Fleet News

Depreciation costs increase as list prices go on rising

Depreciation is expected to become a greater cost burden for fleets over the next few years as expected residual value improvements are cancelled out by ballooning list prices.

Although the depressed new car market since the recession will create fewer good examples of used cars over the next few years, new research by market analysts at CAP has found that steep increases in new car prices will offset any benefit and potentially result in a higher pence per mile cost for depreciation.

CAP’s Mark Norman presented the evidence at the recent ACFO conference and told Fleet News that people shouldn’t be surprised by the news.

“It does surprise many,” he said, “but that’s because they tend to concentrate on residuals rather than depreciation.

“For depreciation to remain level you would need to see massive increases in future used car values and used prices are remarkably static over long periods whatever happens to new prices.”

For fleets to maintain the same level of depreciation as they had become used to, they would have the choice of either increasing their monthly car allowances or drivers face having to downsize or down spec.

Car manufacturers have come under pressure from exchange rate fluctuations.

Norman said: “The pound has dropped over 18% against the euro since January 2008 and the UK is now the cheapest place in Europe to buy a new car according to last year’s EC competition report, despite the rises we are experiencing.”

CAP’s analysis shows that for some key fleet models, people are actually paying less for new cars than they did 10 years ago.

The three year/60,000 miles value for a typical Ford Escort in January 2000 was £3,875 compared with £3,950 for the equivalent Ford Focus in December 2010.

Comparisons for a diesel Vauxhall Vectra and a diesel Audi A4 over the same period show the more modern versions worth slightly less.

Norman said: “These examples show that despite all the increases in technology, economy, features, comfort and so on that used car buyers are actually paying less for used cars now compared to 10 years ago.

"It also illustrates that relying on increases in used values to make up for higher list prices is probably unrealistic.”

He also warned that depreciation could be thousands of pounds higher over the benchmark period for new cars being procured now, compared with the vehicles they replace, which is likely to results in higher purchase or contract hire costs.

Norman said it would be difficult for fleets to protect themselves against these higher costs, although there might be some avenues open to them that would help mitigate the hardship.

He said: “If organisations are in a position to impose lower specification cars on drivers and encourage downsizing or downgrading then costs can be probably be maintained at similar levels.

“However, if they want to replace like with like then it’s more likely they’ll need to go knocking on the FD’s door and ask for a larger budget.”

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