of the oil & gas industry, many companies are reacting to lower crude oil prices and the pandemic by extending services lives and defleeting.
Another barometer of the vitality of the fleet market using telematics data is fuel consumption based on the number of gallons purchased comparing the current month to same time last year.
New Safety Protocols
A top trending topic during the COVID-19 pandemic is the emergence of new safety protocols. Sanitization is now an integral part of many corporate fleet safety programs. Disinfectant procedures are now part of driver protocols. Social distancing is now part of the fleet safety equation.
All of these new safety protocols require new training procedures so employees understand these new workplace requirements.
Accident management practices have also been impacted by the pandemic. For instance, the shelter-in-place mandates created a dramatic decrease in traffic congestion; but it didn’t make the roads safer. In fact, average commercial vehicle speeds increased. According to telematics data from Geotab, there was a double digit increase in speeding during the early days of the shelter-in-place mandates. Its data revealed that speeding over the posted speed limit by company drivers increased 10%-20%.
Not only was there an increase in driving at speeds above the posted speed limit, but there was also an increase in the use of handheld devices while driving. Although there was a sharp decline in accident rates in the month of March, about 20-30% lower compared to same time last year, there was a 10% increase in the number of speeding related accidents.
While employees are still sheltering-in-place or working virtually from home, there is an erosion of driving skills due to decreased time behind that wheel that has prompted proactive fleets to have drivers take the refresher online safety courses.