Fleet News

Fleet funding: vehicle acquisition

Automotive industry expert Professor Peter Cooke has tracked the developments in vehicle acquisitions in a new report

How do you acquire your vehicles?




Respected fleet expert Professor Peter Cooke, of the University of Buckingham, has been asking this very question as part of his in-depth report into the fleet industry, Business Car Perceptions.

The report, produced in conjunction with consultancy Bearing Point, examines the current state of the industry and the changes over recent years based on a survey of hundreds of fleets of all sizes.

CURRENT STATUS

Currently, contract hire is the most popular form of acquisition by fleets with more than 10 vehicles – 55% of firms use it. Outright purchase is also popular and is used by 47% of fleets.

Cash for car is an option for a quarter of all fleets, and 23% use mileage allowances for drivers in their own vehicles.

Also popular are finance leasing (13%) and hire purchase (12%).

“Outright purchase, probably the simplest method of acquisition, has been among the most popular, particularly with larger fleets, where they can often borrow funds at aggressive rates,” said Prof Cooke.

“Over the years the most consistently popular acquisition method has been contract hire, with the exception of smaller fleets. Leasing companies are increasingly targeting small fleets as this sector offers the largest potential for growth.”

Prof Cooke says personal contract hire schemes are becoming more popular, despite significant start-up costs.

“More than 10% of companies claim to use one or other of the personal finance methods,” he says.

“Mileage allowance has become increasingly popular, probably driven by the tax situation and employees’ urge to be independent of the company for car provision.

“However, there is always a risk that this relies too heavily on trust and employees recording the correct mileage. It is all too easy to round up the figures.

“Equally important is that these units are relatively time consuming to manage and regular checking and a clear audit trail are mandatory if everything is to work smoothly.”

TRENDS

Prof Cooke’s research has shown a decline in middle and senior management taking up a company car option.

“I suspect a lot of that is associated with cash for car,” he says. “People are taking the money and charging back mileage to the company.”

The rise of employee car ownership schemes (ECOs) have also made an impact.

“It’s interesting seeing the way it’s moved over that period,” Prof Cooke says. “The company car years ago was like a badge of rank but now the whole thing has changed.

Now we are starting to see people taking the money.”

The number of fleets using contract hire has fallen by 10% since 2003, while cash-for-car provision has risen by 21% and mileage allowances by 13% since 2000.

“These methods are based on employees providing their own car for use on business,” says Prof Cooke.

“This is an option coming under increased scrutiny as more importance is attached to duty of care issues, particularly in light of only a quarter of respondents claiming to be “totally aware” of changes taking place in management responsibility for employees’ own cars on business.”

This dichotomy between growing responsibilities and a move away from “controllable” methods towards cash alternatives is worrying.

But Prof Cooke believes that as the industry realises the problems cash alternatives can pose, there could be a resultant boost for another sector.

“I can see more and more companies having strong links in the future with daily rental companies,” he says.

“If someone doesn’t have a company car they will use daily rental because it will be of the appropriate quality. I think we’re going to see more and more growth in that area – it’s one to watch in the next few years.”

THE FUTURE

Larger fleets expect to change the way they acquire vehicles over the next couple of years.

Among fleets with more than 1,000 vehicles, 57% say they plan to make changes – logical, says Prof Cooke, when considering the regularity with which they buy and sell vehicles.

ECOs seem to be the most popular future venture – 39% of respondents plan to offer them, including 100% of fleets with between 500 and 999 vehicles.

Cash-for-car schemes also look set to become more popular. Some 31% of firms expect to see them introduced. The next most likely options are outsourcing all acquisitions and switching to company cars.

“These strategic expectations would indeed suggest that the fleet market is in a state of flux,” Prof Cooke says.

“Growth in the ECO segment clearly exerts pressure on their company car scheme in favour of ECO. Perhaps it would be fair to say that drivers and companies are both keeping their options open and any change in fuel price, inflation or tax could change the situation quite quickly.”

REASONS FOR CHANGE

It will come as no surprise that money is the main reason fleets are looking to change.

Vehicle price or contract hire rate was the most important or one of the most important issues for most fleets questioned, with reliability second most important for all but the largest fleets.

Away from those issues, fleets have varying ideas about what is important. Fuel consumption and CO2 emissions are high priorities for medium and smaller fleets, along with discounts, special offers and wholelife costs.

WHY LEASE RATHER THAN BUY?

The lack of capital investment is, perhaps unsurprisingly, the main reason for opting to lease vehicles rather than buy, but also high on the list is the ability to forward budget.

A reduction in administration also has strong appeal, as does the complete removal of any residual value risk.

“The clear message is that respondents have a broad spectrum of needs or benefits from contract hire,” Prof Cooke says.

“That, in turn, could reflect on the range of services required from the leasing industry and the importance of offering a service tailored to individual operators, rather than a standard off-the-shelf product.”

Fleet reaction

  • Robert Kingdom,
    Head of marketing, Masterlease

    “The headlines from Peter Cooke’s report serve to highlight the contradiction between the growing corporate responsibility agenda and the continuing trend towards ‘outsourcing’ the management of the company fleet to employees, through cash for car schemes.

    Not only do these create problems meeting health and safety and duty of care responsibilities, but they tend to have a negative environmental impact.

    “Research shows that drivers are 24% more likely to choose a used car or sport or 4x4 models when opting out of the company scheme, contributing to an average of 15% more CO2 than those vehicles in employer-managed fleets.”

  • Colin Tourick
    Fleet consultant

    “Companies are having to learn how to manage the health and safety risks attached to the grey fleet cars used by their employees for business over which employers historically had little control.

    “The report shows how much influence tax has when drivers and fleets decide how to fund their cars.

    While contract hire remains very strong, cash for car schemes, and particularly ECO schemes, are right for many fleets.

    We are waiting for next month’s pre-budget report which is widely expected to change yet again the tax treatment of company cars through changes in AMAPs, ECO rules and capital allowances.”

  • Richard Taylor,
    Head of sales, Siemens Motor Contracts

    “In spite of the increasing popularity of ECO schemes, we continue to advise our customers to show great caution unless they are well advanced in implementation.

    “This is because HM Revenue & Customs has still to provide clarity regarding how it intends to tax schemes like this.

    “There is no question that the regulatory burden on fleet managers has increased exponentially over the past few years and many see cash-for-car provision as a solution – hence the 21% rise.

    “But this does not circumvent the fleet manager’s – and therefore – company responsibility when it comes to issues such as duty of care and corporate manslaughter.

    “Irrespective of who owns the vehicle, if it is being used for business purposes then the company has a responsibility. Yet in a cash-for-car scenario the fleet manager now has far less control over the vehicle.”

  • Lorraine Farnon,
    UK sales director, National Car Rental

    “It is difficult to say categorically that volumes have increased as a result of cash-for-car upturn.

    “However, we do see the non-affiliated business traveller as a key market opportunity and we feel they represent a proportion of consumer volume increase this year.”

  • Leave a comment for your chance to win £20 of John Lewis vouchers.

    Every issue of Fleet News the editor picks his favourite comment from the past two weeks – get involved for your chance to appear in print and win!

    Login to comment

    Comments

    No comments have been made yet.

    Compare costs of your company cars

    Looking to acquire new vehicles? Check how much they'll cost to run with our Car Running Cost calculator.

    What is your BIK car tax liability?

    The Fleet News car tax calculator lets you work out tax costs for both employer and employee