Automotive Fleet, February 2016

depreciation trendsment will further benefit from continued demand created with growth in construction markets Wuich said Thus long term used vehicle values may see a decline It is reasonable to assume that this supply shift will result in a moderate low single digit percent annual decline in used vehicle values over the foreseeable future If economic or industry factors drastically change it is reasonable to expect that the pricing deterioration will be more severe Fortin said Graham of ARI however is seeing some positive potentials Overall I think it is hard to say but continued economic growth combined with an interest in new technology and newer models across every segment could lead to upward pressure on depreciation values We have seen some bumps along the way as the economy has recovered for example the oil and gas sector has had to adjust as oil prices have dropped and this has affected vehicle orders Uncertainty across the globe is another wild card that could affect how our own economy performs But for the most part I think prices will remain stable with the potential for growth in depreciation values if the economy remains strong Graham said Also noting economic factors is Black The biggest unknown is the future of interest rates For several years low interest rates drove new and used vehicle loans to consumers and floor planning loans to dealers New technology combined with a good economic environment contribute to good performance in both new and used vehicle markets he said In the end Donahue of EMKAY cautioned fleet managers to remain vigilant ensure frequent discussions and never make assumptions Blanket assumptions for depreciation levels for an entire fleet never should have been considered a best practice Fleet managers must handle depreciation levels on a vehicle by vehicle basis as driver utilization cycling policy etc vary across the board We predict strategic discussions circling around depreciation levels will become the norm in the fleet arena Donahue said demand will be one factor to consider Future used vehicle pricing is driven by supply and demand so it makes sense to examine these two variables separately when forecasting future secondary market and depreciation levels said Paul Fortin economist and VP of Strategic Modeling and Analytics at LeasePlan Demand is dependent on both economic and industry factors that have been generally favorable in 2015 The supply side of the equation while complicated by changes to funding type and term mix is based on the fact that new vehicle sales drive future used vehicle supply Since new vehicle sales have increased substantially over the past few years from more than 10 million SAAR in 2010 to more than 17 million SAAR in 2015 the growth in used vehicle supply will continue to put pricing pressure on future secondary market values The impact of increased supply is forecast to continue to impact overall depreciation We forecast a modest increase in depreciation costs over the next few years due to the record supply of returns anticipated in calendar years 2016 through 2018 The increase in supply will be primarily from off lease and rental car returns This trend is very similar to the record supply we encountered in the early 2000s said Black of Wheels Inc At that time it resulted in lower selling prices however there is a big difference this time The remarketing industry is better poised to handle the increased supply with better technology for both the buyer and the seller which results in market efficiencies and a larger geographic footprint In addition an anticipated increase in new vehicles costs associated with the new CAFE standards in model year 2017 will likely impact used values As in the past higher new vehicle costs can pull used vehicle values higher in the auction lanes But the long term forecasts could be good for pickup trucks In general larger vehicles will continue to outperform the compact car segment in the resale market as fuel prices continue to remain low The pickup truck seggasoline prices and the new models with updated technology being introduced into the market has led to increased demand Depreciation has remained steady but it is not clear if that will last Graham said Short Long Term Depreciation Forecasts Looking at depreciation forecasts for the near term there may be some challenges ahead As the economic demand matures and used supply increases across most segments we expect the depreciation levels to worsen from the strong depreciation seen in the past four years But 2016 depreciation levels are expected to still be better than the pre recession range at 16 to 18 percent depreciation Trucks are expected to continue to perform better than cars said Goyal of Black Book Vehicle cycling will also have an impact on near term depreciation Some fleets haven chosen to cycle more quickly than before SUVs and trucks in particular due to strength of the resale market and newer technology offered As a result more used vehicles are becoming available The near term impact may be to slow or reverse recent increase in resale value said Wuich of Donlen However Webb of Cox has a more optimistic outlook We expect the pace of vehicle depreciation will accelerate back to more normal levels in the years ahead as wholesale supplies grow as a result of larger off lease volumes Related pricing will likely be weakest for those models that had a high volume of heavily subvented leases originations in the past few years he said But according to Crocker of Merchants Fleet Management The OEMs are building more cars than ever The question is if the SAAR levels or declines into 2016 how will the OEMs respond with incentives to move additional volume and how long until the wholesale market ceases to keep up with the increased supply and prices erode Looking long term vehicle supply and AUTOMOTIVE FLEET I FEBRUARY 2016 48 WEBB Cox FORTIN LeasePlan USA