Fleet News

Long-term rental - a fleet manager's flexible friend

Saving cash will have moved up a few places on the fleet manager’s ‘to do’ list this year. In fact, given the current economic climate, it’s probably occupying the number one spot.

But there’s one simple way to free-up cash which is being overlooked by many businesses – choosing rental as a method of acquisition.

Currently this method accounts for less than 10% of the fleet market, according to Northgate Vehicle Hire.

And its managing director Phil Moorhouse insists: “Too many businesses are failing to appreciate the cash-saving potential of rental.”

When it comes to vans, the vast majority of fleet managers (around 90%) still choose outright purchase.

On the surface, this may seem the cheapest method.

But given the current used van market, how many fleet managers will get a good return on their investment?

With rental, should van prices plummet, it will be more of a headache for the rental provider than the fleet manager, as they will take the risk at selling time.

Not just a stop-gap solution

“Historically, rental has been viewed as a temporary stop-gap solution,” continues Mr Moorhouse.

“We need to change that perception.”

Rental companies now offer much more than straightforward daily rental.

Products include longer-term rental with no contract charges, and sale and rentback, which is offered by Northgate.

Much like sale and leaseback, provided by leasing companies, fleet managers can sell all, or some, of their vehicles to a rental company and then rent them back.

The benefit is that a depreciating asset can be removed from the company’s balance sheet and turned into cash, which can then be used as a new source of working capital.

For cash-strapped companies hit by the economic downturn, this will be particularly appealing.

“There have always been operational benefits, but in the current climate I believe it is the financial benefits that tip the balance even more in favour of sale and rentback,” says Mr Moorhouse.

Sale and rentback does have a string attached to it, however – the fleet is effectively contracted to Northgate for 10 months.

After this period, it reverts to a flexible rental package called Norflex.

This package is contract-free and means that the fleet manager can change the make-up of their fleet should they wish.

For instance, they can increase or decrease the size of the fleet and change the type of vehicles.

Rise of flexible, long-term rental

Flexible rental, such as the Norflex package, is thought to have been introduced to meet the needs of supermarket delivery fleets.

They needed to respond to short-term demands by increasing their fleet size without committing to a long-term lease.

Daily rental was seen as too expensive, so long-term rental was created.

Many rental companies, such as the Europcar UK Group and TLS Vehicle Rental, now offer flexible long-term rental products.

TLS says that over the years it has seen the length of the average van hire increase, and that the credit crunch is accelerating this trend.

Companies like TNT, Skanska and Balfour Beatty are turning to flexible contracts.

They are currently working with Reflex Vehicle Solutions, which deals solely with corporate customers.

Reflex has seen a growing demand for its products over the past 18 months with the number of rentals rising from 4,000 to 8,500.

It was recently ranked 21st in The Sunday Times Fast Track 100 league table.

So, while rental may not be the most popular acquisition method among fleet managers there are signs that its appeal is on the rise.

Rental’s plus points

Some of the benefits of choosing rental as an acquisition method are:

  • No long-term financial commitment.
  • No early termination charges.
  • Set monthly fee.
  • Removal of depreciating assets from a company’s balance sheet.
  • No need to seek loans to fund vehicles.
  • Flexibility to change the make up of the fleet at any time.
  • A more modern and cost-effective fleet.
  • Vehicles will have the latest safety features, helping to meet duty-of-care legislation.
  • Emission levels of vehicles will be as low as possible, which will improve the fleet’s carbon footprint.
  • In-depth management information may be provided.
  • Breakdown and maintenance cover can be included in the cost.


Things to consider

But rental won’t suit all businesses, and fleet managers need to give it careful consideration before signing up to a supplier.

One thing to look out for is penalties.

There may be no termination penalty, but what about penalties for damage?

Most vans take quite a battering, with typical damage being broken door mirrors and dented bumpers.

What damage will the rental company find acceptable?

What do they class as fair wear and tear?

And what about high mileage? Reflex and Northgate say they have no mileage penalties, but other rental firms might.

It is also worth checking whether the provider requires you to have the vehicles for a minimum period before the rental becomes truly flexible.

It’s important to do the sums, too.

“My advice is to do an objective analysis,” says Prof Peter Cooke, of the Centre for Automotive Management at the University of Buckingham.

“How utilised are your vans? Are they used two or three days a week rather than daily?

“Compare how much it would cost to rent them rather than own them.”

And think about the long-term future of your business. Mr Moorhouse says: “Consider what your view is on the risks facing your sector over the next couple of years.”

Key questions

  1. How utilised are your vans?
  2. Can the rental company supply in-house servicing and maintenance?
  3. Can the provider meet any specialist equipment needs?
  4. What service and support will you receive?
  5. Is the rate more competitive the longer the rental?
  6. Are there any penalties?
  7. Is there a minimum period?
  8. Does the provider have young, leading badge vehicles?
  9. Is the latest technology available? For instance, can you rent additional services such as satellite navigation?
  10. Are you simply choosing the cheapest rental and not considering whether the make and model is right for your business?

 

Case study: McGinley Recruitment Services

McGinley Recruitment Services, with a fleet of more than 300 vans, is one of the firms using Reflex’s flexible rental product.

Chris Dean, supply chain manager, believes that switching from contract hire to flexible rental has saved the company £500,000 over a three-year period.

“It’s given us the ability to swap and change our fleet,” he says.

“It means that we’re not carrying any deadwood.

"I could order 300 vans on contract hire and then four months later realise I need only 250, and I’d have to carry the 50 extra for the rest of the year.

"With flexible rental there’s no contract and there are no penalties if I send the vehicles back early.

"I can have them for a day, a week, a year, whatever suits the needs of the business. They are daily rental vehicles effectively, but on a cheaper rate.”

Flexibility is important to McGinley Recruitment Services as it supplies staff on a temporary basis to organisations such as National Rail.

“Our workforce is fluid,” explains Mr Dean.

“The minimum contract is a month, but the job could take six weeks or it could take a year. And in the current economic climate the decision to switch to flexible rental has paid-off.”

As the company’s vehicles are used round the clock, one of the benefits is that breakdown, full maintenance and all relief vehicles are included in the monthly rate.

“Reflex’s out-of-hours facility is excellent. It’s allowed us to keep our vehicles on the road 24/7.”
Another benefit has been the ability to pass on cost savings to customers.

“The money we’ve saved means we can offer more competitive rates to customers.”

McGinley’s requirement for an aftermarket conversion to the van’s seats was met by its current bodyshop, who then charged Reflex.

As for damage, Mr Dean says they have the choice of fixing it themselves or getting an estimate from Reflex.

Have there been any disadvantages? “We are paying slightly more, but we’re paying to offset our risk. You have to weigh up whether you want to take on risk or not.”

Case study: Full Spec Solutions

Full Spec Solutions

Sale and rentback solved the problem of ageing vehicles for Full Spec Solutions, which operates in the shop and bar fitting industry.

The company uses vans daily and, as the vehicles were previously purchased on a four-year replacement cycle, they became tatty.

It was felt that the condition of the vehicles was reflecting poorly on the business.

A year ago the company opted for Northgate’s sale and rentback service. Initially, only part of the fleet went on to the scheme, but now all 25 vehicles are rented.

It has given the company fleet a facelift and released the capital locked up in the vehicles.

Full Spec wanted additions to the vehicle, such as roof racks, rear door access ladders and reversing sensors, which Northgate was able to provide.

The company opted to add livery itself.

Dave Thompson, director of Full Spec, says the main benefit of sale and rentback is that the vehicles now always look their best as they are fully maintained and replaced every two years.

Of course, it also means that there are no additional maintenance costs, such as paying to replace a worn-out clutch.

Another benefit is the flexibility the product brings, with the freedom to change vehicles.

Currently, Full Spec is looking at downsizing eight vans in order to achieve better fuel economy and save money.

Case study: Tesco.com

Tesco refrigerated

Even highly-specialised requirements can be met by rental.

Last year Tesco.com signed up to a long-term contract with Northgate for the supply of 130 refrigerated vehicles.

While the refrigerated bodies are supplied on six-year contracts, the chassis on all vehicles will be replaced every two years.

Dino Papas, fleet manager at Tesco.com, explains: “By changing the chassis every two years we can ensure that our vehicles are among the ‘cleanest’ on the roads, in terms of engine technology, and that rising maintenance and wholelife cost issues surrounding older vehicles are confined to history.

"Previously, vehicles were replaced on a five-year cycle.”

Tesco.com has around 2,000 vans with only 1% being outright purchased.
 

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