Fleet Sales: Outdated Automaker Metric?

Chrysler President Jim Press says 'retail is the bulk of the market. No one is going to make money just selling fleet.'
Publish date:

The automobile industry produced a slew of bad numbers in February, but one of the steepest declines -- the 71% drop in


fleet sales -- was just the way Chrysler wanted it.

Since 2007, the Detroit Three have sought to de-emphasize fleet sales, which at expanded levels had become symbolic of a flaw in their former business models. To create work for employees who could not efficiently be laid off, automakers produced an excess of cars that they sold cheaply, sometimes below cost, to rental car companies, government and corporate fleet buyers.

Today's economy has forced a dramatic overhaul of the old Detroit business model. Labor costs are falling, fuel efficiency is rising, production is being slashed to better meet demand and fleet sales are lower. No one has been more adamant than Chrysler in embracing the move to reduced fleet sales.

"We started restructuring 17 months ago (and) we're putting our resources in retail," said President Jim Press, in a sales conference call with reporters and analysts. "Retail is the bulk of the market. No one is going to make money just selling fleet."

In February,

General Motors

(GM) - Get Report

reported an even steeper fleet sales drop than Chrysler, with a 75% decline, while


(F) - Get Report

said fleet sales declined by 52%.

At GM, the decline occurred largely because rental car companies "took 2009 models in the summer, then canceled or reduced (orders) and decided to hang on longer," said Mark LaNeve, sales vice president. "The traditional nine- to 12-month turns became 22-month to 24-month turns." GM's long winter production slowdown also has contributed to the drop.

Meanwhile, Ford already has the lowest daily rental mix among the Detroit Three, said analyst George Pipas, in an interview. In 2007, only 12% of Ford sales were to daily rental companies. While low-margin, "this business provides valuable exposure to customers, some of whom might never try a Ford product," Pipas said. "People who fly on business and pleasure are new car prospects."

In reality, fleet sales have pluses and minuses, says auto analyst John Wolkonowicz of IHS Global Insight in Lexington, Mass. On the one hand, they "are undesirable because you don't make much if any money and they drag down residual values, which hampers the ability to offer competitive leasing costs, and to sell to customers who value looking into things like 'What's the resale value going to be?' "

"The upside is that it keeps the factories humming when you have a slow sales situation," he says. "With the old UAW contracts, that was mandatory, and even now fleet can really come to your aid. In December, GM was able to pump (business) into fleet and its numbers looked pretty good.

"Right now, the market is so weak, consumer confidence is so low, and sales and production are so low that automobile companies are looking for every straw they can grasp to tell a positive story, and fleet sales can help prop up numbers," Wolkonowicz says.

Standard & Poor's analyst Efraim Levy marks the distinction between types of fleet sales. "Rental fleet sales have poorer margins," he says. "The government and corporate sales have better, more reasonable margins."

In general, Levy said, fleet sales "produce profits, plug up volume and keep the facilities running, but each company has to figure out what is its optimal level."