Cheap Gas Has New Car Buyers Thinking Big

Remember when the U.S. consumer was steering away from large, gas-guzzling automobiles? With gas prices hanging below $3 a gallon over the last 18 months, industry sales are now flourishing as many consumers are choosing the biggest vehicles they can find.

Last month, Americans bought 1.5 million vehicles, a 3.6 percent bump from a year ago, according to data provider Autodata, for a seasonally adjusted annualized pace of 17.4 million vehicles. That puts automakers on track for a second consecutive annual sales record, and delivers an upgrade from the industry’s March report, which had sales on track for a 16.6 million annual pace.

April’s 1.5 million-vehicle mark is a new record for the month, eclipsing the old mark set 11 years ago. In 2005, however, those sales were being generated with automakers offering huge discounts and lease deals to keep churning out more cars and trucks, with some vehicles even being sold at a loss.

Now, with companies operating at a lower factory capacity in the wake of the Great Recession, automakers can demand higher prices to meet stronger demand. The industry reported a $1,500 jump in average transaction prices last month, nearly double the average.

The rebound comes at a key time for the world’s automakers who count on the U.S. as the most profitable market in the world. Margins are slim to nonexistent in Europe and earnings in China, while relatively strong, are split with joint venture partners.

For Detroit automakers, the chance for record 2016 profits remains very much alive. The Big Three — General Motors, Ford, and Chrysler — earned $6.8 billion in combined operating profit from North America in the first quarter, or 86 percent of total global operating profit for the group during the period.

The Nasdaq OMX Global Auto Index [CARZ] is down more than 30 percent over the last 12 months, compared to the That New Car Smell motif has fallen 18.2 percent in the same period. There may be upside here as strong profits could push investors to pile into the stocks of major auto makers.

Keep on truckin’

The triple threat of low fuel prices, favorable credit conditions and a strengthening economy continue to bring buyers into dealerships. Fleet sales to rental-car companies, government buyers or corporate accounts drove much of the gains in the first quarter, according to the Wall Street Journal. Meanwhile, retail sales to individual buyers have held steady.

With gas prices hovering just north of $2 a gallon on average across the country, customers continued to choose larger — and pricier — trucks and sport-utility vehicles, with sales of those models climbing 11 percent in April. Meanwhile, passenger-car sales fell 5 percent.

The shift has given companies like Ford Motor Company F an outsized share of the benefit. For the second month in a row, the company delivered more than 70,000 F-series pickups—its most profitable model— and sold the most SUVs in its history. Toyota also sold more trucks and SUVs than ever.

With buyers showing their heavy favor toward SUVs and trucks, however, manufacturers may be forced to discount cars to keep their inventory moving. While that’s good for consumers in the near term, industry watchers say incentives can ultimately flood the market with cars and hurt resale values.

At Fiat Chrysler Automobiles FCAU, car sales fell 8 percent April, and Ford’s own car sales fell 12 percent. Hyundai’s two top-selling cars, the compact Elantra and midsize Sonata, each saw big sales declines.

On the other hand, big price wars are brewing because many auto factories can easily switch from cars to SUVs (many SUVs are built on the same underpinnings as cars), says Rebecca Lindland, a senior analyst for Kelley Blue Book. Indeed, Ford and Fiat Chrysler both reported strong North American margin growth during the first quarter when both companies laid out their plans to shift more investment into U.S. truck and SUV production.

Just for good measure, sales of General Motors Company GM all-new Chevrolet Malibu and Honda Motor Compoany, Ltd. HMC new Civic each rose nearly 25 percent.