If you’ve read enough press about the automotive industry, you’ve heard auto executives say that a manufacturer is “reducing sales into fleet.” This may give pause to those running small business fleets — does this mean you’ll have less opportunity or choice to buy what you need?
Conversely, fleet managers of the large commercial accounts often hear at fleet events that “fleet business is good business.”
So are the manufacturers talking out of both sides of their mouths? Not quite. When they say “reducing fleet sales,” this is shorthand for reducing sales into rental fleets. Taking it one step further, they’re saying “we’re reducing sales into rental fleets to protect our vehicles’ residual values.”
Commercial fleet units never suffered the same stigma as rental units. Those vehicles generally have had one “owner,” a professional or an executive, and are better equipped. On the other hand, the base models with the rollup windows ended up in rental fleets, as did the overproduced models, or the models on a slow path to extinction.
But those days have changed. Even before the Recession, manufacturers had “found religion” when it came to rental fleet sales. Since then, they’ve raised prices on rental units. They have avoided the ignominy of the bare-bones model and have equipped rental units with content a retail buyer would want. And, most importantly, have sold a smaller percentage of cars into rental fleets.
This philosophy shift has had a positive effect on residual values, especially with the domestic manufacturers.
At last year’s Conference of Automotive Remarketing, Eric Ibara, director of residual value consulting for Kelley Blue Book (KBB), presented an analysis of residual values based on model redesigns since the 2007 model year to understand how model changes affect residual values.
KBB’s data showed that a car model that incurred a 10% increase in rental penetration percentage suffered a surprisingly small residual value drop of .4%. Perhaps as surprising, lease penetration produced the same ratio: A 10% increase led to the same .4% drop.
But then there’s the perception that all rental customers are bent on outdoing Evel Knievel. The reality is that the majority of rental cars are driven by people aged 25 to 65, half on business and half on leisure. They hold credit cards and most are air travelers.
Rental units are washed and checked every three or four days (the average rental length) and undergo scrupulous preventive maintenance, especially to satisfy the rules of manufacturer’s repurchase programs.
At least two manufacturers— Toyota and Nissan — do not ban off-rentals from becoming coveted certified, pre-owned (CPO) units, as long as the vehicles meet the programs’ age, mileage and other strict conditions.
Believe it or not, for the number of miles driven, rental cars do not incur more accidents than other cars. A common rule of thumb is an average of one accident claim in the life of a rental car, about 30,000 miles. That’s a smaller percentage of claims than cars in the general populace.
Nonetheless, the reality has yet to totally dispel the perception. Several states, including California, Wisconsin and Maine, require dealerships to disclose vehicles’ initial use in a rental fleet. And this has some detrimental side effects:
“Our used car managers do distinguish true commercial fleet cars from rentals because they don't have to be disclosed as rentals. The leased units often have nicer equipment, or at least are different than the rental cars, and are older so they are at a lower price point,” writes Jeff Barron, a commercial fleet lessor with Ellis Brooks Leasing in San Francisco. “But the biggest thing is that they don't have to be disclosed as a former rental.”
But the tide of perception might be changing. In a 2012 case, Bentley v. Weinberg Dodge, a dealer was brought to trial in Kansas City, Mo., for not disclosing that a sold used car was a rental unit, as well as for not disclosing previous damage. The jury found for the plaintiff for only $2,500, to pay for the previous damage. In other words, “the jury awarded no damage because the car had been a rental,” says fleet consultant Jim Tennant, who testified at the trial.
If anything, when manufacturers say they are “reducing sales into (rental) fleets,” that should make commercial fleet accounts happy. Today, rental fleets are better managed by the manufacturers and fleet accounts, meaning that “fleet business — all fleet business — is good business.”