The Economics of Sedans vs. SUVs

The vehicle preferences of drivers have been evolving over the last few years, with a notable trend being the increased interest in crossovers and SUVs over sedans.

Not only have consumer buying trends revealed this shift, but so have recent industry developments, such as Ford announcing plans to phase out most of its sedans by 2020 in favor of a North American portfolio comprised of 90% trucks, utilities, and commercial vehicles.

Further still, drivers in China, Australia and other countries have had an increasing interest in SUVs/crossovers, according to a New York Times article.

This trend is present in the fleet industry as well. Recent Automotive Fleet data has found that a number of fleets, including GEICO, Johnson and Johnson, and LabCorp, have revealed a reduction in sedans in favor of more SUVs and crossovers.

But how does this trend impact fleet? Fleet Financials reached out to fleet experts from several fleet management companies to get their thoughts on the scope and impact of this change.

While not every fleet is taking part in the shift over to SUVs/crossovers, recent data has revealed certain fleet segments have gradually been making the transition.

Indeed, John Wuich, VP strategic consulting services for Donlen, noted that in 2015 there was a spike in acquisition on sedans, both compact and intermediate. However, acquisition trends have changed over the last three years.

“Since then, in each of the last couple of years, there has been a notable decline. From 2015 to 2016, there was about a 3% drop in sedan orders we were putting on the road,” said Wuich. “There was an even bigger drop in the segment from 2016 to 2017, as we saw an average 32% drop, almost a third reduction, with the intermediate group having declined faster than the compact group.” He added that the decline in sedans was witnessed in fleet segments such as the pharmaceutical and insurance industries.

The transition to more SUVs and crossovers was also observed in other industries, according to experts.

“We’ve also seen this shift occurring in sales fleets, though this largely depends on the products they’re selling. Many of the beverage/spirits companies lean toward SUVs in order to carry product back and forth,” said Mark Donahue, manager, fleet analytics and corporate communications for Emkay. “Even construction and retail service fleets have started utilizing SUVs, once again, largely for the ability to move product and/or tools around job sites.”

Also observing this trend is Jeff Krogen, assistant VP of fleet strategy for Enterprise Fleet Management.

“Our clients have always leaned toward trucks, vans and CUVs/SUVs over sedans, but even clients that value cost above all else have been more open to switching from sedans to CUVs/SUVs in recent years,” said Krogen. This also includes sales fleets, he added.

Reasons for the Shift to Compact SUVs

Many of the same reasons as to why fleets are gravitating more toward SUVs/crossovers are the same as why consumers are interested in the segment.

Michael Singer, strategic consultant of Merchants Fleet Management, attributes some of the popularity in crossovers/SUVs in fleet due to the comparable fuel economy to sedans, increased interior space, and also the available AWD options, which make them well suited for snowy conditions.

He mentioned that, in the past, fleets may have resisted SUVs partly due to their historically lower MPG. However, the evolution of the vehicle landscape has changed perception of the SUV/crossover.

“They’re bigger, they’re roomier, and they can get the same fuel economy. Fleets are making the transition, and we’re seeing several manufacturers getting out of the sedan market and almost exclusively being an SUV based company,” said Singer.

Further still, fleet experts mentioned fleet incentives from OEMs as another driver impacting the types of vehicles that fleets have leaned toward for their portfolios. 

Other reasons for the shift can be attributed to fleets using SUVs and crossovers to bolster employee satisfaction (due to roomier interior space, higher seating position, etc.) and as a tool to incentivize the retention and acquisition of new employees.

“That narrow gap (between crossovers and sedans) can be a no-brainer when it comes to the benefits of employee satisfaction, increased head and leg room, greater visibility, and more flexible interior cargo space,” said Krogen of Enterprise Fleet Management.

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Singer of Merchants also mentioned that there’s more variance in utilization with SUVs versus sedans for drivers.

“Every company has a strategy to weigh the variables that go into vehicle selection, including the weight of cost of ownership versus driver satisfaction,” said Becky Langmandel, VP of analytics, consulting and transformation for LeasePlean USA. “Some fleets will offer both an SUV and sedan on their selector and let the drivers choose. Often the overall selection population weighs heavily in favor of the SUV versus the sedan, but fleet decision makers are allowing that choice.”

Despite these trends, it’s important to note that every fleet is different. So, while several experts have observed this shift toward implementing more SUVs and crossovers, this has not been the case for every fleet, which may be partially due to company culture and concerns of how making the transition could impact the bottom line.

“The decision is largely based on TCO but also on what the fleet needs in terms of driver demographics, cargo needs for samples, etc,” said Shonn Glenn, director of account management with Wheels Inc.

Wuich of Donlen observed that automotive part fleets and some sales fleets have tended to hang onto the sedans in their portfolio longer, which he said may be attributed to loyalty to the dealers they acquire assets from, or loyalty to the vehicle segment itself.

Meanwhile, ongoing changes to the vehicle landscape, including the SUV/crossover, may further change the perception of the segment in the industry.

“The SUV we’re talking about today conjures up certain stereotypes, and I think it’s probably important to mention that the SUV landscape is changing,” said Matt Costolo, assistant manager, business intelligence & analytics, ARI. “When an OEM announces plans to eliminate sedans, it’s natural to envision existing models being replaced by the current lineup of mid-size or small SUVs, and that probably won’t be the way it’s going to play out. As OEMs phase-out sedans, they’re likely to introduce new crossover/SUV models as well.”

Analyzing Total Cost of Ownership

When acquiring new vehicles, the total cost of ownership (TCO) is always top of mind for fleets. Because of this, some fleets, especially those whose focus is on keeping acquisition costs low, may be put off by the generally higher MSRP.

However, there are several important elements that have a direct impact on TCO that fleets should be aware of if they are considering implementing more SUVs and crossovers.

“When you factor in acquisition cost, manufacturer incentives, maintenance and resale, comfort and ease of entry/exit, SUVs can be more attractive,” said Glenn of Wheels. “There is also an increased trend for manufacturers to launch improved or innovative safety technology in SUVs first, making them more attractive to the fleet manager.”

And, beyond this, the overall TCO for certain crossovers and SUVs now more closely matches the average sedan TCO.

“What some fleets have noticed is, while some SUVs will come with a higher price tag and a higher TCO, this can be offset by incremental revenue generated from having larger cargo space,” said Rob Bradley, senior strategic consultant, Element Fleet Management. “If they are able to make incremental trips, or get rid of more product on the same number of trips, then there is certainly a case for the SUVs additional revenue generation to offset the incremental costs.”

Costolo of ARI, added to the sentiment of how the price of SUVs and crossovers can be offset by other factors that play into the segment.

“On average, TCO for crossovers and SUVs is about 10-12% higher than comparable sedans, often driven by upfront acquisition costs. Fuel economy and maintenance expenses also impact TCO but to a much lesser extent. A projected increase to resale value will help to offset this slightly,” said Costolo of ARI. “Sustained demand for crossovers and SUVs is increasing projected resale value by as much as 50% as compared to similar sedans, helping to offset some of the initial invoice increases. This is a reflection of the used-vehicle market as a whole as consumers continue to opt for small SUVs rather than mid-size sedans.”

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But considering how much the segment has evolved to match the needs of drivers who have historically preferred sedans, other experts have mentioned that, for certain vehicles, the cost difference toward implementing SUVs or crossovers versus sedans is negligible.

“The total cost of ownership is similar when comparing many midsize sedans to small SUVs,” said Langmandel of LeasePlan USA. “It’s really reviewing all of the cost data components and looking at the aggregate costs.”

Indeed, Wuich of Donlen observed several fleets being able to make the transition to SUVs with minimal or no increase to TCO. This is due partly to volume incentives and the better resale demand on SUVs, he said.

Meanwhile, Bradley of Element has not observed a major shift toward SUVs. “In what I would say is a fairly cost-constrained environment, I’m noticing less of a shift into SUVs because of that and generally due to the bottom line impact that it has.”

Some experts mentioned this could be due in part to a corporate focus in cutting acquisition costs in an effort to bolster the bottom line.

“The potential for a noticeable increase in operating costs is definitely a large factor for fleets considering the move to SUVs,” said Donahue of Emkay. “The monthly cash flow for our customers is very important. If they are moving to a large unit they need to know how that is going to affect them monthly. Our customers are concerned with cost efficiencies, increasing monthly cash flow, and finding savings where they can. Their fleet is one aspect of the business where saving opportunities can be explored.”

But, Donahue added, it’s also important that fleets have close contact with their FMC to communicate concerns relating to this, as these discussions can help those interested in making the transition weigh their options.

“It comes down to what type of sedans fleets are transitioning from and the crossover or SUV that they are transitioning to. This is vital to the conversation and determining the trends that are going to impact their overall bottom line,” said Costolo of ARI.

Indeed, Bradley of Element elaborated on the necessity of considering the type of sedan and SUV that are being factored into the vehicle selection processes.

“If you look at just a cost perspective, then there is definitely a notable difference when looking between sedans and SUVs.” said Bradley. “When you think about entry level sedans compared to entry level SUVs I would say there is a significant difference from a total cost of ownership (TCO) perspective.”

Considering Vehicle Fuel Economy (MPG)

When breaking down fleet spend, one top area fleets focus on is fuel. As mentioned, fuel economy for an SUV or crossover has generally been perceived as being lower than that of a sedan, making them once an unattractive fleet vehicle.

Glenn of Wheels echoed sentiments as to why fleets had once resisted SUVS.

“Historically, SUVs in general have been more expensive to operate not only due to higher acquisition costs, but typically lower fuel economy and increased maintenance due to AWD options,” said Glenn. “However, with the improvements in powertrains in recent years, we are seeing the gap in cost to operate shrinking.”

 Now that crossovers and SUVs have begun to match sedans in the MPG, the minds of some fleets have started to shift.

“Sedans still reign as TCO (total cost of ownership) champions, but lower fuel prices and better efficiency have closed the gap significantly,” said Krogen of Enterprise Fleet Management.

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However, this doesn’t necessarily mean that any fleet can, or may even be interested in transitioning to a SUVs/crossovers. It’s something that must be considered on a case-by-case basis, factoring vehicle utilization, and also depends on the type of vehicle the fleet is bringing into its portfolio.

“SUVs and crossovers now tend to achieve strong fuel economy, similar to sedans. However, we caution our customers to not make a vehicle selection on fuel cost alone. When considering the move to SUVs, I advise our clients to look at soft cost factors including driver satisfaction and productivity,” said Glenn of Wheels.

The volatility of the fuel prices is also something the fleets need to factor in when they are considering the transition to SUVs/crossovers. Even if the fleet is specifically seeking SUVs/crossovers with higher MPG, fuel costs will remain a concern. And with fuel being a major concern for fleets, this is often top of mind for management.

“Fuel is usually going to be one of your two to three biggest expenses,” said Bradley of Element. “If making a significant shift, I like to advise my fleets to do a sensitivity analysis around it. This allows my team to work with fleets to assess the current and projected costs of fuel, as well the vehicle types the fleet might be interested and help them decide if the transition will be beneficial in the long run. It’s to help them see how an increased cost at the pump will impact their annual spend.”

Indeed, when it comes to assessing fuel, fleets have many options to consider with regards to the type of fueling of the vehicle.

“There are plenty of engine offerings within the SUV segment that can help to minimize the increase in fuel expenditures,” said Donahue of Emkay. “Opting for an EcoBoost/Ecotec or a flex fuel/hybrid engine option can assist with keeping fuel costs low. Weight reduction initiatives have also been critical with the manufacturers in recent years. Even the aforementioned heavier vehicles are naturally becoming more efficient with weight cutting measures (aluminum utilization, etc.)”

Langmandal added that fleets with global responsibilities may want to take into consideration CO2 emissions standards for countries outside of the U.S. when deciding on vehicles types they implement into their operations.

“Global fleets are always looking for cleaner and greener vehicles that have a more efficient fuel economy,” said Langmandel of LeasePlan USA.

The benefits of having an alt-fuel SUV/crossover were also echoed by Glenn of Wheels.

“There are also many SUV options that offer hybrid technologies that give fleets the fuel economy typically associated with a smaller vehicle,” said Glenn.

Langmandel added, “Electrification is the wave of the future and many fleets have started looking toward electric vehicles to meet their fuel and emission requirements. As OEMs have announced EV lineups, including SUVs and sedans, this will eliminate the fuel economy variance discussion between these two segments.”

Maintenance Not a Factor

Generally, the transitioning of sedans to small SUVs/crossovers will not impact things in the realm of maintenance, and that’s driven mainly by the change of the build for vehicles of the segment.

“Most SUVs have gravitated toward a car chassis, and because of that, almost all of their maintenance data is very comparable, or almost interchangeable, to a sedan. And I think a big difference is how they are being run,” said Singer of Merchants. “A factor of maintenance is utilization. If you’re overusing a vehicle, if you’re overloading a vehicle, maintenance costs are going to go up.”

However, when it comes to the actual replacement, Donahue of Emkay mentioned that there may be a higher cost for SUVs in terms of tires and brakes.

“When we provide lifecycle cost analyses to our customers we determine maintenance costs by historic cost per mile (CPM) trends per make, model, and engine type,” said Donahue. “The results of these analyses show that sedans typically carry a lower CPM than SUVs mostly due to the higher cost of tires and brake repairs. While the CPM is slightly higher, it’s typically not so much that it removes the SUV from the list of potential vehicles.”

Costolo of ARI observed similar cost concerns relating to tire maintenance.

“The concerns related to tire cost are partly due to the increased cargo capacity and load of the vehicle but also, the actual size of the tire plays a factor as well. There tends to be a difference there which adds some cost for replacements but otherwise the cost is fairly similar,” said Costolo of ARI. His TCO forecasting model also found the difference in overall maintenance costs to be rather minimal, a 1.5% increase on average when comparing crossovers to sedans.

Glenn of Wheels added that, with fleets that allow for personal use, the maintenance costs for an SUV may increase due to non-fleet related use such as towing and off-roading, which can be mitigated with a strong fleet policy.”

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