Fleet News

Funding: Extending contracts – to keep or not to keep (cars)

Has the tide already turned against the fleet policy of extending company car holding periods by up to 12 months to ride out the recession and the drop in residual values?

As more than a third of fleets decide to add a year and 20,000-plus miles to their cars, the market conditions that underpinned such a policy may already have changed.

Last year the business case for extending company car holding periods was incontrovertible; the secondhand car market was in freefall, interest rates were rising, access to credit was difficult, and future staffing levels were uncertain. Fast forward 12 months and interest rates are at an all time low, credit lines are reopening and the used car market has bounced back.

Not that savings from extending lease rentals have completely evaporated, with fleets able to negotiate a cut in monthly rentals of 5% to 10% by keeping a car for an extra year.

“The savings grow even further if you compare the reduced lease rental with the cost of a new, like-for-like replacement car,” advises Andrew Cope, chief executive of Zenith Provecta.

It’s a different situation for fleets that carry the maintenance risk for their cars. Expensive components start to fail at higher mileages and every car runs the annual gauntlet of an MOT test once it’s three years old. The risks in the used car market are even higher, with Martin Ward, manufacturer relationship manager at CAP, bluntly warning that, “anything over 100,000 miles carries a death sentence, such is the stigma attached to it.”

He also raises the concern that keeping cars for longer could expose fleets to savage depreciation depending on the vehicles’ place in the model cycle.

“You might not just have the old model, but the old, old model,” he says, with painful consequences for secondhand values. So perhaps now is the time to sell?

“Residual values have made such a remarkable recovery that there’s actually a shortage of cars coming back to the market at the moment,” says Julie Jenner, chairman of the Association of Car Fleet Operators (ACFO). “Will the market fall next year when all the contract extension cars come back? Will there be a glut?”

Delaying replacement at least affords employers greater flexibility with corporate headcount. Where a new car involves a minimum three year commitment to staffing levels, a 12-month extension to a car’s fleet life gives an employer a year’s grace to assess the economy before making a decision.

But Don’t forget the drivers when making this decision, says fleet consultant David Rawlings, director of Vertivia.

He points out that in a climate of salary freezes, most employees will understand the cost-saving case for extending holding periods, but “the way employees talk about their cars always amazes me, and employers need to realise just how important the company car is.” Employees will stay where they are while the job market is difficult, but the lesson from the last recession was that driving an old car, “could be a trigger to change jobs when the economy picks up.”

The mileage of cars raises different concerns for Jack Pryde, secretary of ACFO Scotland and supplier relationship manager at Dunfermline Building Society, which last year increased its fleet holding period by 12 months to a maximum of four years and 100,000 miles. The experience has made him reluctant to see the thresholds stretch into five years.

“Your repair bills are beginning to wrack up, staff would not want to be seen driving five or six year old cars, and in business you have a duty of care to employees and older cars have a higher chance of breaking down,” he concludes.

 

 

Options for fleets – how to extend your contract without losing money

  1. Negotiate contract extensions with your leasing company. Expect savings of 5%-10% on your rental. Beware any increases in lease rentals – it’s a clear signal that the car is not worth keeping.
  2. Outright purchase fleets should analyse any cars with unduly high maintenance records. Don’t let repair costs sabotage depreciation savings.
  3. Explain the policy clearly to drivers. Show how their benchmark lease rental now equates to a lower category car.
  4. Explore the chance to reallocate cars within the fleet, switching high mileage cars to low mileage drivers and vice-versa.
  5. Outright purchase fleets need to keep a close eye on the used car market. Sell the right car with the right age/mileage at the right time, and the financial benefits could outweigh the advantages of extending holding periods.
  6. Emphasise to drivers the importance of regular oil and tyre checks on older, higher mileage cars.
  7. Decide whether the longer holding period will become policy so that any new cars are sourced on the basis of a four or even five-year calculation.
  8. Consider fleet management software that will track maintenance spend per car and trigger alerts when services are due.

State of the market: Contract extensions

 

  • A third of fleets on traditional three-year/60,000-mile contract hireagreements are looking to extend these contracts. This means around 150,000 customers are expected to do it this year.
  • Some companies are opting to lease second-hand cars instead of new ones to save money.
  • About 10% of lease contracts are usually running over by up to three months because of the lack of availability of new cars.
  • Average contract mileages are reducing, which makes it easier to extend the length of the contract until they do meet the mileage limit.

Source: BVRLA

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Comments

  • akoulianos - 23/06/2010 03:07

    We are also seeing very similar fleet market and used car market conditions here in Australia.

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