Automakers that depend on the luxury market or fleet sales could face the toughest challenges as the COVID-19 pandemic and its economic consequences play out, experts say.
“The fleet market is dead, dead, dead right now,” said auto analyst Dennis DesRosiers. “Virtually zero business; you are not using any of your cash to renew your fleet. There are no airports, there are no trains, there is no need for at least 70 per cent of the daily rentals out there, if not higher.”
While airports are open and airlines are operating, they are nowhere near capacity. The Canada Border Services Agency last week said there was a 98 per cent drop year-over-year in travellers flying to Canada between May 25-31. The agency said 762,620 travellers arriving that week in 2019 to just 16,939 a year later.
Luxury brands, meanwhile, could endure a bigger hit than mainstream brands as some customers move downmarket to save money, said Robert Karwel, J.D. Power senior manager of automotive practice in Canada.
“Luxury manufacturers in the last number of years have been going head-over-heels in a downmarket push to extend volume, to make their brands more accessible. People want to put those brands on their driveways. But now it’s those same people that are losing their jobs, don’t have employment, and they’re not re-striving for those entry luxury cars because they can’t afford it anymore.”
To be sure, every automaker will hurt this year, particularly in the near term as new-vehicle sales plunge and the industry struggles to resume production. Even in many best-case scenarios, when the outbreak fades and the economy begins to reopen by the third quarter, total annual new-vehicle sales are expected to fall well short of what was expected when the year began. After May sales plunged 44 per cent year-over-year, Scotiabank Economics and DesRosiers Automotive Consultants both said annual sales would fall at least 20 per cent. Toronto Dominion Bank in a recent report also warned that 2020 sales could fall more than 20 per cent.
Government-mandated shutdowns of nonessential businesses and stay-at-home orders designed to slow the spread of the coronavirus brought the North American auto industry to a virtual standstill from mid-March to early May. Auto plants were closed many dealership showrooms were temporarily shuttered. Those that remained open saw greatly reduced demand.
While many customers are expected to return to showrooms when the crisis eases, it was unclear which vehicles would prove to be most in demand or if consumer tastes would shift. The 2008-09 financial crisis moved consumers away from the bulky SUVs and trucks favoured earlier in the decade and toward smaller, more economical cars.
‘CRAZY CHEAP’ OIL
Karwel said that could be less likely this time around, in large part because gasoline remains “crazy cheap” in the wake of the recent oil-price collapse. That would likely be a boon to the Detroit Three automakers, which are dependent in large part on the success of their pickups.
“Someone who wants a pickup, they’re still going to want a pickup after this because there’s a perceived need for them to have it,” he said. That could help to offset the major hit it appears they will take due to the collapse of fleet sales. DesRosiers said General Motors Co., Ford Motor Co. and Fiat Chrysler Automobiles “dominate” the fleet market, which typically accounts for about 20 per cent of the overall new-vehicle market.
He said that because fleet usage is down dramatically due to the pandemic, it was unlikely that lost fleet sales would ever return since such purchases are tied to usage.
NO PENT-UP DEMAND FOR FLEET
“Those aren’t vehicles that get pent-up demand,” he said. “If they’re not being used, they’re not being replaced.”
In general, automakers were thought to be in better shape than they were heading into the 2008-09 financial crisis. Kristin Dziczek, vice-president of industry, labour and economics at the Center for Automotive Research in Ann Arbor, Mich., said automakers have fewer looming liabilities on their balance sheets and have a “decent amount” of cash and liquidity.
But the unprecedented nature of the crisis is sure to test many of them.
“Automakers get paid when a car comes off the line and goes to a dealer,” Dziczek said. “So if you’re not making cars, you’re not making revenue, but you still have expenses.”