Fleet News

Contract extensions - the right decision?

Contract extensions are now common across Europe but fleets must consider carefully whether keeping their cars for longer makes sense for them.

A recent study by GE Capital’s Key Solutions fleet consultancy arm, which looked at how contracts had changed between 2007 and 2009 based on data from over 200,000 company cars managed under an “operating lease” arrangement across the seven European markets, found that four-year contracts are now becoming the norm across the continent.

The average contract length is highest in Belgium at 48 months, but all countries have seen contracts extending since 2007.

“Over the last two years, extending contracts to control fleet costs has been prevalent throughout the industry. Extending a lease by 12 months can drive down the monthly cost of a company car by 10 to 15%, and our research demonstrates this has been a high priority for companies looking to control costs in response to the downturn,” said
Peter Stroem, Pan-European fleet commercial leader at GE Capital.

“French companies were particularly active in this area in 2008 and 2009 as they took advantage of their traditionally shorter-term leasing arrangements to drive huge cost savings.”

As a result, French fleets achieved the highest levels of cost reduction via contract extensions. Average contracts in France increased from 31 to 39 months between 2007 and 2009.

The low contract lengths were down to several factors, not least that company car drivers cover high monthly mileages and therefore have typically kept their cars for shorter periods.

This however has changed as the used market became more accepting of higher mileage used cars.

Indeed, this trend of extending contracts will have a major impact on the used car market, although it may not all be detrimental.

“Not all fleets are going to extend to four or five years,” explains Alex Barbereau, who heads up GE Capital’s Key Solutions consultancy team. “Therefore there will be a greater mix of used cars coming to the market – some three, some four and some five.”

BCA disagrees: “Contract extensions are unlikely to lead to a wider choice of ex-fleet vehicles to buy – fleet vehicles have always been available at a variety of price points, ages and conditions – and what dealers want is good quality vehicles they can take away and retail immediately,” said BCA’s Tony Gannon.

“In fact, the net result of the last two years or so of economic pressure has been fewer new cars sold to fleets and retail buyers and a reducing and ageing car parc.”

BCA figures over the last 40 months suggest the average age of fleet cars coming to auction has risen from around 38.25 months to 39.5 – an increase of 3.25%, although this ageing seems to have accelerated in recent months.

“Within this average age spread, there will be much younger and older cars, of course, and it is the latter that operators should pay attention to ensure are managed properly through the remarketing process,” said Gannon.

However, Manheim has seen a more pronounced ageing of the ex-fleet cars it is receiving.

In January 2008, the average age of defleeted car going into its auctions was 40.99 months, and this has risen every month since, until the average fleet car age at an Manheim auction is now 47.05 months.

A spokesman added: “Compared with three years ago when the majority of ex-Fleet cars coming to auction were on average 36 months to 42 months old, buyers now have a much wider age profile from which to choose.”

But extending lease contracts can make the SMR costs associated with older cars significant. Manheim, which now runs its company cars to four years and has an average annual mileage per car of 21,000 miles, saw maintenance costs increase from £700 to just over £1,000 per car – an increase of more than 40%.

Fleets should also consider that a four-year-old car will be less efficient than an equivalent new model, with some new cars achieving up to 10mpg more than older models.

In addition, as Barbereau explained, fleets need to benchmark their cars against others in their sector. “”Our advice is to check on your peers, because a company car is a motivation factor and so needs to be on par with your competitors.”

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