By Mike Antich

Fuel prices hit record highs. The cost of financing a fleet doubles. Used-vehicle values plummet. Dealers are unable to sell the vehicles they have in inventory. Geopolitically, the U.S. is embroiled in war and the macro-economy teeters on recession. If you think I'm talking about 2008, think again. The year was 1973.

This year is the 35th anniversary of the Arab Oil Embargo. The 1973 oil embargo, along with the 1973-74 stock market crash, has been the only event since the Great Depression to have an ongoing effect on the country's economy. The embargo began on Oct. 15, when members of the Organization of Arab Petroleum Exporting Countries (OAPEC, consisting of the Arab members of OPEC, plus Egypt and Syria) announced an oil embargo to the U.S., Western Europe, and Japan in retaliation of the U.S. decision to resupply the Israeli military during the 1973 Yom Kippur War.

The oil embargo and resulting fuel shortage shook the U.S. fleet industry to its core, causing it to experience the greatest change since its inception. The fallout from the oil embargo was far-reaching and shaped the fleet industry of today. As a student of fleet history, I believe the oil embargo of 1973 offers insights into the current impact of the credit crisis on fleet and, more importantly, its future consequences. If you put credence in the observation that history is the prelude that shapes today, then this moment in fleet history deserves re-examination. Much can be learned about the long-term effects of today's credit crisis based on what happened to fleet in the early 1970s.

 A Period of Crisis

The early 1970s was a period of incredible challenges for the fleet industry. Literally overnight, gasoline prices skyrocketed, dramatically increasing fleet operating costs. Gasoline prices increased 100 percent for fleet vehicles that averaged only nine to 15 miles per gallon, at best. There was tremendous pressure from corporate senior management to make fleets more fuel efficient. Consequently, there was a rush to replace entire fleets with smaller cars and the need was to do it right now. Back then, in-service periods were very similar to today. Full-size cars were kept in service for 24 to 36 months with 60,000 or more miles. In the three months following the start of the oil embargo, a literal panic developed at many companies, forcing fleet managers into making hasty and costly miscalculations. At this time, these decisions appeared justified. In many areas of the country, there was no fuel to buy at any price. Fuel availability was uncertain and long lines formed at gasoline stations on the rumor of an impending fuel shipment. Many who lived through that period remember it as a time of panic and knee-jerk reactions in all segments of the automotive industry.

 Permanent Change in Fleet Buying Patterns

Not only were gasoline prices rising, used-vehicle prices plummeted due to the collapse in the sale of full-size automobiles. Within 30 days of the start of the oil embargo, the resale value of a two-year old Chevrolet Impala was cut in half. Fleet managers saw wild fluctuations in used-car prices, averaging $500 for the same model of car within a four-month period. Prior to the fuel crisis, the average full-size fleet car had a used vehicle value of approximately $1,600, so these gyrations were jaw-dropping. Ultimately, the resale market rebounded in April 1974, but not until tens of millions of resale dollars evaporated.

The fuel crisis dramatically changed the complexity of running a fleet. In 1973, the typical fleet vehicles were the Chevrolet Impala, Ford Galaxie, and Plymouth Fury. The immediate impact of the fuel shortage was increased consideration of smaller cars for fleet service. The wholesale market for full-size fleet cars dried up as few dealers or wholesalers bid on these units. Although resale prices were down overall, the cars bringing the best return were the intermediate-size cars. As a consequence, many fleet managers decided their 1974 and 1975 model-year selectors would consist of as many intermediate-size cars as possible. Fleets began to change their buying patterns. More fleets followed this acquisition trend in the ensuing years. In 1973, most fleet had a model mix of 75-percent full-size cars and 25-percent intermediate cars. The shift to primarily intermediate models was a dramatic turnaround in a business that was very conservative and slow to change product mix. Fleets operating full-size cars were downsizing to intermediates or shifting from intermediates to compacts and eventually to K-cars. Not only were vehicle sizes changing, but so were engine specifications. In the early 1970s, most fleet cars were equipped with eight-cylinder engines. The fuel crisis caused fleets to shift to six-cylinder engines and to include diesel engine passenger cars in some fleets. The diesel engine autos proved to be disastrous decision for some fleet managers. 

Financing also changed dramatically in this time frame. At that time, financing was sourced from the auto manufacturers at Prime or Prime plus one. The fuel crisis caused a dramatic increase in the cost to fund a fleet. By July 1974, the Prime Rate rose to an unprecedented 12 percent, just about double the highest levels of the prior 20 years. This resulted in the highest interest rates in 50 years. This set the stage for the future growth of fleet leasing as a method of funding fleet acquisitions. In 1981, further impetus was given to fleet leasing when the Swift Dodge vs. IRS court decision legitimized the use of the TRAC clause in an open-end lease.

The oil embargo caused great uncertainty in the auto industry, and by the time it was over, a whole new world had emerged for the fleet manager. Besides dramatically more expensive fuel, the composition of vehicle types within fleets changed significantly. One consequence to the change in fleet composition was that the industry began to be concerned about fuel management, which nobody cared about before. As fleets transitioned employees to smaller cars, driver safety became a greater consideration. In the final analysis, the oil embargo created fundamental and permanent changes in the composition of fleets, how they operated, and the services provided to drivers.

 What are the Lessons for Today's Crisis?

From my perspective, the key lesson of the oil embargo of 1973 is that monumental economic disruptions produce permanent change within an industry. My prediction is that the "Great Credit Gridlock of 2008," for lack of a better descriptor, will likewise produce dramatic (and permanent) change within the fleet industry similar to the sweeping changes that emanated from the fuel crisis three decades earlier. The fleet industry will weather the severe economic turmoil of 2008-2009 and emerge stronger, but different. This has been the pattern for every past crisis that has confronted the fleet industry.

Here are the probable outcomes to today's credit crisis:

  •         The cost to operate a fleet will increase in terms of acquisition, funding, and operating expenses. In the long term, the fleet industry will survive because there will always be a need for company-provided transportation for sales and service. However, the cost of this transportation promises to become more expensive. I predict this will prompt many companies to seek a "technological solution" to counter higher fleet costs, primarily through the adoption of telematics-based fleet management programs.
  •          The increased cost to operate a company-provided fleet will cause reimbursement to re-emerge as a potent (but misguided) threat and one that will find a sympathetic ear with many in corporate management.
  •          Fuel prices will escalate again as regional economies re-emerge from the global downturn, and as this finite resource becomes further depleted. In addition, future geopolitical events will cause fuel prices to spike. Both the current and next U.S. administration promise to confront the Iranian nuclear development program, which shows no signs of being resolved diplomatically. All of which will make fuel a front-burner issue once again. One wildcard is possible legislation mandating corporate greenhouse gas reductions, which I foresee occurring, and its impact on fleet. Ultimately, I predict this will result in the widespread "hybridization" of the fleet vehicle population industry-wide. Although OEMs are making dramatic advances in increasing the efficiency of gasoline-powered engines, I am convinced that legislators will mandate the increased use of non-conventional engines, such as hybrids, in future greenhouse gas reduction legislation.
  •         In the next two to three years, the fleet resale market will re-emerge stronger than ever. If today's new-vehicle market generates the used vehicles of tomorrow, it appears there will be fewer used vehicles in the future. If new-vehicle sales decrease, especially over a multiyear period, it stands to reason there will be a corresponding decrease in the future number of used vehicles available in the wholesale market. I predict the wholesale inventory of used vehicles will be lower than buyer demand, especially in wake of the demographic changes of a growing national population and the large bubble of Millennials or Generation Y children who will reach driving age within this time frame. These are prime buyers of used vehicles. In terms of overall population, the Millennial generation is even larger than the Baby Boomer generation in terms of sheer numbers.
  •          There will be widespread dislocation of fleet managers – either for better or worse – due to ongoing corporate belt-tightening reorganizations. Strategic sourcing will further increase its influence in corporate fleet decisions, further changing the relationship between companies and their industry suppliers.
  •          There mostly likely will be significant change among OEM and fleet management company players in the coming years. Other OEMs – non-traditional players in the fleet market – will begin to play a more active and significant role in fleet. I also predict changes in the economic landscape will make the U.S. fleet market more appealing for entry by major European fleet management companies.
  •         Industry-wide cost pressures will cause the amount of fleet incentives offered by OEMs to diminish.
  •          Another wildcard is the impact of government intervention, especially in terms of tax policy to spur economic activity. Efforts to counteract the turmoil of today's economy may introduce new players to the fleet market with the enactment of business simulating tax regulations. For instance, the government could reinstitute the Investment Tax Credit, which, in the past, had a dramatic impact in enhancing the appeal of the fleet market to non-traditional fleet players.


Stronger but Different

The key takeaway is that we are on the cusp of permanent change in the fleet industry. However, change, in and of itself, is not bad. If given a choice, most of us would choose the fleet market of 2008 over the fleet market of 1973. The deep-seated concern about this impending change is fear of the unknown.

The fleet industry will survive this frightening and unprecedented economic crisis, and, if history is our teacher, it will emerge as a stronger, but much different industry.

Let me know what you think.

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Mike Antich
Mike Antich

Editor and Associate Publisher

Mike Antich has covered fleet management and remarketing for more than 20 years and was inducted in the Fleet Hall of Fame in 2010.

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Mike Antich has covered fleet management and remarketing for more than 20 years and was inducted in the Fleet Hall of Fame in 2010.

View Bio