Outlook 2024: Is Fleet Back to Normal?

Remember right before the Great Recession? The business mood was “fat, happy, and oblivious.” Flash forward to today, as we exit four years of epic disruption and enter an era of seemingly relative calm. Or is it?

We may never enter fat-and-happy mode again. We know better. Black Swan events are almost expected these days.

This year is starting to resemble the pre-pandemic era in terms of a return to seasonal patterns and an ability to forecast the immediate future. What the future looks like for fleets varies considerably depending on the segment.

Let’s dig in:

Economic Outlook

The overall economy is looking more stable than it has in years. Stable doesn’t mean “great,” but we’ll settle for stable.

What the prognosticators are saying: GPD growth will be weak but we’re unlikely to slide into a recession. Interest rates will moderate slightly, but inflation will stick around.

High inflation and a weak labor market will restrain retail vehicle sales and produce higher inventories. Fleets will likely pick up some of the slack but at a slower pace than in 2023.

But the higher cost of money also affects fleets: Large fleets are more able to absorb the price increases while smaller fleets may delay acquisitions until inflationary pressures ease.

“Fortunately, all the major OEMs have committed to expanding the scope of vehicles allotted for fleet operators in 2024 so we certainly expect to see an increase in fleet sales,” said Ed Powell, director of consulting services at Holman.

“Currently, demand continues to outpace supply, even as some companies scale back due to lingering economic uncertainty.”

Supply and demand trends diverge by segment. While retail supply grows as demand weakens, commercial vehicles are a different story. 

“Entering 2024, some supply chain issues remain but we’ll continue to see overall improvement. Class 2 to 7 demand growth waned in the fourth quarter of 2023, which will likely continue through the first half of 2024,” said Stephen Latin-Kasper, senior director of market data and research at NTEA-The Work Truck Association.

“Fleet demand growth will likely continue to decelerate in the first half of 2024 before stabilizing and recovering in the second half, along with the U.S. economy,” he said.

Segment Trends

Those macroeconomic trends are affecting segments in different ways.

Cargo Vans: Cargo vans are still very much in high demand and short supply. This trend will continue. 

The Ram ProMaster factory went through a retooling in February and March, which further decreased day’s supply, said Chip Cooper, owner of Cooper Motor Company, a fleet-focused dealer in South Carolina.

Ford added a third shift to its Kansas City facility in 2023 to increase Transit production.

Step vans: “There are still too many step vans in dealer inventory,” said Dan McDonough, director of operations at Auto Park Fleet. "It's a major problem that will take months or longer to fix. Cutaways are available, but not selling because step vans are actually cheaper right now.”

Compact vans: With the discontinuation of the Nissan NV200, Ram ProMaster City, Ford Transit Connect, and Mercedes-Benz Metris in the U.S. market, new compact ICE van models are no longer available.

Pickups: While light-duty trucks are becoming more available, there are still restrictions on certain engine specs and interior features, Cooper said. As the retail market for 3/4-ton trucks is slowing, those units are more available for fleet.

Medium Duties: Medium-duty trucks — 3500, 4500, and 5500 chassis — are still very difficult. “While we are able to stock some retail units in lower numbers, the larger fleet orders are just not getting filled,” Cooper said.

Classes 6-8: With demand still far exceeding supply, trucks and heavy-duty tractors in Classes 6 to 8 are even tougher to obtain than vans, according to Steven Jastrow, vice president of consulting & analytics for Element Fleet Management.

S&P Mobility predicts a drop in registrations for Class 6-7 and Class 8 in 2024 and 2025, where all other commercial segments will see growth.  

Hybrids: Hybrid passenger cars are available, but demand is heating up. “The acceptance of full hybrids into fleet utilization has grown tremendously from model years 2023 to 2024, with interest in plug-in hybrids in the evaluation stage,” Jastrow said.

New hybrid models are coming online to meet that demand.

Increasing Incentives

The high retail inventory of passenger vehicles and light trucks is producing higher overall incentives and discounts. In November 2023 new-vehicle sales incentives surpassed 5% of the average transaction price for the first time since September 2021, according to KBB, indicating a shift to a buyer’s market.

Fleets are taking advantage, especially on volume order commitments, said Jason Kraus, director of vehicle acquisition & lease structure at Mike Albert Fleet Solutions.

Passenger car incentives may increase moving into model-year 2025, but incentives for vans, heavy-duty trucks, and large SUVs are not expected to significantly increase.

“Incentives are up, but not near pre-pandemic levels and certainly nowhere near the impact given the large increase in vehicle invoice pricing,” said Justin Lisonbee, assistant vice president of fleet operations for Enterprise Fleet Management.

Normalizing Residual Values

The fourth quarter of 2022 and the first quarter of 2023 were historical anomalies, as supply chain issues and semiconductor shortages produced greatly inflated new and used vehicle values. We may never see “negative depreciation” again.

The recent changes to residual values are better described as a trend toward normalization, rather than a deterioration. “While values have decreased, they have done so at a steady rate and are still well above their indexed values from before the Covid-19 pandemic,” said Timothy Mundahl, director, fleet consulting at Merchants Fleet.

Yet residual value for vans and medium-duty trucks will remain buoyant. "These vehicles are equipment that makes money for the companies that lease or buy them and are a valuabel asset," Cooper said. 

Open Order Vs. Allocation

As supply loosens, automakers are expected to move from an allocation system back to the traditional “open ordering” method. However, vehicle classes still in tight supply — vans, heavy-duty trucks, and large SUVs — may have restrictions. “Controlled allocation for these models is likely to persist for at least the 2025 model year,” said Lisonbee of Enterprise Fleet Management.

Lisonbee also believes manufacturers may have ordering parameters around hybrids, given their increased demand.

“The allocation methodology used by OEMs over the past few years will likely remain in place for vocational vehicles,” said Mundahl of Merchants. “It appears that OEMs are less willing to offer free-flow ordering on commercial-type vehicles where a robust retail channel doesn’t exist.”

Improving Supply Chains

In recent years, the industry suffered through parts shortages, fewer maintenance techs, longer vehicle lifecycles, and extended vehicle downtime. There has been improvement in each area, but it has been uneven and incremental.  

Lingering challenges include disruptions with suppliers for backup cameras and frames, said Lisonbee.

Cycle Times: By necessity, fleets held onto vehicles for longer than historical norms. While cycle times are improving, again, it varies by segment availability.

Kraus of Mike Albert said cars and SUVs are faring much better while pickups are improving, but commercial vans and heavy-duty tractors and trucks are still at extended cycle times.

Those improvements may not be felt immediately.

“It will likely take multiple order cycles to normalize vehicle lifecycles, which have likely been severely disrupted by several years of limited new vehicle availability,” said Patrick Doyle, director of supply chain solutions at Holman.

Technicians: The automotive industry’s technician shortage, which began before the pandemic, is seeing a glimmer of hope: According to the TechForce Foundation’s annual report from December 2023, completion of postsecondary degrees in the automotive sector increased for the first time in a decade.

The report also shows that the technician workforce grew by 4.3% from 2021 to 2022, outpacing the overall U.S. Labor Force’s growth of 4%. Nonetheless, the report finds that the industry still needs about 80,000 new automotive sector technicians to meet demand over the next five years.

OTD: New vehicle order-to-delivery (OTD) times were running around 24 weeks on average in 2023, said Kraus. He predicts the average will drop close to 18 weeks in 2024.

OTD is still exacerbated by a lack of rail car availability, vehicle carriers operating well above normal capacity, and labor shortages across the board.

Again, OTD will vary by segment, as passenger vehicles will decrease dramatically with renewed production capacity, while OTD for commercial vans will remain higher.

Downtime: Jastrow of Element reported a small 5% improvement in vehicle downtime in 2023, and about a 15% reduction from the downtime peak in 2022.

The issue won’t necessarily be resolved as supply chains improve: As vehicles become more technologically advanced, more repair time will be required to return them to pre-accident conditions.

Parts Supply: Dealerships are now holding lower replacement part inventories, which leads to a greater dependence on parts availability from the OEMs, Lisonbee said.

“We still have a problem, and we are far from optimal,” Jastrow said.

Get Creative, Stay Flexible

Fleets have a few traditional and novel options to manage changing supply and evolving market conditions. They’re not always the preferred solutions, but a little creativity and flexibility can get reasonably close.

To hedge against supply issues, Jastrow has seen more fleets move from single sourcing to multiple OEMs as well as employ a primary and secondary OEM option. 

The lack of full-size cargo vans has some fleets hunting for units in dealer stock, though the desired GVWR, wheelbase, roof height, options, and trim levels might not be available.

In response, fleets are increasingly turning to late-model, lightly used vans, Mundahl said.

With the lack of compact vans, spec’ing full-size vans is an option, but fleets would need to evaluate the higher initial expense and the increase in fuel costs. And they’d still face limited supply.

New, full-size electric cargo van models are entering the market en masse in 2024, but fleets shouldn’t consider them as one-to-one replacements yet, as they involve higher initial costs and the methodical buildout of charging infrastructure.

Regarding higher financing costs, fleets could work the predicted downward trend in interest rates to their advantage. “Fleets should consider converting to floating rate-based leases that will allow rates to float downward over the life of a new lease versus a fixed rate, which is locked in today at higher rates,” Mundahl said.

The slowdown in retail demand is allowing creative passenger vehicle options for fleets.

As half-ton pickups are more plentiful than vans, traditional cap and insert options offer covered cargo space that will work for non-urban delivery applications. A newer option is the Ford Maverick compact pickup with an upfit, truck cap, or tonneau cover.

For the right application, fleet management companies, dealers, and upfitters are working together to turn passenger cars, SUVs, and minivans into work vehicles.

Cooper Motors is converting the Chrysler Voyager minivan into a cargo van with a hard floor covering, partition, window covers or heavy tint, and metal screening if desired. “It has been successful in filling a huge void,” Cooper said.