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."
Minivan Depreciation Varies
The minivan segment was the only segment that experienced a decrease in effective depreciation, according to Beardsley of GE Capital Fleet Services.
"In this segment, our customers held onto vehicles longer than in 2007 and 2008," said Beardsley.
In contrast, Bauer from Wheels saw depreciation for minivans increase.
"There are several reasons behind the increase," he explained. "First, minivans were the most popular replacement for the Chevrolet Astro after it was discontinued. Second, many sales fleets removed minivans from their selectors. The result is a much higher percentage of minivans are used to carry parts and tools rather than passengers. Minivans returned are not always in great condition. Missing seats result in a significant drop in value."
Corrigan also noted a supply and demand imbalance in the minivan market, driven largely by the reduction in new models offered for sale and the continued demand for this category of transportation.
"We saw steady improvement all year in values for the minivan segment, but very low sales volumes," said Corrigan. "Higher volumes would most likely drive prices lower."
Full-Size Vans Undergo Significant Depreciation Cost Increases
The full-size van segment underwent the most significant shifts in depreciation costs, as well as replacement strategies, since 2007, according to McKerns of Donlen.
"The aggressive replacement policies of 2007 shifted to more conservative and traditional approaches, which managed to moderate increases to effective depreciation rates," said McKerns. "However, reduced manufacturer incentive programs and higher acquisition costs within this segment pushed depreciation costs in 2009 27-percent higher than 2008, and 51-percent higher than 2007."
Beardsley of GE Capital Fleet Services believes this jump in depreciation was more likely due to the economic environment and companies de-fleeting in response to financial performance.
Depreciation Costs Down in SUV Segment
As commercial fleets shifted to smaller SUVs and resale values recovered from the sharp declines driven by higher fuel prices, monthly effective depreciation within the SUV segment continued to decline, according to McKerns of Donlen.
"Depreciation costs are down 15 percent from 2008 and 6 percent from 2007 levels" in the SUV segment. "Again, fuel prices and the weak economic environment in 2008 significantly impacted depreciation costs; however, acquisition strategies focused on good residual performers and recovering market values have greatly benefited this segment," continued McKerns.
Corrigan of PHH and Bauer of Wheels saw a recovery in the SUV resale market.
"After two straight years of decline, this segment began recovery in the spring of 2009, continuing through the fall. Sales volumes were also lower, which most likely contributed to price increases," said Corrigan.
The biggest change in SUVs over the past several years has been model mix, according to Bauer of Wheels. "Mid- and full-size SUVs used to be the biggest sellers. Over the last several years, the Jeep Liberty, Ford Escape, and Chevrolet Equinox have been the volume leaders. Large SUVs put in service by our fleets are 20 percent of what they were in the 2002-2004 model-years. Depreciation on the smaller SUVs increased somewhat during the 2009 model-year."
Fleets Extend Replacement Cycling
Responding to the sluggish economy, commercial fleets often elected in 2009 to keep vehicles in service longer than in recent years, adding significantly more odometer miles, said Les Lynott, manager, vehicle remarketing for Emkay.
"Fortunately, supply shortage has helped vehicle resale values remain high. Despite the higher mileage, the relative resale value has been stronger due to supply shortage in the marketplace. Consequently, fleets are receiving similar money as to what they typically experience with fewer miles," said Lynott.
According to November 2009 data from GE Capital Fleet Services, the average months in service at time of sale increased slightly in the minivan and SUV market, most likely due to the poor 2008 resale market and customers holding on to vehicles in this segment longer than a normal cycle.
On the whole, with the exception of the full-size van segment, only small increases in replacement cycles have occurred, according to McKerns of Donlen. However, these modest increases effectively held depreciation costs close to 2007 levels.
"In many cases, when effective depreciation rates are examined, the small extension of service terms reduced rates below 2008 levels and kept those rates in line with 2007 results," said McKerns.
McKerns sees indications, however, of more substantial alterations to replacement policies, which may become apparent in 2010.
Although many fleets talked about extending cycle times, actual months in service and mileage at replacement have remained the same for our clients the last three years, noted Bauer of Wheels. "Only light trucks had a significant increase in months in service. At the same time months in service was increasing, mileage at replacement went down."
Replacement deferral caused a reduction in vehicles available for sale, which pushed resale values higher, reported Corrigan of PHH. "We saw this in the truck and SUV segments specifically. Layoffs that affected sales fleets caused significant increases in the number of intermediate cars being offered for sale, which kept a lid on price increases for these vehicles in the resale marketplace."
LeasePlan USA has seen more fleet managers turn to historical depreciation and maintenance cost data to determine replacement cycles, as opposed to simply falling back on traditional parameters.
"Many fleets that adhered to established month- and mileage-based replacement parameters for business reasons lengthened replacement cycles in 2009 to lower their average depreciation cost per month and/or avoid selling vehicles in a negative equity position towards the end of 2008," said Paul Fortin, vice president, asset risk management and analytics for LeasePlan USA.
Resale Market Gives Mixed Signals
Most marketplace segments experienced rebounds in resale prices from the market tumble in 2008, noted Lynott of Emkay. "Vehicles that appreciated due to gas prices, such as hybrids or compact cars, dropped in price in 2009. On the other side of the equation, trucks and vans appreciated relative to July/August 2008 low prices fueled by lower gas prices. Consequently, most fleets saw nice appreciation across their fleets in the used-vehicle market in 2009."
With the most significant impacts of the economic downturn on wholesale prices hitting in 2008 and restrictions on used-vehicle suppliers in the market throughout 2009, fleets largely took advantage of increasing price trends when vehicles were taken to market throughout the year, according to McKerns of Donlen. "Based on our National Auction Index wholesale volumes, a slower growth rate within the fleet segment indicated commercial fleets opted to forego replacements to some degree as a strategy to avoid potential market volatility."
Although the resale market sent mixed signals, depreciation in 2009 remained at levels very similar to the previous two years, noted Bauer of Wheels.
"Overall, the market has been favorable as we recovered from the lows we saw in late 2008," said Corrigan of PHH.
"The resale market rebounded back to 2007 levels," according to Corrigan, who expected to see the impact to effective depreciation decrease by year-end  as customers continue to cycle vehicles through the end of the year and into 2010.
"In all vehicle segments, we are seeing a trend of higher than average monthly miles driven, which would off-set the improvement in the resale market performance," said Corrigan.
Deferring new-vehicle payments for the current cycle can significantly impact a company's cash flow and budgeting plans if the fleet manager finds the fleet is carrying an aging inventory of vehicles and will need to replace more vehicles in the same year versus spreading out the ordering cycle in subsequent years, explained Beardsley.
"Holding onto an aging inventory of fleet vehicles will also result in higher maintenance costs, more downtime, and older model-year vehicles that have a less desirable fuel economy than newer vehicle models," continued Beardsley.
In 2009, the used-vehicle secondary market reversed the declining trend experienced in 2008 and reached historically high price levels.
"Any realized depreciation benefit due to the market improvement was dependent upon when the vehicle was put in service," according to Fortin of LeasePlan USA. "Vehicles that were delivered in 2007 and experienced the full double-digit market decline of 2008, experienced some depreciation relief. But, the first (very favorable) few months of 2009 were required just to reach price levels comparable to the previous two years."
Vehicles put in service toward the end of 2008 (at the market bottom), according to Fortin, were expected to be the major benefactors of higher 2009 market levels and to experience a lower overall rate of depreciation after the vehicles were terminated and sold.
New Vehicle Acquisition/Capitalized Costs Remain Flat
Reductions in manufacturer incentive programs and increased vehicle prices on new acquisitions will continue to apply upward pressure on depreciation costs, noted McKerns of Donlen. However, fleets effectively managed these increases in capitalized costs by strategic vehicle selections focused on good residual performers and managing replacement cycles.
Beardsley of GE Capital Fleet Services saw capitalized costs for every vehicle segment remain flat since 2006 with the exception of the compact car segment as result of growing demand for more fuel-efficient vehicles.
"The increase in capitalized cost resulted in higher effective depreciation rates in both 2009 versus 2007 and 2008," said Beardsley.
Through the first nine months of 2009, LeasePlan USA also saw no changes in acquisition/capitalized costs that would result in any significant impact on depreciation, according to Tim Martin, senior vice president, operations for LeasePlan USA.
"The vehicles sold in 2009 were ordered when fleet incentives were very generous," said Bauer of Wheels. "None of the vehicle types had increases in acquisition costs over the past three years. The next three years may tell a different story. New vehicles acquired in 2009 and 2010 are different from the previous years. More foreign nameplates, small vehicles, and more four-cylinder and hybrid vehicles are going into service."
Continued pressure on new-vehicle sales tended to keep new-car prices down, remarked Corrigan of PHH, while at the same time, the resale market has recovered, creating a favorable depreciation environment from fall 2009 though early 2010.