Fleet News

Fleet managers see the value of contract extensions

The incidence of fleets extending contracts is now being widely practiced across Europe as more fleet managers identify the potential savings of keeping their drivers in the same cars for longer.

Last year, European companies saved almost £1.3 billion (€1.5bn) by lengthening their company car contracts.

And, according to researchers, the trend is continuing with typical contracts across Europe likely to hit four years by the end of the year.

The average contract length - the amount of time a car is leased before a replacement is provided - increased from 36.7 months in 2007 to 40.5 months in 2009 across the seven markets – Italy, UK, France, Germany, Netherlands, Spain and Belgium – studied by GE Capital.

Arval found a similar trend after its CVO research found typical company car lives were ‘dramatically’ longer in Europe than the UK (Fleet News June 10).

Extending contracts became more common in the UK during the recession, with fleets here increasing the average length of time they lease a car from 35 to 36 months, according to GE.

This suggests many extended from two and three-year leases to four years, which pushed the average up across all the fleets by one month.

This is confirmed by Sewells research, which found that it is now commonplace for UK fleets to run cars on 48-month contracts.

PricewaterhouseCoopers also found in research earlier this year that the most frequent used replacement cycle is now three or four years. It also found that a quarter of companies were considering extending contracts this year and that the number of companies with three-year replacement cycles had decreased, while the percentage of those with five-year contracts had increased.

“All companies are still under cost pressures,” explained Alex Barbereau, who heads up GE Capital’s Key Solutions consultancy team. “And contract extensions are one area we advise them to look at – it is easy to implement and was picked up successfully by a lot of our customers in 2009.”

Extending the duration of an operating lease from 36 to 48 months saves a fleet an average of 12.5% per month on the leasing cost, said GE.

This calculation takes into account increased SMR (service maintenance and repair) costs associated with running cars that have typically run out of their manufacturer warranty cover.

The trend of extending contracts is continuing. “Overall average contracts are extending – there is a clear trend. We very seldom see 24-month contracts now,” Peter Stroem, Pan-European fleet commercial leader at GE Capital told Fleet News.

“We are starting to see five-year contracts in the Netherlands and Germany, but is this a trend? It is too early to say.”

However, he says provided fleets stick to returning cars under the 111,000-mile (180,000km) then five-year contracts are accepted.

Click here for more on contract extenions.


 

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