The car rental industry has an age old concept called the $500 car. The concept revolves around the idea that operators should be hyper vigilant about used-car values and the minute they see that they are in a position to sell a vehicle for $500 more than their cost basis, they pull it out of service and sell it. The concept and the practice may be unique to the rental market but there are some lessons to be learned here for commercial and public sector fleets as well.
Residual values for most vehicle classes have been rock solid since the Great Recession. We keep waiting for the bottom to fall out of the used-car market by now that we’re 10 years into a bull market, it may be time to consider these values the new normal. If you are like most fleet managers, you establish a depreciation schedule when you put your vehicles in service and probably never think about it again until it’s time to pull it out of service and send it to auction. Maybe it’s time you took a more active view toward managing depreciation.
Active residual management means keeping an eye on the used car market at all times. We’ve seen holding periods increase every year as fleets look to maximize asset value. The conventional wisdom has always been to hold vehicles until the wheels fall off, or just before the wheels fall off, so you put a replacement vehicle in service before maintenance costs outweigh depreciation or before downtime starts to eat into productivity. But now we’re starting to see some well-run fleets experiment with short cycles, quick turnarounds, and the results can be impressive.
Shortcycling has several benefits that might not be obvious at the outset. Maintenance costs are an obvious gain. Cycling out in the one to three year time frame will limit maintenance for a lot of vehicles to oil changes, tires, and maybe a set of brakes. A further benefit is the ability to stay on top of the latest technology. As OEMs drive safety technology down their product lineups, every model year sees new opportunities to make your vehicles safer for your drivers. Keeping a vehicle for four to six years means you are going to market with a used car that is probably a technological dinosaur. That 2-3 year old car has a much wider potential buying audience. And a bigger audience means more bidders in the lane and probably a higher resale value.
Active fleet management gives you a chance to be a hero to your OEM and as a consequence get larger fleet incentives. A 500-unit fleet with a 30-month replacement schedule vs. a 60-month schedule is going to purchase twice as many units in any given year. And that means higher fleet incentives. And that means a lower acquisition cost which should lead to lower depreciation. Before you know it, you might find yourself with some vehicles with $500 more equity than you expected. And you’ll be able to sell that vehicle and be a hero to your management.