Economic Outlook and the Impact to Fleet Budgets

Economic Outlook and the Impact to Fleet Budgets

Greg Corrigan, Vice President, PHH Strategic

ConsultingFebruary 9, 2010

Presentation topics

•Year in review•Economic outlook for 2010 and beyond

– Overall economy– Fuel/Energy– Inflation, interest rates– Manufacturers

•Other cost considerations•Fleet strategies

Economists…

•Two economists, three opinions

Measures of Economic Activity

Moving 12-Month Total on ALL Roads

2,800

2,850

2,900

2,950

3,000

3,050

3,100

2005 2006 2007 2008 2009

Year

Veh

icle

-Dis

tanc

e T

rave

led

(Bill

ion

Mile

s)

Source: Department of Transportation

Measures of Economic Activity

Source: Bureau of Economic Analysis

Source: Bureau of Labor Statistics

Source: Bureau of Labor Statistics

Source: Bureau of Labor Statistics

Gross Domestic Product

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

Q1

04

Q2

04

Q3

04

Q4

04

Q1

05

Q2

05

Q3

05

Q4

05

Q1

06

Q2

06

Q3

06

Q4

06

Q1

07

Q2

07

Q3

07

Q4

07

Q1

08

Q2

08

Q3

08

Q4

08

Q1

09

Q2

09

Q3

09

% a

nn

ual ch

an

ge

CPI - New and Used Vehicles

-12%

-9%

-6%

-3%

0%

3%

6%

Se

p-0

8

Oct

-08

No

v-0

8

De

c-0

8

Jan

-09

Fe

b-0

9

Ma

r-0

9

Ap

r-0

9

Ma

y-0

9

Jun

-09

Jul-

09

Au

g-0

9

Se

p-0

9

Oct

-09

No

v-0

9

% a

nn

ual

ch

ang

e

All itemsNew vehicles Used cars and trucks

CPI - Maintenance, Repairs, Insurance

-4%

-2%

0%

2%

4%

6%

8%

Se

p-0

8

Oct

-08

No

v-0

8

De

c-0

8

Jan

-09

Fe

b-0

9

Ma

r-0

9

Ap

r-0

9

Ma

y-0

9

Jun

-09

Jul-

09

Au

g-0

9

Se

p-0

9

Oct

-09

No

v-0

9

% a

nn

ual

ch

ang

e

All items Motor Vehicle Insurance

Maint. and repair Vehicle Body Work

Looking ahead

•What’s good– Leading indicators turning around:

• ISM• Consumer confidence• Hiring intentions

•What’s worrisome– Falling value of dollar– Exploding federal and state deficits– Inflation potential– Stimulus going away– Real Estate, residential & commercial– Global debt fears

Looking ahead

The Positive

• Money supply growth

• Lower housing prices

• Government spending

• Stock market – a leading indicator

• Yield curve – steep curve is bullish

The Negative

• Money supply growth

• Lower housing prices

• Government spending

• (un)Employment – a damper on consumer spending

• Banks still slow to lend

• Pending tax increases and regulation

Source: http://money.cnn.com

Survey says…

•Forecasters surveyed by WSJ:– Improved confidence to lead consumers to spend more– Employers to slowly increase hiring over next 12 months– Unemployment rate to climb some more before falling mid-

2010– Job-market weakness expected to keep Fed from boosting

short-term interest rates until at least August 2010

Fuel/Energy

• For 2010 futures market and the Energy Information Administration currently

forecast $2.85 for gas and $2.96 for diesel, an approximate increase of 17% over

2009. It is possible the forecast may increase in their next update, as commodity

prices have risen and the economic outlook begins to improve

• Recommend budgeting for $3 a gallon this year

• Diesel will probably just stay ahead of regular gasoline

Oil and Gas Prices

$1.50$1.75$2.00$2.25$2.50$2.75$3.00$3.25$3.50$3.75$4.00$4.25$4.50$4.75$5.00

Jan-09

Feb-09

Mar-09

Apr-09

May-09

Jun-09

Jul-09 Aug-09

Sep-09

Oct-09

Nov-09

$/g

all

on

$30

$40

$50

$60

$70

$80

$90

$100

$110

$120

$130

$140

Cru

de o

il $/barrel

Regular Gas $ per gallonDiesel $ per gallonCrude Oil OPEC $/barrel

Manufacturers

• What is the new reality for production?

– 10MM? 13MM? 15MM?

– Fuel prices?

– Interest rates?

– Credit availability?

• Adjusting to new production schedules, staffing

• Still erratic demand at retail level

• The Michigan-based Center for Automotive Research predicted deliveries will climb to 12.4 million from 10.4 million in 2009. They believe U.S. auto sales will rise 20 percent in 2010, buoyed by pent-up demand and stronger credit markets. The forecast exceeded other projections by consultants and analysts for domestic industry deliveries which range from 11.3 million to 11.8 million light vehicles.

Manufacturers

Source: Bureau of Economic Analysis

Other expense items

• Maintenance / Tires• Insurance / Accidents• Regulatory and Tax – Look out

• Fleet composition (age and mileage) is large determinant of total repair costs

• More vehicles are falling outside warranty coverage window

• Occasional parts supply shortage for newer vehicles

Budget Expectations for 2010

•Expect base interest rates to start climbing in the second half of the year

•Expect vehicle prices to increase in MY 2011 and beyond

•Expect continued strong resale market•Expect higher fuel prices•Expect normal inflation for maintenance, however remember the age of your fleet

•Expect higher taxes and violations collections•Expect total budget impact to be 5-7% increase over 2009, largely due to fuel

Retrospective: Fleet Strategy for 2009

•Recommended deferring replacements– Economic uncertainty– Manufacturing uncertainty– Corporate downsizing– Used vehicle values were at all-time lows– No credit for retail buyers or new or used vehicles

•How did that work out?– Case studies showed a savings of $600-$1,500 per

vehicle, net of all expenses•What about 2010?•How about…the opposite

Fleet Strategies

•Manage for the upside•“Size up” your fleet•Fall replacement – order early•Plan for evolving production schedules

•Change MPG profile of fleet before fuel prices soar

•Get ahead of costly vehicle repairs•Spec for future resale market

Questions?