For fleet managers, knowing how and when different vehicles hold their value is important for optimizing overall cost and fleet performance. We spoke recently with Eric Ibarra, a 20-year auto industry veteran and the manager of residual value practice for Kelley Blue Book, for the latest intelligence in the commercial market.
How has the sluggish economy affected the value of commercial trucks and vans?
Eric Ibarra: From the data that we’re seeing vans and trucks appear to be doing fairly well in spite of the weak economy. What we’re seeing is the supply of these types of vehicles is low, and therefore it contributes to the higher-than-normal prices for these kinds of vehicles.
Is that because fleets are holding on to their vehicles longer to save money or for some other reason?
If you recall, we had a very wild year in 2008. It started out with fuel prices rising and reached its crescendo in the summer, and then fuel prices fell off just as quickly. That caused truck prices to really plummet. Manufacturers were caught with inventories of trucks and large SUVs that they just could not move, and I think it really scared them, so they discounted heavily to get these vehicles off of their lots and then they cut back on productive drastically. The industry went into a deep funk in 2009 and only sold 10 million vehicles. It was a pretty large drop from where we had been just two years prior. So the contraction in the industry concentrated in these large fuel-inefficient vehicles meant that three years later, when these cars would ordinarily be turning, there’s a shortage of them because they just weren’t made three years ago.
How about fuel-efficient hybrids? They’ve now been on the market for several years. Are there reliable figures about their trade-in value?
Yes, actually. The only two that have been around for any number of years would be the Prius and the Civic Hybrid and those vehicles are not doing especially well. Last year there was a run-up in fuel prices again and it helped those two cars along with other hybrids hold on to their value a little better, but since fuel prices eased off in 2011, we’ve seen prices of compact vehicles and hybrids weaken.
What’s happening in that market is that for the longest time the Prius was really the poster child of environmentally friendly people. If you wanted to save the planet, you drove a Prius. But today there are cleaner vehicles around, notably the electric vehicles. Currently the [Nissan] Leaf and the [Chevy] Volt are probably the most visible, but this year there are going to be a number of EVs that are introduced, and we think that’s hurting the Prius. Of course, the EVs are much more pricy, but they are really, truly zero-emission.
So in general, in comparison to similarly sized conventional vehicles, the trade-in value of hybrid vehicles is quite a bit lower?
It depends on how you measure it. If you just measure it on a straight dollars perspective than the hybrids would carry a premium, but how we typically measure vehicles is as a percent of their original list price. So if you’re looking at that percentage than it is harder for the hybrids to maintain their retention percentage because their list price is higher.
If a fleet trades in its vehicles every several years, is the fuel savings enough to offset the difference in value retention of a hybrid?
The answer to that question unfortunately is that it depends on the prevailing fuel prices. So at $2.50 a gallon the answer is probably no, but at $4.50 a gallon it probably would pay for itself. And it depends on the length of time that the consumer keeps the vehicle. If it’s only for a two-year period then it’s harder to break even, but over a five-year period it’s a lot more realistic.
If a fleet manger were considering trading in or purchasing used vehicles in the near future, what advice would you have for him or her — hold out a little bit longer or act now?
There are so many considerations that it’s really hard to give blanket advice. We feel that used car prices for most of the segments will continue to be strong this year. However, we see competition increasing in the fuel-efficient segments, primarily because the industry is subject to higher CAFE regulations. The standards that are in place are for 34 mpg in 2016. The Obama administration is proposing that that gets raised to 54.5 mpg by 2025. That hasn’t been legislated yet, but in general you can see that the CAFE requirements are increasing and, in order to meet them, manufacturers are introducing more fuel-efficient engines or lighter or smaller vehicles. And so we can see that the segments for these smaller, fuel-efficient vehicles are going to be getting crowded very shortly. We’re already seeing more vehicles introduced into these segments.
Are there any other trends in the market for used vans and light trucks that you think would be of interest to fleet owners?
Really those types of vans don’t really change much from year to year. It’s really quite unlike the passenger or the consumer market where there are trends and new vehicles come out. The cargo vehicles typically remain the same.
I believe the Ford Transit Connect — it’s on the smaller side — launched an electric version of their vehicle, so that’s new. A trend that really hasn’t caught on yet but may make sense in the future would be to see more natural gas vehicles, so compressed natural gas. It makes sense for many of the larger vehicles like municipal buses or trash pick-up trucks. We see a lot of compressed natural gas vehicles in that size of vehicle, and it probably would make sense also on a smaller cargo size van.
Are we still a years away from smaller natural gas vehicles becoming commonplace in the market?
I do not know of any manufacturer who has plans for rolling out vehicles like that. I know that conversion kits are available. I think the biggest impediment is that any company looking into this would need to set up their own natural gas supply, but if you have a route that brings you back to the same place every night, it certainly is feasible. Natural gas is not as plentiful as petroleum, so you can’t really find a service station at every corner.