Fleet sales are an important part of many automakers' businesses. Sales of multiple vehicles to commercial or government customers can be steady and profitable, and they're important markets for trucks.
In the U.S., both Ford (NYSE:F) and General Motors (NYSE:GM) compete hard for commercial and government fleet sales -- and Fiat Chrysler (NYSE:FCAU) has said that it would like to win more of that business.
But sales to rental-car fleets are a different story. GM said recently that its sales to rental-car fleets are down 11 percent in 2015. That's not lost business; it's a planned reduction.
Why is GM cutting back on these sales?
How improving used-car prices helps GM sell new cars
Automakers like to make some sales to rental-car fleets. It's profitable business, and it exposes potential new customers to their products. But in recent years, both Ford and GM have cut their rental-fleet sales considerably.
To some extent, it's because rental-car sales are less profitable than retail sales, and both automakers have worked to boost their profit margins.
But the cuts are probably mostly related to GM's leasing efforts.
The price and profitability of a new-vehicle lease is determined by the vehicle's residual value. That's an estimate of what the car will be worth on the used-car market at the end of the lease. It's typically expressed as a percentage of the car's selling price when it's new.
For years, GM in particular had terrible residual values. As recently as 2009, GM's average residual value was just 36.5%. (The top mass-market brands have residual values just over 50%.) That was due in part to the relative undesirability of GM's vehicles, but it was also due to the fact that the market was flooded with recent used GM products, because rental-car companies sell off their cars in bulk after a couple of years.
GM's efforts to improve quality have helped to boost its residual values since, as have its efforts to limit rental-fleet sales. According to figures from TrueCar, GM's average residual value is now 47.02%, just shy of the industry average (48.61%).
When it comes to leasing, a higher residual value is good. It means that the financing company can count on selling the car for a good price at the end of the lease. That in turn means it can charge less for the lease itself. The upshot is that the automaker can offer a more competitive lease deal while still making money.
With new-car prices rising, leasing can make a lot of sense
Leasing has always been a big part of luxury-car sales. But it has become more important for mainstream models as average transaction prices have increased. GM's average transaction prices hit a record $35,800 in November.
Longer-term loans have helped to get more buyers into new cars with an affordable monthly payment as new-car prices have risen. But for customers who don't want to be spending the next six or seven years paying off their new car, leasing can make a lot of sense. And thanks to its improved quality, and its efforts to roll back its sales to rental-car fleets, GM is now in a better position to profitably compete for those lease-minded customers.
John Rosevear owns shares of Ford and General Motors. The Motley Fool recommends Ford and General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.