Cars
MPG Takes Center Stage
With fuel at record prices, hybrids and gas-muzzling models replace SUVs as showroom stars.
By Mark Solheim, Senior Editor, Kiplinger's Personal Finance
November 2005
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When the 2005 models hit showrooms last year, buyers still hungered for faster, bigger vehicles. Fuel economy was so 1970s. But as the 2006 models debut, their miles-per-gallon rating is the pivotal statistic. Big SUVs gather dust on new- and used-car lots while Honda Civics, Toyota Corollas and hybrids are as scarce as $2-a-gallon gasoline.
Tiffany and Cory Heikkila focused on fuel economy when deciding to replace their 1995 Lincoln Mark VIII, powered by a gas-sucking, 4.6-liter V8 engine. After Hurricane Katrina pushed gas prices above $3 a gallon, the Sugar Land, Tex., couple became enamored with the Honda Accord Hybrid. They wanted to reduce the cost of their 50-mile-a-day commute into Houston, but they also wanted a roomy, four-door sedan with some zip. With fuel economy approaching 40 mpg on the highway and a bit more power than the gas-only V6 Accord, Honda's gas-electric hybrid fit the bill. The dealership had one in their favorite color (silver), and they bought it -- just in time.
Two weeks later, Hurricane Rita forced the evacuation of Houston. Cory, 32, stayed behind, but Tiffany, 35, decided to take their 5-year-old son, Presley, to her dad's house in Austin. They left with a nearly full tank of gas two nights before Rita made landfall. "We got caught in traffic almost immediately," says Tiffany. "We were crawling." The usual three-hour trip to Austin stretched to 11 hours, but every time Tiffany stopped, the Accord Hybrid's auto-stop feature shut down the gasoline engine and the electric motor took over. While SUVs lined up to refuel, Tiffany kept going. "I still had half a tank when we pulled into Austin," she says.
Sales of big, truck-based sport utilities -- the pride of Detroit -- are tumbling, but hybrids can't take up much of the slack. The ten models available now represent only a tiny fraction of vehicle sales (learn more on hybrids and their true cost). Instead, affordable small cars and fuel-efficient Japanese models are selling briskly. And because size still matters to some, buyers are turning to crossover SUVs, which are built more like cars and get better gas mileage. Large sedans have also jumped in popularity. No matter which kind of vehicle consumers are buying, many of them are choosing smaller, less-thirsty engines.
But good gas mileage isn't first on everyone's shopping list. Luxury cars -- mainly high-horsepower, premium-gasoline drinkers that cost $30,000 and up (see the tables in the December issue of Kiplinger's Personal Finance) -- are selling almost as well as they did last year. If you can afford a pricey car, you can afford the gas. And some analysts think the flight to fuel efficiency could be a blip, especially after post-hurricane gas prices settle down. "We could see people who had been in full-size SUVs realize that the smaller vehicles aren't meeting their needs, and they could go back," says Jeff Schuster, of J.D. Power and Associates. He points out that long-term buying habits won't be affected until we have sustained fuel prices of $3.50 to $4 a gallon.
Sizing up the market
The average sticker price of a new car is about $29,500 -- $600 less than a year ago, reports Edmunds.com. But haggling and rebates push the transaction price down to $26,140, which is about the same as a year ago. The Detroit carmakers have been trying to wean buyers from rebates, and rising interest rates have reduced the number of low-rate financing offers. But discounts are still critical to keeping sales strong.
Sales surged this past summer when General Motors introduced employee-discount pricing on 2005 models, and Ford and Chrysler followed suit. The bottom-line prices weren't much lower than buyers had been paying before, but shoppers felt relieved of the burden of haggling. And it simplified the deals. "Do you recall the ads prior to employee pricing?" asks Paul Taylor, chief economist of the National Automobile Dealers Association. "It was package A and package B and $500 if you graduated from college recently and $1,000 if you're a veteran. You couldn't do the math in the 30 or 60 seconds the ad ran."
As the new model year gets under way, GM, Ford and, to a lesser extent, Chrysler are touting value pricing in lieu of confusing incentives. Value pricing is designed to set stickers closer to the transaction price. But because value prices are higher than employee prices, consumers remain wary. More than half of potential buyers surveyed by Harris Interactive and Kelley Blue Book say they're not likely to purchase a new car without incentives. Not surprisingly, when traffic to the big-three dealerships stalled in October, GM, Ford and Chrysler started offering a smattering of rebates on 2006 models, with up to $3,500 back on a few new-model SUVs. It's a good bet that either generous incentives or employee-discount pricing will return before year-end, as Detroit carmakers make a last-ditch effort to boost market share for the 2005 calendar year.