Brian Rogerson rounds up the many challenges facing the fleet
contract hire and leasing industry, from rival forms of funding to
the collapse in RVs.
These are dark days for the fleet leasing industry. This
November, the registrations of fleet and business (i.e. smaller
fleet) new cars reported by the Society of Motor Manufacturers and
Traders (SMMT) sent a stark message to the industry. In short, the
market is collapsing.
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During November the number of fleet vehicles purchased dropped
by almost 30 per cent to 59,721 (Nov 2007: 84,789) and business
vehicles by 45 per cent to 4,422 (Nov 2007: 7,976). In the 11
months to the end of November, the number of fleet cars registered
totalled 1.05m – or 6 per cent lower than the previous year
(year-to-end Nov 2007: 1.117m). Business cars, moreover, showed a
decline of 20 per cent to 122,986 (year-to-end Nov 2007:
153,939).
A reflection of falling demand
The slowdown appeared in line with generally weaker demand in
the UK, although the Chancellor’s move to cut VAT on December 1,
announced in the pre-Budget report, may have deterred any
end-of-month sales drive into December or even 2009.
It was also in line with the collapse of the commercial vehicle
sector where, in November, truck registrations fell by 19 per cent
and light commercial vans by 47 per cent. Small to medium-sized
enterprise (SME) fleet-buyers were particularly reluctant to change
their vehicles during the month.
Although the market decline in November was universal across all
sales types, fuel types and segments, it was apparent that small
cars weathered the decline better than most, and the SMMT reported
an improved market share for these models.
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By GlobalDataInterestingly, the amount of finance take-up for company cars
either directly or at the point-of-sale has, so far, remained
virtually static during 2008. Finance & Leasing
Association members reported in September (the latest figures
available) that new company cars acquired up to the end of
September totalled £6.3m – the same as at September 2007 – while
used cars acquired by companies fell only by 3 per cent to £983m
(year-to-end Sept 2007: £1bn).
It seems likely that, as with private buyers, point-of-sale
finance is coming to the fore for corporate buyers, as banking
lines elsewhere remain blocked.
A question of survival
The dilemma in which UK motor lessors find themselves was
succinctly put to Motor Finance by one industry expert who, with
experience of several previous downturns, says: “We’re now in a
phase where customers are cancelling direct debits, asking for
extensions, making promises and not keeping them, then going into
administration. Trying to get cars back from drivers whose
employers have gone into administration takes forever, and this is
happening a lot. Eight years out of nine this is a great industry
to be in – but that ninth year you might as well just spend on the
beach.”
As UK motor lessors faced up to rising defaults, a shortage of
new customers, falling residuals – and the inevitable staff cut
backs and redundancies – some observers were calling for a change
of model.
One observes: “Manufacturers have been churning out an
ever-greater number of new models, shortening product development
cycles and trying to subsidise losses on car sales with higher
parts and servicing prices. In turn, lessors have been selling
almost exclusively on price and have set high turnover as their
principal goal. It has been the economics of the madhouse.”
Professor Colin Tourick, fleet management consultant, tells Motor
Finance that under the current economic crisis lessors must face up
to two principal tasks for survival. “Firstly, lessors must
endeavour to maximise the return on every single de-fleet vehicle.
Up to now each lessor has their own priority for disposing of
vehicles. Some use auctions exclusively, some use auctions
selectively, some re-furbish modestly and some extensively. Some
use retail outlets – and some customarily use a variety of routes
to market.”
Tourick’s argument is that the proliferation of so many
permutations of de-fleet routes has meant the lack of best industry
practice for the sector. Speed of sale has often overridden a more
careful disposal evaluation model. “However,” he adds, “if ever
there was a time to look again at the way you are disposing of your
cars, then it is now.”
His second task for survival is an urgent re-appraisal of
current clients’ credit standing. “It can be carried out in a
spirit of offering ‘tender loving care’ with more frequent contact
and requests for up-to-date accounting information,” he says.
In the face of rising SME liquidations and administrations
Tourick believes that lessors should be actively protecting their
current book. “Banks and equipment lessors regularly assess their
current clients’ creditworthiness,” he points out. “The same can
not be said about motor lessors, who invariably re-assess their
clients only rarely.”
In any event, Tourick believes that paying assiduous attention
to their current clients will have a longer-term benefit for
lessors. “Apart from setting their minds at rest about
creditworthiness,” he says, “it will strengthen lessor-lessee
relationships. If you look after your clients well in the bad
times, they will remember you fondly when times improve and tough
competition returns to the market.”
Looking after the lessee
Similarly, lessees will be looking to their leasing companies to
offer wise words of advice in a time of crisis. Stewart Whyte,
director of ACFO and managing director of Fleet Audits Ltd,
stresses that fleet managers should, now more than ever, make sure
that their fleet serves the needs of their business satisfactorily.
“If a company believes that its continued prosperity is best served
by leasing thirsty sport utility vehicles (SUVs), then it must
continue to do so,” he explains. “All fleet managers have a
responsibility to tighten their company’s belts wherever they can
at the present time – but only if it is a responsible and sensible
course of action. Each vehicle type should be analysed as being fit
for purpose in its current role – and current lease term.”
Whyte also believes that every lessee should be cutting its fuel
bill by encouraging a revision of journey planning among employees,
filling in mileage forms and, where appropriate, acquiring fuel
cards and benefiting from the consequent monthly reportage.
“Video conferencing should be encouraged to replace unnecessary
journeys,” he says. “It is a valid form of communication that can
be factored into the whole-life running costs of a company car.
After all, the greenest mile is the mile that you don’t
travel.”
Tourick warns against lessees early-terminating leased vehicles.
“If possible, they may be re-deployed within the company.” Lessees
should also re-negotiate contract hire agreements mid-term rather
than accumulate excess mileage charges, he believes. “They should
be encouraged to move to a fixed-car list rather than a
user-chooser option,” he advises, “to use a whole-life cost
calculation to select cars, and to investigate whether it makes
sense to have one manufacturer’s cars across their fleet. They may
also consider the possibility of introducing a cash-for-car scheme
or an employee car-ownership plan.”
“Do lessees still have to have a company car for all their
staff?” Whyte asks. “Now is the time for a comprehensive fleet
review – and it should include the cars used by those at the top,
the bosses.”
He adds: “It may be appropriate for cars to be taken under a
daily hire basis rather than allowing employees to use their own
vehicles.”
New hope for lessors in 2009?
Despite the gloom as 2008 fades away, some industry observers
see a glimmer of hope for the New Year.
Firstly, demand for motor leasing is likely to be robust. Chris
Glen, transport chairman at the Federation of Small Businesses told
delegates at the Fleet News conference held in London in November:
“With uncertainty over residual values causing concern, members are
increasingly looking to fleet suppliers to offer the best deals.
Cars and vans are a crucial ingredient to their success and more
and more businesses want to lease their vehicles rather than buy
them outright.”
Adrian Rushmore, managing editor at EurotaxGlass’s insists that
there is “cautious optimism” regarding residual values in 2009. He
says that the used-car market is the most likely to recover first
from today’s lows, followed by a steady, albeit modest, upturn in
retail sales of new cars.
“We believe that the swift and painful downturn we saw in the
summer months of 2008 was probably a one-off event. The arrival of
the 09-plate next March will clearly be an acid test for both new
and used sales, and analysis of the current market indicators
suggests there are reasons for cautious optimism,” he opines.
Rushmore points to falling fuel costs and lower interest charges
as indicators that the knock-on effect will be to inject a little
buying enthusiasm into the minds of consumers by Q1 2009. “It is
worth remembering,” he adds, “that many have deferred purchases of
replacement cars during 2008, so there could be some limited
release of pent-up demand, helped by a realisation that prices will
be at an all-time low.”
Meanwhile, the stresses felt by lessors’ parents are likely to
lead to further sector consolidation. Moreover, there is a
discernable trend for smaller lessors to increase their share of
the market. The market share of the top five players in the list of
the 50 largest motor lessors was down by 1.4 percentage points
year-on-year from 47.4 per cent to 46 per cent in 2008. This is the
third year in a row that the top five lessors had shed market share
to the smaller lessors. An indicator, perhaps, that listening hard
to the needs of lessees and providing a package with sufficient
differentiation to attract sound business levels at a meaningful
margin may be the model for the future.
ALTERNATIVES TO LEASING
Car rental in the doldrums…
The car rental sector is undergoing its own challenges at
present. Recession-hit commercial vehicle rentals have plummeted
and many rental companies are reported to be reducing their stocks
of both light commercials and cars.
In November, Avis Europe announced that it is axing over 300
staff – or some 5 per cent of its total employee base. It also
plans to close some operations in markets where rental margins are
low. Pascal Bazin, Avis Europe’s chief executive explains: “The
average rent per day we achieve on cars has fallen in the second
half of the year compared to the same period in 2007. We anticipate
continued difficult conditions in 2009 – and beyond.”
Lorraine Farnon, Europcar’s UK group sales director confirms
that the rental industry is bracing itself and its customers for
change. “While we are seeing an increase in rental business from
some sectors, fleet managers should be aware that prices are likely
to rise across the industry unless the current economic situation
does not improve.”
She says that falling demand for new cars, higher import costs
and declining used-car values are forcing motor manufacturers to
become much more disciplined about the way in which they will work
with rental operators.
“Some manufacturers,” she says, “may step away from the rental
market altogether. Others will want more control over the value at
which their vehicles are being sold and “may decide to reduce
volumes through these agreements.”
Taken in the round – and considering the proposed tax changes
that come into effect next April (road fund tax, first registration
fee and capital allowances) – the rental industry is facing massive
challenges of cost control at the present time.
Northgate Vehicle Hire, meanwhile, is attempting to develop its
LCV sale-and-rentback product in the face of the recession.
Marketing director Ross Clarkson argues that it provides businesses
with “an immediate injection of cash that can be used to fund core
activities, the removal of depreciating assets from their balance
sheet and the elimination of the need to seek loans to fund
vehicles and other capital equipment at a time of credit crunch.”
If companies which currently take vans on contract hire agreements
decide to switch to rental rather than leasing, it could be another
blow to fleet providers.
…but car clubs flourish
Latest figures from transport charity Carplus show that
membership of car clubs has more than doubled in the last year – in
direct relation to the credit crisis.
Over 50,000 people are now using some 1,500 car clubs, the
majority in London, where around 70 per cent of the cars are
currently located. However, Mark Hodgkinson, managing
director of Leeds-based Corporate Car Club (CCC) believes that
fleet operators seeking to cut costs should consider using a car
club to cut fleet spending, especially in the “grey fleet” and
pool-car sectors.
CCC supplies fully managed and maintained eco-friendly
sub-120g/km pool cars which aim to reduce fuel consumption and
costs, as well as cutting CO2 emissions and meeting duty-of-care
obligations. Hodgkinson says: “While some businesses are poor at
checking the condition of their ‘grey fleet’ vehicles, others have
substantial numbers of pool cars at multiple sites across their
business which are often under-utilised and stand idle for long
periods.”
By using a car club, he adds, fleet operators can provide
vehicles directly where they are needed, cutting their operating
costs, increasing vehicle utilisation and reducing their carbon
footprint and CO2 emissions – all at the same time.
Hodgkinson says that he is currently in negotiation with a
number of major leasing companies “to offer our proposition as an
additional service”.
The strong growth of the market has drawn new competition from
car-rental company Hertz which is set to launch its own car-club
operation in 2009. Avis, Hertz’s rental rival, first ventured into
car clubs in 2002 with its launch of Urbigo – an experiment that
was rather ahead of its time and which collapsed after some two
years. It seems likely, however, that other rental companies will
enter the market during 2009 which will present a challenge to the
smaller, more local players that have so far dominated the car club
sector.
It is even possible that motor lessors, battered by the current
crisis hitting their regular corporate client base, will be
attracted to the car-club concept with its low-start up cost base
and its relatively high margins.
PRE-BUDGET REPORT
Lessors tackle cost savings
“The biggest challenge facing many businesses over the next 12
months is survival,” says David Rawlings of businesscarfinance.com.
“And with business cars being one of the largest cost areas,
accountants will be examining expenditure and use of capital very
closely. It is worth leasing companies factoring this into their
calculations.”
Peter Hollinshead, managing director of HSBC Vehicle Finance
confirms that market conditions are such that he has seen more
requests for sales and leaseback recently than he could ever
remember.
He adds: “From 1 April 2009 cars, whether leased or purchased,
will become more expensive to finance. But leased cars with CO2 of
up to 160g/km will become relatively cheaper in whole life cost
(WLC) terms than other forms of finance. As a result lessors should
encourage their customers to base their policies around WLC
considerations, revisit their funding choices and make adjustments
in alignment with the new tax rules.”
John Lewis, director general of the British Vehicle Rental and
Leasing Association (BVRLA) emphasises that members should benefit
from the pre-Budget VAT changes and “claw back over £53m from the
government” by the end of 2009. “Meanwhile,” he adds, “the
reduction in disallowed VAT on leasing costs could save our
customers £100m over the same period.”
Nevertheless, Lewis argues that all lessors will be “reeling”
from the Chancellor’s “cynical” decision to offset the reduction in
fuel VAT by an increase in fuel duty. “While the reduction in VAT
is temporary,” he says, “the increase in fuel duty is not.
Businesses can reclaim the VAT cost of their fuel regardless of the
rate, but they cannot reclaim fuel duty. Hauliers and other
businesses that depend upon road transport will be bitterly
disappointed by this devastating increase in costs. The Chancellor
has given the road transport industry a real kicking.”
For some industry players, the biggest thing to come out of the
pre-Budget report was the publication of information regarding the
changes to corporation tax treatment of company cars from April
2009. Stewart Whyte says that ACFO welcomed the clarification of
the transitional rules related to capital-allowance reform. “All
existing leases will continue to be taxed under the current
system”, he explains, “although at the reduced 20 per cent per
annum writing-down rate, for a period of five years – so
potentially only a very small number of contracts will need to be
transferred to the new system.”
As widely expected, the new regime will only apply to new leases
signed after the rules come into effect, something for which ACFO
“has persistently lobbied HM Treasury.” ACGO also welcomes the
confirmation that the flat-rate lease rental disallowance will only
apply once in a chain of leases/sub leases, as this will aid
flexibility and costs in the funding supply chain – where the
current financial crisis has restricted the credit lines of many
fleets.
“Nevertheless,” Whyte says, “fleet costs remain under severe
pressure, and ACFO is providing members with some opportunities to
identify cost reduction techniques.”
