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How best to manage vehicle depreciation

Fleet Management Posted by Bill Womack, VP of Sales on June 22, 2016

UnionLeasingtruckvalue-01.pngLast month, Black Book released a residual value forecast that highlighted rising vehicle depreciation

Here are highlights from the forecast:

  • Due to the increase in the supply of used vehicles, the average residual value of a three-year-old vehicle — the most commonly remarketed fleet vehicle — could fall from 52% (in 2016) to 47.8% by 2019.
  • Retention values have been on a steady decline from 2013, when they peaked at 54.3%. Black Book pointed to credit availability, continued growth in demand, and consistently low gas prices as reasons for high retention rates in the last five years.

With this forecast in mind, it’s probably a good time to talk about how fleet managers can best manage depreciation. Like gas, there’s nothing we can do to control depreciation rates, but there are a few strategies fleet managers can use to better position themselves for the remarketing stage.

Negotiate the lowest vehicle cost.

This one might be a given, but it really does make a difference. The lower you go, the less you stand to lose in depreciation at the end of the lease. It helps to look for negotiating room in competitive assistance programs, OEM holdback rates, floorplan support or dealer advertising allowances. Your leasing partner should know about these additional areas to leverage in negotiation.

Select the right vehicle.

This tip isn’t just about the best make and model for the job; it’s also about resale value. Research the used-vehicle market (better yet, have your fleet management partner help!) and check out which models and feature options are bringing additional resale. In work trucks, for example, there might be a preference for certain powertrain configurations.

Perform routine preventive maintenance.

Vehicle condition is one of the top six major areas that sellers, and buyers, of used vehicles consider when determining value—this includes mechanical and physical condition. Most fleet managers have a preventive maintenance schedule—the issue is enforcing, tracking and documenting it accurately.

Consider a driver purchase program.

Fleet vehicles can be sold through any number of avenues: auction, wholesalers, brokers, etc. Some companies actively market their resale vehicles to employees through a special program. The sale price tends to be higher than any reseller’s market price, but lower than what the employee can find in a retail market for the same vehicle.

Find the right time to replace your fleet.

The model year of your vehicles is a big factor in resale value. Consider these two scenarios.

  1. You replace a vehicle in July 2016 with an upcoming 2017 model-year vehicle. Your fleet gets the full 2017 year credit when you sell that vehicle in 2019.
  2. You replace a vehicle in February 2016 with a 2015 model. The resale market will punish that 2015 model year with a value penalty when it’s time to remarket in 2019.

If you replace your vehicles a little early, or hold on to them a few months or a few thousand miles past normal replacement, you can really benefit. Jumping into the market at the perfect time is another way your leasing partner’s expertise can be invaluable.

Consider short or extended cycling.

As we saw from Black Book’s forecast, the market for used vehicles changes—highs and lows appear all the time, and for various reasons. We suggest keeping current on the market, so you can be strategic. When markets are very strong, you might “short cycle” some vehicles in your fleet, replacing them before they’ve reached normal policy guidelines. When markets are unusually weak, consider keeping some vehicles in service longer, until markets recover. Of course, neither decision should ever be made lightly, in case the plan backfires. If you do choose to go this route, it’s best to do so with only some of the fleet.

Above all, original cost and resale process are the two main elements in vehicle depreciation. Having said that, a lot can happen in between and fleet managers can influence how large — or small — that cost will be.

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