In its September – October Industry Report, Automotive Lease Guide provides an analysis of rental fleet penetration by segment and its impact on resale values:

Fleet sales have served many functions over time; some manufacturers used rental fleet sales to help gain exposure for a new product by offering limited vehicles to reputable fleet companies, while others used rental fleet as a channel to off-load excess inventory when actual demand was below production levels.

Historically, through proprietary modeling and research, ALG found that high rental fleet penetration levels not only have had a negative impact on residual values, but on perceived quality and brand image as well. In the past, many rental fleet companies purchased the most basic trims available for a particular model with little or no residual value adding equipment. Some manufacturers also offered fleet-only variants that had little equipment and occasionally had less potent powertrains. These strategies served to create a negative image for the fleet model, while increasing used supply on less desirable trims, which diluted the strength of a given model nameplate.

With many manufacturers becoming increasingly aware of this negative impact, the rental fleet strategies have shifted. The trim mix offered to rental fleet companies has begun to include better-equipped vehicles, while many manufacturers have also staggered rental fleet sales in order to mitigate the negative impact from large quantities of used supply returning to the market within a short period of time. While ALG has always recommended a conservative rental fleet strategy, there is some flexibility in rental fleet penetration levels for certain segments.

The chart above shows the results of ALG's proprietary custom modeling. Generally and historically speaking, ALG has found that the negative impact to residual values increase when rental fleet penetration levels exceed 10% for mainstream brands, and 5% for luxury brands. The updated custom modeling has shown the following results for selected segments:

• The Entry Compact and Mid Compact segments see little negative impact on resale/residual values for rental fleet levels up to 15-20%.

• The Midsize and Fullsize segments are consistent with ALG's recommended threshold of 10% rental fleet penetration, while the Minivan, Compact SUV, Midsize SUV and Fullsize SUV segments show that maintaining rental fleet levels consistent with the segment average yields optimal resale values.

• Near Luxury modeling yields results consistent with ALG's established threshold.

Conclusions:
ALG maintains that the generalized rule of 10% and 5% rental fleet penetration for the mainstream and luxury brands remains the key gauge to avoid adverse impact on residual values but is also incorporating these new updated findings. Furthermore, ALG closely monitors rental fleet penetration levels that diverge significantly from optimal levels, as well as trends well above segment averages.