Managing the Financial Side of Commercial Fleets

Depreciation Up in Most Vehicle Segments

According to industry analysts, most vehicle segments increased in vehicle depreciation in 2009 due to such factors as extended replacement cycling, shifts in the wholesale vehicle market, and higher capitalized vehicle costs.

January 2010, by Lauren Fletcher - Also by this author

Changes in the largest fleet expense, vehicle depreciation, impacts fleets in a big way. In 2009, many fleets extended replacement cycles due to the impact of the economic downturn, which contributed to higher depreciation costs.

To determine how depreciation expenses affected fleet costs by vehicle segment in calendar-year 2009 compared to 2007-2008, Fleet Financials spoke with Automotive Resources International (ARI), Donlen, Emkay, GE Capital Fleet Services, LeasePlan USA, PHH Arval, and Wheels Inc.

Depreciation Varies by Vehicle Segment

The average depreciation in 2009 was up from 2007 and 2008 in all vehicle segments - with the exception of the minivan segment, which actually saw a decrease in effective depreciation from 2.22 percent in 2008 to 1.93 percent in 2009, according to Trudi Beardsley, strategic consulting and financial modeling manager for GE Capital Fleet Services.

"In short, in all segments besides the minivan segment, the trend in 2009 is for companies to cycle out their higher-mileage vehicles more so than in prior years. The average monthly miles driven per month for all segments besides minivans has increased 19 percent in 2009 from 2008," said Beardsley.

Compact Car Segment Returns to Historical Depreciation Averages

By class, compact and mid-size cars remained fairly even while larger cars, trucks, and vans showed an increase in depreciation percentage in 2008, according to Bob Graham, director, vehicle remarketing for ARI. "This was mainly due to higher gas prices, which increased demand for compact cars. As the gas prices declined in 2009, bigger vehicles became more desirable, again allowing a lower depreciation versus compact models year-over-year."

The average months in service for compacts and intermediates were approximately 51 months in 2007, 53 in 2008, and 60 in 2009, according to ARI data.

"Many clients kept compact vehicles in service longer in 2009 due to economic concerns. Two additional months of depreciation from 2007 to 2008 would normally allow for a slight decrease in depreciation percentage; however, the depressed resale market forced the depreciation percentages to increase," said Graham. "Conversely, in 2009, the seven extra months coupled with a stronger resale market enabled depreciation percentages to return to their lower 2007 levels."

Donlen also saw small increases (6 percent) in the compact car segment in monthly effective depreciation costs for 2009 relative to 2008 levels, "largely due to shifts within the wholesale market as operational behaviors remained consistent and depreciation costs were effectively flat with 2007 levels," according to Evan McKerns, manager, Strategic Consulting Services for Donlen.

"2008 and 2009 represented a return to historical patterns of utilization within this vehicle segment, as fleets extended cycle terms back to pre-2007 levels to offset generally weak market conditions from late 2008 through early 2009," said McKerns.

Beardsley from GE Capital Fleet Services also saw depreciation for compact cars increase in 2009 compared to 2007-2008.

"The average effective depreciation in 2009 was up from 2007 and 2008 due to higher capitalized vehicle costs in 2009," Beardsley said. Although the resale market was stronger in 2009, "the average monthly miles driven increased in this segment, resulting in higher mileage units at time of sale," Beardsley added.

For three years running, depreciation for the compact car segment has correlated to fuel prices in an inverse fashion, explained Greg Corrigan, vice president, PHH Strategic Consulting.

"As long-term fuel prices have risen or fallen, depreciation for compacts has moved in the opposite manner. Resale values in this segment fell off after fuel prices plummeted fall and winter 2008, and since the beginning of 2009, prices gradually and steadily recovered," said Corrigan.

John Bauer, manager of fleet analytics for Wheels Inc., saw compact car resale prices rise in the summer and fall of 2008 when fuel prices peaked. "Since that time, prices of compact cars have returned to historical averages."

Intermediate Cars Return to 2007 Depreciation Levels

Similar to the compact car segment, intermediate cars saw a return to 2007 levels for effective depreciation performance, according to McKerns of Donlen. However, in 2009, "costs actually declined slightly (4 percent) from 2008 levels as the economic downturn in fall 2008 impacted fleets in the heart of their fall replacement cycles."

While service terms for vehicles taken out of service increased slightly from 2008 to 2009, "indications show fleets pushed out their replacement targets," said McKerns, noting a full picture of policy change results will likely be known sometime this year.

Corrigan of PHH saw resale values in the intermediate car segment remain flat for much of 2009, after falling from peak values in the fourth quarter of 2008. "Corporate downsizing caused excess supply to move into the marketplace, offsetting slight gains from lower fuel costs this year," said Corrigan.

Intermediate resale prices have been steady from model-year to model-year, noted Bauer of Wheels. "Although some anticipated a drop-off when the economy softened, prices remained strong due to fewer new-car sales and fewer recent-model trade-ins as retail customer fleets purchased fewer vehicles and some manufacturers produced fewer new cars as they emerged from bankruptcy."

Light Trucks Remain Consistent with Depreciation 'Norm'

While absolute dollar amounts of effective monthly depreciation have been on the rise for the light-truck segment, effective depreciation rates for 2009 remained consistent with 2007 levels, explained McKerns of Donlen. "Truck fleets have clearly implemented cycle extension strategies to help manage their depreciation costs and have been largely successful."

The light-truck segment also experienced an increase in net depreciation, again from higher average monthly miles driven in 2009 versus 2008 and 2007.

"Of the light trucks sold in 2009, there has been no significant increase in the months in service by our customers at the time of sale," said Beardsley of GE Capital Fleet Services.

Corrigan noted the light-truck segment had slow, but steady depreciation improvement throughout CY2009, peaking in August.

"Significant improvement is still hampered by the economic slowdown, which is affecting demand for all commercial construction-related capital purchases and fuel prices," said Corrigan.

Resale prices for light trucks were weaker in model-year 2009 than in 2007 and 2008.

"High fuel prices and the weak economy were both factors in the decline," said Bauer of Wheels. "However, it's important to note that during the 2007 model-year, light-truck depreciation cost per mile was almost the same as it was for an intermediate car. Even with reduced prices in model-year 2009, depreciation cost per mile for ½-ton light trucks was 16-18 cents."

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