Car sales: From bad to worse

Even as credit starts to flow to potential car buyers, sales could fall to a 26-year low due to a sharp drop in purchases by car rental companies.

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By Chris Isidore, CNNMoney.com senior writer

NEW YORK (CNNMoney.com) -- Consumers may have had an easier time getting car loans last month, but don't look for that to fuel a rebound in battered auto sales when automakers report their January sales Tuesday.

Auto finance units GMAC and Chrysler Financial received $7.5 billion in federal loans between them since the waning days of December. That allowed them to make more attractive financing offers to a wider range of potential clients.

But forecasts of a modest pickup in sales to consumers are being more than offset by a sharp plunge in purchases by rental car companies, which in a typical year can buy close to 3 million vehicles a year.

That means that the outlook for auto sales in January and through the first half of 2009 is likely to be even weaker than the industry was forecasting just a month ago.

In fact, the big decline in rental car company purchases could lead to the worst month for auto sales since 1982, even worse than any of the months reported in the disastrous fourth quarter. Sales tracker Edmunds.com is forecasting that industrywide U.S. sales fell 30% in January.

January is typically the start of the car buying season for rental car companies as they start gearing up for their busy summer months. But the rental car companies, hit by a sharp drop in demand and a weak market for selling their older vehicles, are in the process of pulling back on purchases.

Pat Farrell, a vice president at Enterprise Rental Car, said the company started trimming its purchases last summer as the slowdown in the economy became evident. The company, which also owns the National and Alamo brands, is the world's largest purchaser of cars -- it buys about 800,000 vehicles bought in a typical year.

When Enterprise experienced an even sharper drop in demand in October, it further cut back on its orders, a pullback that took three months to implement and will be felt in its January sales numbers.

Farrell would not disclose how much purchases were cut at the privately-held company, but he said it would be more than 10%. He said the company is holding onto vehicles about two months longer than normal to make up for the reduced purchases.

Richard Broome, senior vice president at Hertz (HTZ, Fortune 500), also pointed to a double-digit percentage drop in demand for its cars and the weak resale market as the reasons it is pulling back on new car purchases.

"The million dollar question is what will demand be during the summer. At this point it's impossible to forecast that," said Broome. "We want to remain in the market and remain one of the U.S. automakers' biggest customers. But the market dynamics now are not favorable."

Rebound in consumer sales won't be enough to end Detroit's pain

So far this year, General Motors (GM, Fortune 500) and Ford Motor (F, Fortune 500) have both trimmed their forecasts for 2009 sales from the depressed levels they were projecting in December when they submitted turnaround plans to Congress. GM executives specifically cited weak fleet sales and rental car company purchases when they discussed GM's lowered January sales forecast.

GM chief sales analyst Mike DiGiovanni told analysts late last month that a sharp drop in fleet sales could take the seasonally adjusted annual sales rate, or SAAR, below 10 million in January.

The industry SAAR, which was at 15.3 million a year ago even as the recession started, hasn't fallen short of the 10 million benchmark since 1982.

The only bright spot for the industry is that there could be a modest uptick in the sales of cars and trucks to consumers.

"We're clearly seeing stabilization in the retail [sales] rate in the U.S. market," DiGiovanni said last month.

But this slight uptick is not nearly enough to lead to a significant rebound in total sales any time soon, other experts say.

"As a rule right now, people are holding onto cars longer, whether it's consumers or rental car companies," said Jessica Caldwell, industry analyst. Edmunds.com

The easier financing probably won't woo consumers back into dealerships either -- not as long as there's so much uncertainty about the economy and the job market.

"You still have the economy crushing the consumer," said Bob Schnorbus, chief economist for J.D. Power & Associates. "If you have some easing of credit, maybe you're preventing a month-by-month spiraling downward. But at best we're looking for retail sales to be relatively flat." To top of page

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