Is fleet ageing?
In the last few weeks, figures released by Manheim Remarketing showed that the fleet and lease cars going through its sales are older and with higher mileage than the generally perceived benchmark most fleets work to of around three years/60,000 miles.
Less than a fifth of fleet cars sold fell into that bracket, while around a quarter were four to four and half years-old, with 80,000 miles or so. So are we experiencing a blip, where the slow economy has resulted in businesses holding on to their leased cars longer, or is this the evidence of a wider, long-term trend, that fleets are now running cars longer and harder than most industry pundits think? And if so, what are the challenges that come with an older, higher mileage fleet?
According to Sean Consadine, remarketing and logistics director at Pendragon Contracts, its figures corroborate this underlying trend of cars being held on fleet longer, but this has been a recent occurrence. He says: ‘Over the past three months we’ve seen an average increase of hires over 43 months at 75,000 miles. There is no doubt that in the current climate the age-old benchmark is on the up.’
Pendragon Contracts’ sales and marketing director, John Given, agrees: ‘The contracting mileage total has definitely been creeping up over the past year and we’re seeing more new contracts being written between 42 and even 60 months. A company establishing a fleet policy may use three years and 60,000 miles for its choice list, but then actually order based on what each driver is likely to do and the best financial option.’
Paul Mason, general manager – auction sales, at LeasePlan UK, also reckons that this ageing of the fleet car parc is a blip rather than an ongoing trend, and the three year/60,000 mile car is no longer a thing of the past.
‘The industry benchmark of three years/60,000 miles remains the key measure for company cars,’ he says. ‘Whilst we have seen slight movement towards a longer fleet cycle in recent months – running to around 40 months rather than 36 months – there is no indication that the overarching trend is changing. Company cars are typically perk vehicles.
‘With many companies still unable to offer pay rises, the perk car remains important as a cost-effective way for companies to offer an attractive benefits package to their employees. Cars have to be new and desirable for that incentive to be effective.’
Chris Chandler, principal consultant at Lex Autolease, has seen the same trend: ‘Fleet operators seem to be moving beyond three years and 60,000, with the average contract hire contract approaching 43 months and 65,000 providing a good balance between cost-effectiveness and providing a car that is acceptable to the end user, as reliability is less of an issue.
‘Some fleets have longer replacement cycles, however this is still fairly rare as the perception of a car older than four years can be an issue to the driver, and may not reflect such a positive company image. In addition from a tax perspective there is no benefit to the employee of having an older car.’
According to Jim McNally, head of asset risk at Alphabet, the figures may well reflect the significant hit the UK economy took back in June/July 2008. He says: ‘At that time, businesses felt the first icy impact of the global recession and accordingly sought to reduce operating costs. An obvious tactic to reduce short term cost was to extend the terms of the lease and run vehicles for longer. We’re now seeing the results of that change in fleet policy four years later, as cars enter the auction market for sale.
‘Certainly, this is a trend that has mirrored the economic downturn of recent years. However, while our data indicates that relatively few fleets have formally changed their replacement cycle policies from 36 to 48 months, there has been a reasonable amount of “slippage”, with vehicles being returned later than originally planned.
‘Having said that, I believe that the move to longer cycles is a function of corporate uncertainty and it does not always make commercial sense when you consider the impact BIK, fuel costs and NI can have on the company and the driver. Once confidence in the longer term economy returns, we’re likely to see a move back to the traditional three, or even two year model.
‘Even now, we’re seeing fleets exploring options that provide staff with significant perceived benefits – the most efficient and environmentally friendly cars, at a very competitive rate.’
Statistics from Ogilvie Fleet reveal that businesses it deals with are extending the period of time that they operate company cars in two ways to cut costs. Firstly, existing contracts are being extended and secondly new contracts are being taken out for a longer period of time.
In 2009/10, the term of all live contracts at Ogilvie averaged 38 months across the total fleet; 25% of all new orders were placed for a period in excess of 36 months. In 2011/12, the term of all live contracts averaged 41 months across the total fleet, and 46% of all new orders were placed for a period in excess of 36 months.
Ogilvie Fleet sales and marketing director, Nick Hardy, adds: ‘Existing company car contracts may be for 36 months but clients are not always confident enough in the economy to take out a new lease. Instead they are extending the contract period on existing vehicles. The rental adjustment typically delivers a “double figure percentage” monthly saving if extended for 12 months.’
Showing that there is perhaps no real overarching revision, leasing firm Zenith reckons there has been little change in the past few years. The current average end of contract mileage is 70,000 and the term is 37 months, which compares to 69,000 miles and 37 months for cars in 2007, prior to the onset of the recession.
The average contract term and mileage at end of contract steadily increased in 2009 to 2010, however it is now seeing it starting to fall again back to the 2007 levels.
Commercial director, Ian Hughes, explains why: ‘This is due to our Salary Sacrifice cars returning (we launched the product in 2009), with the average end of contract term and mileage for Salary Sacrifice cars (at 20k miles and 20 months) being significantly lower than that for traditional company cars.
‘Salary Sacrifice drivers often use their cars for commuting and as a general run around rather than for long business journeys, therefore mileage tends to be lower. Since the driver selects their own term and mileage they tend to choose a two-year rather than a three-year term, as they see this as providing them with greater flexibility.
‘We saw contract lengths increasing steadily in 2009, with some companies choosing to extend rather than renew their contracts due to economic stability and potential for redundancies. Some employers have not wanted to commit to new contracts.’
Pendragon’s John Given believes the benchmark itself isn’t the important aspect, it’s how long and over what mileage a company runs the vehicle. He says: ‘Generally, miles travelled per annum have decreased a little, with many contracts running into extension. But we are also seeing cars travelling 2,000 to 3,000 miles under contract rather than over.
‘There’s no doubt travel has changed mainly due to high fuel costs but it’s not the benchmark that has altered, just the miles travelled. Essentially, we’re seeing a contract norm of 42 to 48 months, enabling companies to keep costs down and run their fleets for longer, as cars become more reliable, warranties extend, and budgeting for a longer period becomes easier for contract hirers.’
It seems that it is financially viable to run cars longer, because much of the depreciation has already been factored in to the earlier part of the contract. Lex’s Chris Chandler explains: ‘Despite the significant increases in fuel costs of late, depreciation is typically still the largest fleet cost. Depreciation is greatest in the early months/ years of a contract and therefore, typically, the longer you keep a car the cheaper it’s running costs will be.
‘Historically, three years and 60,000 miles was the typical fleet benchmark term. However, as cars have become more reliable, robust and capable of carrying out higher overall mileage – especially diesel engines – fleets have been more comfortable with running cars for longer, as the only real downsides to keeping them longer were reduced reliability and increased maintenance costs.
‘However, although operating vehicles into a fourth year increases the proportion of the total rental related to service, maintenance and repair (SMR) costs, many manufacturer warranties expire at the end of the third year and total mileages increase typically to four years/80,000, so there was a rental reduction as the residual value curve flattened out,’ says Mr Hardy.
‘Most new cars and vans are easily capable of running to four years, even with six-figure mileages, and many of our clients have used some of the cost saving, and better financial modelling with Ogilvie True Cost, to provide drivers with a better car. This minimises the potential HR implications of asking drivers to keep a car for a year longer and is a win-win in most cases,’ he said.
But there are other issues to consider, says Ian Hughes: ‘In addition reliability of cars has increased, which means that cars do not necessarily need to be replaced so often. However longer terms need to be balanced against the ability to improve efficiencies by reviewing vehicle choice lists on a whole-life cost basis and taking advantage of new lower emission, potentially more cost effective options. Tax changes can affect the benefits of different approaches to funding or adopting a mixed approach and methods should also be reviewed.
‘Older cars can have higher maintenance costs, which needs to be considered by an employer, particularly if they have a pay on use maintenance package. From an employee point of view an older car may be seen as less desirable and therefore they can act as a less effective employee retention, recruitment and motivation tool.’
It seems that there is a general, if slight, ageing of the fleet car parc, but it’s certainly not universal among all leasing companies and all businesses. If anything, the challenging economic climate has meant all firms have to look more closely than ever at what suits them specifically, rather than just blithely accepting three-year/60,000-mile contracts and getting on with it. The benchmark remains for cost comparisons and building choice lists, but in practice, fleet are working with leasing firms in a more specialised consultative way than ever before.
What’s happening to LCVs?
The remarketing of light commercial vehicles is a rather different story. At LeasePlan, we are seeing a much longer usage cycle as a direct result of the economic downturn. On average, LeasePlan customers are keeping their vans for over four years or around 65,000 miles – the industry average is higher. This looks set to be a permanent shift, even as the economy strengthens. Unlike company cars, commercial vehicles are typically a tool for the job, with no status attached to them. Many companies will make modifications to the vehicles like adding branding or racking, so they want to amortise that investment by keeping hold of the vehicles for a longer period.
This trend created a dip in LCV supply which kept used-vehicle prices high, peaking at Q4 2011 and H1 2012. However, we are now seeing prices stabilising, with most LCVs now running on a four-year cycle.
Paul Mason, general manager – auction sales, LeasePlan UK
The wider view
BVRLA chief executive John Lewis, on whether there reallyis a shift in the industry to running cars for longer.
‘Manheim’s figures are rather different than the latest report from NAMA which aggregates figures from across the auction sector. Its analysis of the used fleet car sector going back over the last year shows a pretty steady age profile of between 40-43 months and mileage at just under 50,000. Perhaps Manheim has a slightly different product mix?
‘We are certainly seeing lower volumes of fleet vehicles going through auction houses which is an obvious result of the fact that new fleet registrations fell by around 250,000 in late 2008 and 2009. Many of the cars that were sold during this time were purchased through the scrappage scheme and are unlikely to come back into the used market any time soon.
‘All dealers are now much more focused on sourcing good quality ex-fleet stock and they are taking the younger, lower mileage vehicles before they even get to auction. There is going to be a supply imbalance of high-quality fleet vehicles for the foreseeable future, until new car registrations pick up again. This is why used fleet car values remain strong and should continue to do so.
‘There is a gradual move towards running vehicles for longer, with typical current contracts running for more like 39 months than 36. This is not surprising because modern vehicles are more reliable and longer lease periods mean a cheaper monthly rental. However, most fleets and company drivers will want to renew their vehicles within three or four years to take advantage of emissions-based tax incentives.’