Gas Guzzlers Still Selling

Sales of gas-guzzling sport/utility vehicles (SUVs) will sink when fuel prices rise. That's just common sense. Then again, if common sense ruled today's economy, money-losing dot-com companies wouldn't be commanding $300 a share for their stocks.

So in spite of rising interest rates and soaring energy prices - troubling signs that usually put the brakes on the "old economy" - the technology-based "new economy" continues to barrel full-speed ahead, slurping gas all the way.

After hitting record lows where regular unleaded dropped to less than $1 per gallon in many areas of the U.S., gasoline prices soared 32% in 1999 and another 10% during the first two months of 2000. In California, regular unleaded climbed to more than $2 per gallon.

Even so, total vehicle sales sold at an astounding seasonally adjusted annual rate (SAAR) of 19.2 million units in February and are forecast by sister publication Ward's Automotive Reports to sell at a 17.9-million rate in March. SUVs and other light trucks continue to be as popular with consumers as they were when gasoline was $1 per gallon - despite some misleading news reports to the contrary.

Earlier this year several publications pointed to rising inventories of SUVs from December to January as a sign they were losing their appeal.

However, experts say that data was misinterpreted; automakers always pump up inventories during that period in anticipation of the spring selling season - the strongest sales period of the year.

Consumers would need to see significantly higher gas prices - above $1.80 a gallon - as being permanent before they would make dramatic changes to their vehicle buying habits, says Paul Taylor, chief economist for the National Automobile Dealers Assn.

"Our contacts are seeing absolutely no evidence, thus far, to suggest consumers are eschewing SUVs because of higher energy prices," says Jason Trennert, managing director and economist at the ISI Group in New York. ISI surveys 60 dealers per week who own a total of 500 dealerships.

The reasons are manifold, but most analysts agree that a booming economy, high consumer confidence and the relative affluence of today's SUV buyers have made fuel economy a low priority on their shopping lists. As long as the U.S. economy keeps a full head of steam and there are no 1979-like fuel availability problems, demand for SUVs is expected to remain strong.

"In a recession, people tend to gravitate more toward their needs than their wants," says George Pipas, Ford Motor Co.'s manager of sales analysis. That could translate into consumers choosing more practical and fuel-efficient sedans and minivans over SUVs. But with the U.S. economy strong, incomes high and cars and trucks still very affordable in relationship to household income, consumers still are choosing what they want over what they need. And they want SUVs: for their image, for their all-wheel-drive capabilities, and - sometimes - for their perceived safety.

What's more, even though consumers complain bitterly about rising fuel prices, most aren't suffering much of a financial hardship and would save little if they jumped from an SUV to a less-thirsty sedan.

Assuming a scenario of a driver paying 90 cents a gallon all last year and paying $1.50 all this year while driving a typical SUV 15,000 miles annually, with average fuel economy of 18 mpg, a typical driver will pay $400 more for gas this year, or $7.69 more per week.

The driver of a more fuel-efficient 6-cyl. Toyota Camry or Honda Accord that averages 24 mpg would spend about $300 more per year in the same scenario. At least according to Mr. Pipas' calculations, switching from SUV to car would save a paltry $100 per year, or $1.92 per week.

But what about drivers of the biggest sport utes, the ones that are sometimes lucky to just get mileage in the double digits? Well, their drivers probably can afford to spend another $10 or $20 a week at the pump: the median household income of a gas-chugging Ford Excursion is $95,000 a year; for a Lincoln Navigator it's $135,000.

Furthermore, Lincoln Merrihew, head of forecasting for North and South America at Standard & Poor's DRI, says 2000 will likely see automakers pricing SUVs very attractively, just to keep the metal moving. For instance, General Motors Corp. is producing its new-generation Suburban/Tahoe/Yukon/Yukon XL right now, and it's under plenty of pressure from Wall Street to make sure they aren't just home runs, but "out of the park, into the parking lot and down the street" home runs. Mr. Merrihew says.

That means very attractive pricing, and pressure on competitors such as Ford to keep up. With an average of $15,000 pre-tax profit on each of these behemoths, that leaves lots of room for enticing perks.