Sales of cars and trucks to fleets, a $65 billion slice of annual U.S. auto purchases, no longer has to be viewed as the naughty side of the industry.
Few aspects of the auto market capture the changes that will keep Detroit Three profits humming as well as fleet sales, the discounted deliveries to large buyers such as rental-car companies, utilities and governments that make up about a fifth of the industry’s total. For years, automakers lost money twice on these cars: once when they sold them too cheaply, and again when they bought them back and resold them.
Now that automakers have closed unneeded factories and introduced better cars that both retail and fleet buyers actually want, such as General Motors Co. (GM:US)’s Impala and Ford Motor Co. (F:US)’s Fusion, they are showing greater discipline and are making good money off fleets. This is a little-understood reason the industry’s recovery is likely to continue.
“Fleet and even rental fleet are no longer dirty words deserving of blanket criticism,” said Maryann Keller, an auto industry consultant and former director at Dollar Thrifty Automotive Group Inc. “These are not unprofitable transactions, or at least for the manufacturer, they don’t have to be.”
The self-restraint is lasting as the U.S. industry closes in on its fourth consecutive annual gain in car and light truck sales, the longest streak in more than a decade. Analysts are projecting that sales climbed 14 percent last month to 1.47 million, the average of 10 estimates in a survey by Bloomberg News. Automakers will report August results tomorrow.
Sales to fleets probably were about 15 percent of the industry’s total last month, LMC Automotive and Goldman Sachs Group Inc. analysts said. LMC cited “consistency in the fleet environment” and predicted August would be the best month for industrywide deliveries since May 2007.
The annualized industry sales rate, adjusted for seasonal trends, may climb to 15.8 million, the average of 17 estimates, from 14.5 million a year earlier. That keeps auto demand on pace for the highest annual total in six years.
Fleet purchases were 19 percent of sales this year through July for the seven largest automakers, according to Automotive News Data Center estimates. That share is down from 20 percent in the year-earlier period and in line with the level for all of 2012.
“When you’re paying attention to what you’re doing, you can make this a very good proposition,” Kevin Koswick, Ford’s director of North American fleet, leasing and remarketing operations, said in an interview. “It’s a surprisingly healthy business.”
Ford, Detroit-based GM and Chrysler Group LLC each have reduced their share of fleet sales this year, according to Automotive News Data Center. The average estimates of 10 analysts are for August sales to increase 13 percent for Chrysler, 11 percent for GM and 10 percent for Ford.
Sales to fleet customers, particularly to rental-car companies, including Dollar Thrifty, now part of Hertz Global Holdings Inc. (HTZ:US), and Avis Budget Group Inc. (CAR:US) earned their ugly reputation because of the ways the U.S. auto industry was structured before the recession that began in December 2007.
GM, Dearborn, Michigan-based Ford and Chrysler built too many cars that failed to draw enough retail buyers in dealer showrooms. Debilitating labor contracts that discouraged them from reducing output and weak passenger-car entries led to a vicious cycle.
“The manufacturers had excess capacity, they had high fixed labor costs, and they had to keep those factories running,” said Keller, whose consulting firm Maryann Keller & Associates is based in Stamford, Connecticut. “The rental-car industry became a convenient repository of new vehicles.”
The overreliance on fleet also led to oversupply of those models when they returned in the used-car market, often sold at a loss by automakers that had agreed to buy them back from the rental companies for too-high prices.
“The cars went into wholesale auctions with depressed prices,” said Keller, who used to write an annual used-car market report for Manheim Inc., the largest auto-auction company. “It’s a very pure market dependent on supply and demand. So the automakers lost money twice.”
The sagging prices also made losers out of retail customers. The excessive supply of former fleet vehicles depressed the amount of money that regular owners could get when trying to resell their family cars, often leaving a bitter aftertaste for buyers of American cars.
It took painful restructurings to turn GM, Ford and Chrysler around. The three reduced their combined capacity to build cars and trucks in North America by 29 percent, or 3.9 million vehicles per year, from 2004 to 2012, according to the Center for Automotive Research.
The Detroit Three also revamped their lineups with more competitive passenger cars like the Ford Fusion and Chevrolet Impala, and more efficient small utilities like the Ford Escape.
“When we’re tight on capacity, we’re not going to give away Escapes -- trust me,” Joe Hinrichs, Ford’s president of the Americas, said in an interview.
In addition to keeping the amount of deliveries to rental fleets in check, automakers are entering into fewer agreements to buy back cars from the rental companies, instead leaving them with the risk of returning the used vehicles to the market. Those buyers say they have managed that transition to improve their own bottom lines.
Since so few cars were built during the recession, with demand plunging to a 27-year low in 2009, there’s a shortage of recent model-year used cars, which has sent their prices to historic highs. That’s good for resale values, also referred to by the industry as residual values, and gives automakers greater flexibility to sell some cars to fleets.
The true test of automakers’ ability to sell to fleets without hurting their business will come when used-car prices soften, said John Mendel, executive vice president of sales for Honda Motor Co. (7267)’s U.S. unit. The Tokyo-based company has said sales to fleet are less than 2 percent of its total, and those deliveries are made only through its dealers.
Selling to rental fleets “just puts another competitor up against our dealers at a lower price,” Mendel said by telephone.
Honda is the last holdout among major automakers now selling to rental companies, whose fleets are a “hodgepodge” of different brands, including the namesake labels of Toyota Motor Corp. (7203), Nissan Motor Co. (7201) and Hyundai Motor Co. (005380), said Keller.
Honda’s demand from retail buyers last month may have been strong enough to offset its opposition to fleet and still post the biggest sales increase among major automakers. The average estimate of seven analysts is for gains of 20 percent by Honda, 17 percent by Nissan and 15 percent by Toyota.
Hyundai and affiliate Kia Motors Corp. (000270)’s combined deliveries probably rose 9.2 percent, the average of seven estimates. The Seoul-based carmakers have trailed industrywide sales growth in every month since September.
While most Asian automakers have made a foray into the rental company business, they continue to have little presence in sales to commercial and government fleets, portions of the market that never really were problematic for the Detroit Three.
The cars and trucks purchased by commercial and government customers tend to be held on to for longer periods, posing less of a threat to residual values of vehicles sold to retail customers. And some vehicles such as chassis-cab delivery trucks or police cars aren’t offered to retail buyers at all.
“We would always like to continue to grow our commercial presence and strength, and likewise with the government business,” Ford’s Koswick said. “In those areas, I want to grow share.”
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