Fleet News

Fleets must prepare for 'biggest shake-up ever'

Access to funding is easing, but fleets are faced with a post-recession market that is not as competitive on terms, according to Mark Sinclair.

The director of FN50 top 10 leasing company Alphabet says some smaller firms are taking an aggressive stance to winning new business but some bank-backed operations continue to hold back.

“The fleet market is divided in terms of leasing companies which is to do with access to funds,” he says.

But demand for vehicles is rising from fleets; Alphabet claims its prospect list has never been longer.

Companies are looking to both replace extended cycle cars and re-tender for new suppliers.

“We’ve extended around 1,500 to 2,000 cars, which is around 20% of our fleet. If that is replicated across the industry, that’s a lot of orders to replace,” Sinclair says.

“There’s a lot of pent-up demand from companies that haven’t ordered cars for six to nine months – this year will be a big year for orders.”

He believes companies will revert back from extended four-year cycles to their more traditional three-year cycles and predicts 900,000 or possibly even one million fleet car sales this year.

“Replacement cycles are driven by the calculation of finance rental versus SMR costs, but there’s also another dimension – the pace of change of technology in terms of safety and CO2,” Sinclair says.

“Over the next 10 years we will see a huge move in technology – if you are on a long change cycle you will miss out.”

He points to the rising price of oil and its impact on fuel prices, which will influence buyer behaviour more than tax policies.

Almost half of the world’s total oil reserves has been extracted; according to the Hubbert curve, that means investment costs will exponentially rise in order to pump out the rest.

The tipping point is forecast to be 2015.

“Fuel prices will then rise sharply,” says Sinclair.

“Fleets have to have a low CO2 strategy and they have to consider their change cycles so they don’t lock out of technology advances.”

He adds: “The next five to 10 years will see the biggest shake-up of the automotive industry and fleet sector ever.

“There will be very few petrol cars in 10 years’ time – they will be in the minority.”

Fleets need to be considering now how they can drive down average CO2 emissions to below 95g/km – the 2020 vision laid out by Labour and likely to be retained by the new coalition Government.

“Fleets need to have a plan for this – it’s only three changes of car away.”

Sales will be buoyed this year by manufacturers switching attention from the retail-focused scrappage scheme back into the corporate market after they drastically cut back volumes last year.

Deals will return, although Sinclair cautions against raising expectations too high.

“Volumes will be sensible so discounts will be sensible and that means leasing rates will be sensible. Everything will be stable,” he says.

Partly this is down to fewer buy-back deals offered to car rental and credit hire firms. Manufacturers are no longer flooding the market with cars which de-stabilise residual values and create uncertainty when setting leasing rates.

One option might be for rental and credit hire firms to enter into more traditional contract hire agreements where they take the residuals risk over, for example, a two-year period.
Sinclair points to a “sweet spot” just before the first service and before serious maintenance costs start to mount up, including tyre replacement.

He adds: “Manufacturers don’t have stiff targets to hit so I do not see them coming back into this buy-back sector.”

Alphabet expects to return to its pre-recession growth curve this year of 10% annual increases, targeting 50-plus vehicle fleets.

It has some major deals on the table which Sinclair believes might push the company a few thousand vehicles beyond those growth ambitions.

“Our strength is the fact we are independently-funded,” he says. “We have our own credit department so we can lend to credit hire firms or construction companies .

“We can go into sectors that the banks are unable to, either because their margins are too high or they have pulled away. It has created a space in the market.”

Alphabet also runs the corporate finance operation of its parent company BMW, supplying funds via the dealer network to companies of all sizes.

It has seen an uplift in activity, which Sinclair says is a strong barometer of economic health and confidence.

Smaller companies (SMEs) tend to have a more traditional approach to funding and they were very susceptible to the economic downturn last year, particularly as a number of lenders withdrew from the broker market.

Many SMEs went out of business. But they are also the first to react when conditions improve.

“It’s quite a vibrant sector now,” says Sinclair.

So what’s the future for fleet management? Sinclair expects organisations to increasingly outsource to leasing companies and specialists.

He claims many larger companies now operate without a fleet manager, moving responsibility for decisions into the HR or finance departments, or they have put a junior manager in charge of day-to-day administration.

However, he adds: “There’s still a lot to be said for a fleet manager. Duty of care, strategy and the grey fleet all take time and knowledge to get right. There’s still a valuable role for them.”

Alphabet sees a real opportunity for growth of salary sacrifice

Alphabet was one of the earlier entrants into salary sacrifice, launching its product in 2008.

Although it has been a slow start – “last year people were not in the mood for it”, says Sinclair – the company sees a real opportunity for growth in the second half of the year.

“It’s very powerful from a pricing perspective. It gives the employee the ability to leverage their tax position versus benefit-in-kind,” Sinclair says.

“It also offers corporate discounts on the car that drives the benefit – added together, it’s a powerful proposition.”

For employers, salary sacrifice enhances the employee benefits package without costing them anything – indeed, they are able to reduce their National Insurance contributions.

Alphabet has a number of companies close to signing up, typically larger organisations that already offer their staff a salary sacrifice product for other services.

But it’s a slow burn: most employers offer their benefits package once a year, which affects the speed of the launch, while it takes time to tie it into an existing scheme to the satisfaction of the HR department.

Sinclair adds: “For the industry, salary sacrifice is a positive thing because it will help to grow the company car parc and leasing companies can add value as a benefits provider.

And it will drive new car sales which is good for the manufacturers.”

While critics point to a low take-up of 3-5% in the first year, Sinclair compares it to employee car ownership schemes which are typically just 1%.

“Salary sacrifice can grow to 10% overall during the contract, which is really good,” he adds.

“It also scores on greener technology, putting it within reach of employees, and it doesn’t involve big deposits or credit checks so it is more affordable.”

 


Click here for fleet funding best practice and procurement insight

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