Leasing lessons for 2012
For perhaps as much as a decade, the concept of consolidation in the leasing industry has been a constant source of discussion, but much of it has been exactly that – discussion. However over the last few years, and especially in 2011, that talk has turned into action.
Last year saw a number of leasing firms swallowed up by others, as banks and owners decide to recapitalise or use their expertise elsewhere, while others have recognised the difference between funding and managing assets – two entirely different skill sets – and it could well be that more of those who have the expertise to fund decide they need more of those who have the expertise to manage as partners.
With the top 10 leasing companies accounting for about a quarter of all funded vehicles, and the top 25 accounting for more than 90%, most industry commentators expect the balance of power to shift further towards the heavyweight end.
Mark Chessman, head of commercial management at Lex Autolease, expects to see this continue to happen.
He said: ‘Consolidation will remain a feature of the industry as leasing companies, their customers and suppliers continue to evolve to meet the demands of operating in the current credit-constrained economic environment.
‘A combination of overseas banks and financial institutions, increasing presence of manufacturers and some smaller niche operators are the type of new players that might get involved in the market.’
Richard Schooling, chief executive, Alphabet, agreed to an extent, but added that European-wide integration is more likely.
‘Times remain tough for leasing companies that do not have access to their own funds and it seems quite unlikely that any new, large financial players will have the appetite to enter the fleet funding market with things as they are,’ he said. ‘However, in terms of consolidation, we foresee further European consolidation as the trend towards Europe-wide tenders continues. In the fleet services sector we may see more companies moving into new ownership during 2012, as happened with the sale of AllStar fuel cards by Arval and the acquisition of Fleet Support Group by Automotive Resources International at the end of last year.’
Much will depend on the banks’ views of their non-core activities, and whether they feel fleet leasing is still worth the financial return, within the context of wider economic issues they may have to deal with.
Roddy Graham, business development director at Leasedrive, explains: ‘As the squeeze continues on financial institutions, set against a backdrop of the Eurozone debt crisis, expect further banks to question non-core activities and consider concentrating on what they do best. At the same time, expect potential new funding entrants to the leasing market with an appetite for healthy profit. We demonstrated creativity by engaging with Investec to facilitate and importantly fund the Masterlease UK opportunity and introduced a new financial investor into the fleet sector.’
Cost concerns are never far from the top of the agenda for fleets, and those issues tend to rise as the economy gets tougher. For many businesses, it seems this will be a year of ensuring controls are in place and all expenditure is justified.
But it’s not a full-on “batten down the hatches” situation, as in 2008-9, according to Alphabet. Surprisingly the Alphabet Fleet Management Report found that costs are by no means rising across the board; around half of the fleets in the sample reported that overall costs have remained static in 2011.
Costs remain a major preoccupation for fleets however. They come second only to driver safety in respondents’ list of concerns, while the majority of changes made by fleets over the last year have been directly connected to achieving cost savings.
Roddy Graham expects to see cost as the primary concern of 2012. ‘Top of the agenda in the current tough economic climate is a renewed focus on costs. Expect every cost line to be challenged and the winners will be those who do even more with less.
‘Past failure to invest in leading-edge fleet systems will expose those who for too long were content to rest on their laurels. A combination of world-class fleet management systems, integrated solutions and top-quality people will be the winning formula for delivering further added value to cost-conscious customers.’
And of cost concerns, by far the biggest element causing worry, as always, is the price of fuel.
According to Alphabet’s report, eight out of 10 fleet managers reported that their fuel bills have increased “substantially” over budgeted levels, and the firm found that many fleets are prioritising fuel-efficient technology in an attempt to redress the balance.
Around half of businesses are also evaluating business journeys and a third of those that have not already done so are in the process of introducing fuel cards to reduce costs.
Schooling adds: ‘The UK’s economy is more resilient than many give it credit for. But it faces headwinds from the Euro crisis, volatile energy prices and the global slowdown. Companies remain focused on the need to contain costs and there is definitely a requirement for businesses to make their assets sweat more. 2012 will see a number of new innovations launch in the leasing sector and businesses will be able to take advantage of these to move staff around the country efficiently and cost effectively.
‘As slow growth continues companies are looking for new ways to reward and motivate key staff without loading the bottom line. “Green” cars are an obvious option thanks to their tax benefits and popularity with employees. As an industry, we are very well placed to meet this demand via tax-efficient solutions like salary sacrifice, which we can integrate seamlessly with our company car and van solutions.’
Company cars in 2012
Although the dramatic rise in fleet sales last year will in some part have been fuelled by manufacturer actions taken to get unsold retail units on the road in some form or other, there can be no denying that “true” fleet sales rose too, suggesting a renewed vigour in the sector. It’s a trend leasing companies have certainly seen.
Zenith’s Andrew Cope explains: ‘The company car has been growing in popularity and we expect this will continue in 2012. Over the past 12 months we have seen significant growth in new cars under management, through a combination of a move back into cars from cash takers, salary sacrifice car orders and new customers wins.
‘During the recession when private sales (often seen as a good indicator of the state of the economy) have suffered, the fleet market, although impacted, has bounced back more quickly. The number of company car drivers is growing, and, according to figures from the SMMT, whereas private sales have dropped in 2011, compared to the previous year fleet sales have increased.
‘Drivers are swapping their privately owned vehicles for a newer company car, through either a traditional company car scheme or a salary sacrifice arrangement.’
Roddy Graham agrees: ‘Companies are becoming increasingly aware of their duty-of-care responsibilities. Driven by concerns over potential corporate as well as individual director liability, companies are favouring a return of the company car. For them, it’s a safer, greener and cheaper option than cash-for-car and for drivers it’s a more attractive component of a total reward package. Fuelled by a combination of factors – lower CO2 emissions, higher mpg, wider model choice, tougher car policies, a sensible Benefit-in-Kind regime, greater vehicle manufacturer incentives – the company car is back on the road again, something I predicted would happen six years ago!’
The new order: salary sacrifice and EVs
New innovations, new opportunities. Although funding and managing the traditional company car will remain by far the biggest sector for the leasing industry, two new developments of the past few years are expected to be given more time in 2012. Both salary sacrifice schemes and electric vehicles have incurred comment and opinion that outweighs their relative size in the current market, but is that set to change?
Roddy Graham believes that with salaries frozen or increases kept to a bare minimum, salary sacrifice could become more popular for hard-pressed employees wishing to see their money go further.
He says: ‘They can enjoy the benefits and status of a company car at a lower cost than anticipated, with savings on income tax and NI contributions outweighing BiK contributions. They’ll also be behind the wheel of a more fuel-efficient, fully serviced and maintained new car for the next two or three years, backed by comprehensive insurance provided by their employer. It’s tax efficient, so expect more employees to show interest.’
At Zenith, Andrew Cope reckons salary sacrifice is attracting a new breed of company car drivers. Typical cars chosen are the lower-emission ones, which attract the best savings. The opportunity to have fixed costs, protected from market fluctuations, for example in insurance and maintenance, and the easy budgeting is highly appealing; whilst helping companies to provide their employees with safer, lower emitting cars.
For Richard Schooling, the leasing industry is entering a very exciting period. He says: ‘The next generation of mobility solutions is emerging and leading leasing companies are evolving into mobility experts. Companies who are working with progressive leasing companies such as Alphabet will be early adopters of innovative new ways to move employees around the country.’
Roddy Graham retains a certain amount of scepticism over whether electric vehicles will make an impact this year: ‘With more and more new electric vehicles coming on stream from vehicle manufacturers, expect EVs to start making their presence quietly felt, albeit unannounced to pedestrians and cyclists, in towns and cities. Also expect more breakdowns away from home as they run out of juice. Currently only driven by true believers, I expect more people to test them, either through city car clubs or vehicle rental companies.
‘As always, the greatest drawback is the lack of a proper charging point network infrastructure. With the Department for Transport finally announcing a central database for charging points, expect a more concerted and consolidated effort to not leave drivers stranded with no charge.’
What of fleets?Alphabet Fleet Management Report
Alphabet’s Fleet Management Report has revealed a cautious note of optimism, among fleet managers. Private sector fleets were more optimistic that in 2012 operating budgets will increase again, although the mood was found to be considerably bleaker among public sector organisations facing up to the Government’s proposed spending cuts.
27% of respondents said they expected their fleet operating budget to go up in the coming year, although a smaller number (21%) anticipated that the size of their fleet would also increase. In the public sector, however, a significant 56% expect to see their budgets cut, but fewer, 44%, expect that the size of their fleet will fall.
Alphabet’s Richard Schooling comments: ‘The increasing burden of legal, financial and technical specialisation and complexity surrounding the management of vehicles will weigh heavy on in-house managers, who will have to do more for less in the coming year. The focus for fleet managers now must be on delivering significant savings in both time and costs.’
Movers and shake-ups: changes to leasing in 2011
Investec Capital Markets, part of Investec Bank, buys the UK division of contract hire firm Masterlease from Ally Financial (formerly GMAC) for an undisclosed fee.
Leasedrive Velo Group is contracted to take over the management and day-to-day operations for Masterlease and rebrands in May 2011.
Alphabet, the multi-marque leasing arm of BMW, acquires ING Car Lease, part of the Dutch ING Groep NV, for €637m (£570m) to strengthen its position in the European fleet management market.
The acquisition is cleared by the European competition authorities in the autumn and gives Alphabet a combined risk fleet in the UK of over 100,000 cars.
Talks between Royal Bank of Scotland (RBS) and GE Capital over the sale of RBS’s Lombard Vehicle Management subsidiary stall.
The division had been put up for sale earlier in the summer as part of a programme by RBS to sell non-core assets. Following the news, RBS says it’s still considering options and reassures the industry that it’s not looking to wind down Lombard.
American-based Automotive Resources International (ARI) announces that it is to acquire Fleet Support Group, the largest UK-based fleet management company.
ARI says that the move significantly expands its fleet management offerings in the UK and establishes the foundation for further global expansion. It adds that FSG will be able to ‘leverage its prestigious customer portfolio on to the international stage’.
Arval announces that has sold its AllStar fuel card business to US fleet transaction firm FleetCor Technologies in a £194m cash deal.
In a statement, Arval is adamant that the sale of the business is a strategic one as the fuel card business can’t be leveraged outside the UK and says that the sell-off is not a reflection of the performance of the AllStar business or the need for parent bank BNP Paribas to recapitalise.