15 Predictions for the Fleet Market in CY-2022

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A common tool employed by many forecasters is to extrapolate existing industry trends and project them forward into the future. Using this methodology, when looking ahead to the next 12 months, it is clear that it will become more expensive to operate a fleet in the coming years. Vehicle acquisition costs have increased due to reduced fleet incentives. Fuel prices, in all likelihood, will continue to trend upward and maintenance costs will ratchet higher due to more companies adopting extended replacement schedules. Fleet costs will not only continue to increase, but, in all probability they will accelerate.

The reality is that most expenses impacting fleet are beyond the control of fleet managers. Fuel is the highest operating expense facing commercial fleet managers, with price volatility creating tremendous challenges to planning and budgeting for this variable expense. In the final analysis, market demand and market consumption drive fuel prices, which is beyond the control of fleet managers, many of whom are resigned to the fact that fuel prices will remain elevated for the foreseeable future. The reason for this belief is based on the conventional wisdom that fuel prices are quick to rise and slow to decline.

There will also continue to be strong pent-up demand for vehicle assets and services by end-users in CY-2022, which is symptomatic of a strong economy that most likely will continue throughout the year and into the first quarter of CY-2023. End-user demand for trucks and SUVs continues to be very strong in both the retail and fleet markets.

With this as background, here’s my 15 predictions of what I foresee occurring (or continuing) in calendar-year 2022.

Prediction 1: Supply Constraints to Diminish but Will Sporadically Persist 

Supply chain issues continue to be headwinds to the global economy. The supply versus demand imbalance will most likely continue throughout CY-2022 and perhaps into Q1 2023, which is good news for the economy, but creates the risk of ongoing sporadic supply constraints. 

Supply constraints, such as those with microchips, are  a global issue that impacts many different industries. While the microchip situation will get better, it will not be fully resolved anytime soon. There are multiple reasons for the microchip shortage, but the shortage is being addressed by industry suppliers and inventories are improving. Nevertheless, overall end-user microchip demand continues to exceed total global chip production. The anticipation is that this will persist through CY-2022, but the intensity of inventory constraints in CY-2022 will diminish. While microchip inventory and availability is improving, the supply continues to remain volatile and dynamic. With industry-wide vehicle production anticipated to increase in MY-2023, this pent-up demand will continue to exert availability pressures on production volumes, especially for popular models. Or, perhaps more appropriately, availability pressures may be greater for less popular models that will be lower on the totem pole for chip allocation if microprocessors supplies tighten.

Prediction 2: Model-Specific Vehicle Availability Constraints

Pent-up demand for fleet replacement products is so high that it will not be fulfilled in what will be a shorter 2022 model-year. The risk of early order cutoffs still exists, especially for high-demand vehicle models as fleet buyers start their ordering process earlier and earlier.

The past several years have been tumultuous with the magnitude of challenges facing the fleet industry that it has not seen since the Oil Embargo of 1973 or the credit crisis of 2008-2009. Today, the greatest challenge that fleet managers face is the lack of availability of specific assets and equipment due to the supply chain interruptions caused by the COVID-19 pandemic. This challenge is not only occurring at the OEM level, but also with many upfitters as well.  

The situation is improving, but as many fleet managers will tell you, it’s still a battle. Fleet managers are being forced to keep vehicles longer than planned due to the difficulty (and uncertainty) in sourcing replacement units. As a result, they are discovering firsthand an increase in higher maintenance costs. According to Automotive Fleet’s latest operating cost survey, unscheduled maintenance costs have increased 3% in CY-2021.

Prediction 3: Extended Service Lives for Fleet Vehicles

The difficulty in sourcing new replacement vehicles is prompting companies to extend the service lives of the vehicles currently in service, resulting in a greater incident of vehicle downtime, which is lost productivity of a revenue-generating asset. Also, older vehicles are  less safe because they are not keeping pace with the availability of new safety technologies migrating down to fleet trim levels. Longer service lives also result in higher fuel consumption, which increases operating costs.  Here’s a good rule of thumb – the older the vehicle, the greater risk of catastrophic failure. Here’s another analogy –  80% of a person’s lifetime medical expenses occur in the last five years of life. This is similarly true with fleet vehicles.

Prediction 4: Upward Pressure on Fleet Costs will Continue in CY-2022

In CY-2021, there have been across-the-board cost increases. These will most likely continue through the first half of 2022. Multiple market forces and inflationary pressures will put upward pressure on the cost to operate a fleet. 

  • Vehicle acquisition costs have increased. 
  • Fuel prices, in all likelihood, will remain elevated and maintenance costs will ratchet higher due to more companies adopting extended replacement schedules.
  • In CY-2021, tire costs were up 3-10% due to higher commodity prices.
  • PM costs are up due to more fleet vehicles requiring synthetic motor oils.

With fleets extending the life of their vehicles coupled with the reduced availability of new vehicles, there will almost certainly be a greater demand on maintenance organizations. This coupled with a higher demand for experienced technicians will most certainly raise costs, in particular labor rates.  The ongoing shortage of spare parts on back order will also increase vehicle downtime.

Prediction 5: Higher Fuel Costs

Fuel price volatility is unpredictable, but there is a very high probability of it continuing in CY-2022. The psychological pricing thresholds have been shattered during the past decade – first at $3 per gallon following Hurricane Katrina, then $4 per gallon in the summer of 2008. Don’t be surprised to see the next pricing volatility upswing with prices north of $4 per gallon as a nationwide average. 

Prediction 6: Fleet and Retail Incentives to Remain Low

The reality is as long as end-user demand exceeds production volume, there is no need for OEMs to incentivize buyers. The decrease in incentives – both fleet and retail – translates into higher acquisition costs. Looking ahead to 2022, vehicle prices are going up and incentives are experiencing downward pressure. As OEMs reduce incentives, transaction prices will continue to grow.

Prediction 7: Longer Lead Times for Vehicles

Order-to-delivery (OTD) times have increased with slower turnaround of product at upfitters who are coping with staffing shortages and parts constraints.

Overall demand for trucks is high causing some fleet customers to wait longer for the chassis to arrive at an upfitter, then for the body build times. Raw material costs of products are going up and affecting the bottom line for some upfitters and causing price increases for upfit components.

The concern is that product availability constraints will continue into the 2023 model-year. 

Prediction 8: Out-of-Stock Orders Continue to be Scarce and Pricey

Dealer inventories are at historic lows. Dealer inventory will continue to be extremely tight with OEMs under pressure from their dealer body to increase vehicle allocation to them. Out-of-stock purchases will continue to be difficult. Plus, dealers are selling retail units at MSRP and are reluctant to sell it at a lower price to a fleet

Prediction 9: Trucks to Continue to Drive Growth in Fleet

Strong demand for light-duty trucks in both the retail and fleet markets has created competition for truck production allocation between dealers and fleets, lengthening OTD. Vocational trucks are vulnerable to OTD delays because fleet orders tend to be concentrated among a handful of models with limited secondary choices. 

As shown in past ordering cycles, high order volume of trucks and vans creates a backlog at upfitters delaying deliveries. Upfitters are operating at capacity. The tight labor market, especially for skilled labor, is inhibiting capacity expansion at upfitters. 

Light-duty truck sales will continue to grow relative to cars. There’s still a market for cars, especially for compact cars, but overall, car sales will remain at their decreased levels, which has become the new norm.

Prediction 10: Electrification Gains Momentum

The shift to battery-electric vehicles will accelerate in 2022-2023 as more EV products becomes available. My prediction is that OEMs will sell out their entire EV production volume for the next several years since there is pent-up demand among early adopter retail customers and many corporations have committed to going to all-electric fleets. For instance, many have taken the EV-100 Pledge, which is a commitment by 120 member companies to switch their fleets to EVs and/or install charging for staff and/or customers by 2030. In addition, 50 major corporations have announced that they will be carbon neutral by 2040, such as Wal-Mart, Amazon, FedEx, Unilever, Coca-Cola, Johnson Controls, etc.

Facilitating this market demand is that the product pipeline for most OEMs include a growing number of  vocational EVs to include in their product portfolios. To create a successful transition to EVs, however, it is imperative that there must be a viable and robust used-vehicle market for EVs that are affordable to lower-income consumers, who are the traditional buyers of used fleet vehicles.

Prediction 11: Resale Values Remain Strong

Resale prices in the wholesale market will continue to be very strong. For fleet vehicles, full-size pickup trucks are experiencing the lowest depreciation of all vehicle segments. Resale values for vocational trucks and vans remains extremely high in the secondary market due to tradesmen and independent contractor demand for used vocational vehicles in good condition.

Similarly, resale values for compact crossovers also remain strong validating the truism that “what sells good new, sells good used.”

If the new vehicles of today are the used vehicles of tomorrow, the anticipation is that used-vehicle inventory in future years will remain tight increasing upward pricing pressures on used-vehicle resale values. The decreased number of new vehicles built in 2020 and 2021 means fewer used vehicles will enter the wholesale market in 2023 and 2024 creating a favorable supply-demand ratio for resellers.

Prediction 12: Budget Constraints

Fleet managers are facing tightening budgets, pressures to right-size their fleets and implement never-ending cost reduction initiatives in the pursuit of an overall reduction in total fleet costs. This is being complicated by increased acquisition costs from OEMs and fleet service providers, upward pressures arising from unscheduled maintenance costs, higher fuel prices, and the lack of spare parts or delays in receiving shipments of upfit components. 

Fleet budgets are currently under pressure in all areas and capital replacement budgets have been no exception, with the current financial state of both public and private sectors dealing with reduced revenue in the organization. No stone is left unturned when trying to find ways to save on costs and expenses. 

As COVID-19 stressed the financials of many companies, management immediately asked fleet managers to conserve cash. As soon as fleet activities started to increase due to increased business levels, the expectation of management was that costs will continue to remain low. Now fleet managers have to manage their fleets with shrunk budgets while maintaining the same activity levels as costs are increasing across-the-board. This strategy can only work in the short-term  and management will have to become more realistic and understand that the dip in fleet expenses in 2020 was tied to lack of fleet activity because of a once-in-a-lifetime pandemic event.

Prediction 13: Increase in Preventable Accidents

Driver distraction continues to be a primary factor causing preventable accidents as employees are multi-tasking while driving due to increased workload caused by staff cutbacks. There is growing management concern about increased corporate liability exposure.  The greater availability of Advanced Driver Assistance Systems (ADAS), however,  promises to put downward pressure on the incident frequency of preventable accidents. But there are other concerns on the horizon. For instance, there is growing concerns of driver impairment using recreational marijuana during personal use. This concern is growing industry-wide as additional states look to decriminalize marijuana use.

Prediction 14: Incremental Growth of Last-Mile Delivery Fleets

The last-mile delivery market in North America is growing by leaps and bounds. The increased reliance by consumers and businesses on deliveries from online purchases is causing this accelerated growth of last-mile fleets.

The term “last-mile” refers to the final stage in the delivery of products and goods from a local distribution center to customers, although the word “mile” is used loosely and can vary from dozens of miles to just a few blocks. As we all know, since the start of the pandemic, there has been an unprecedented spike in online orders. Last-mile delivery fleets were already the fastest growing fleet segment, but COVID-19 has been the catalyst triggering an even stronger surge in final-mile deliveries.

Prediction 15: Inflationary Pressures

The rising cost of living due to inflationary pressures is a hot topic around the globe in the final quarter of 2021. Is inflation a temporary effect of the COVID-19 rebound or something longer-lasting? A “sticky” inflation is predicted by some economists as we move deeper into next year, with higher fuel and energy prices driving more persistent inflation and perhaps not as transitory as previously believed.

Some sectors will have seen temporary price increases caused by supply chain constraints and other bottlenecks. When operations return to normal, the hope is that prices will normalize too. 

However, the consensus seems to be building that inflationary pressures will persist through the first half of calendar year 2022 and probably beyond.