UK fleet sales have been increasing year-on-year for the past few years, gradually recovering from the drop caused by the financial crisis. In 2014, fleet sales reached a seven-year high with 1.178 million vehicles sold, an 8.7% increase compared to the previous year.

Doug Hyett, director at Lex Autolease says the current activity in the fleet lease market is the highest for the past five-to-six years and that competition is fierce: "The leasing organisations seem to be more interested in taking on new business," Hyett says. "The marketplace has never been so competitive."

The recovery finds a different fleet leasing market, with a reduced number of players and a dichotomy in terms of business sizes.

Martin Brown, managing director at Fleet Alliance said: "There’s been some movement and consolidation. Companies like Lombard pulled back from the market, while Zenith and Leasedrive came together as Zenith Leasedrive.

"The market has changed and there have been businesses acquired, while one or two exited the market. We have these super-huge leasing companies, the big five, and a number of small and medium players. There is a big gap in fleet size between the big five and the rest of the firms."
The majority of UK banks have turned their back to the market, as currently only Lloyds has a fleet unit (Lex Autolease). On the other hand, fleet divisions of international banks – ALD Automotive and Arval – are still operating in the market.

According to the industry professionals Motor Finance spoke to, the main reason behind the expansion of the fleet lease market over the past few years has been the strong growth of the UK economy.

The improved economic conditions have boosted business confidence, with some companies that were reluctant to seek vehicle leasing during the financial crisis and its direct aftermath, now placing orders.

Brown believes the strong value of the pound against other currencies has also triggered an increase in fleet leasing.
"Another force that helped market growth was the favourable exchange rate, as manufacturers have been looking at the UK market very positively," says Brown. "I think it has brought down the prices in some respects for consumers and user businesses too."

The SME sector has been responsible for a significant portion of the fleet lease market growth, with many companies increasing their marketing focus on SME customers.

According to Fleet Alliance, while larger customers have been cutting their fleet, fleet leasing to small businesses has accelerated.

Brown says: "Our experience from the financial crisis was that our larger clients were more likely to be putting orders on hold and being circumspect, whereas SMEs were a bit more responsive.

"The SME sector has always been important but I think there’s greater awareness, particularly with big players, on the importance of focusing on SMEs. Until five-to-six years ago companies would only want to win contracts with the huge thousand-
vehicle operators."

He adds that the SME sector presents growth opportunities for both the large and small lessors, as particularly in this segment of the market lessors of all sizes compete heavily with each other.

Gerry Keaney, chief executive at the British Vehicle Rental and Leasing Association (BVRLA), says: "The surge in demand from SME customers has been reflected by the increased focus major funders are placing on their leasing broker channels."

Recent trends and popular products

According to the BVRLA, contract hire remains the most popular form of vehicle leasing in the country.

However Brown believes it will grow at a slower rate than personal contract hire in the near future.

He says: "Personal contract hire is the one to watch. It used to be an opt-out product for directors and people on cash loans, but now if you go to a car dealer or original equipment manufacturers they will be offering personal contract hire products. I think in terms of contract hire we will see small-digit growth in the coming years, whereas personal contract hire is where the significant growth will come."

One trend Hyett has noticed is an increasing number of light commercial vehicles coming into the leasing market, as they are a popular choice for SMEs.

He also sees the advent of low-emission vehicles as a result of pressure on fuel prices and benefit in kind taxation.
Keaney agrees, and says: "Fleets are choosing smaller vehicles in lower Vehicle Excise Duty bands with low emissions, which has resulted in an increase in deliveries of lower-medium, mini and crossover class vehicles at the expense of those in the upper-medium and executive categories.

"Average emissions for new lease car registrations fell by 4% from 119.1g/km CO2 at the end of 2013 to 114.7g/km at the end of 2014. This means the average new lease car emitted 7% less than the average for all new cars registered that year."

Despite the increasing interest among companies for low-emission vehicles, leasing of electric vehicles and plug-ins has not caught the attention of lessees.

"From a leasing perspective, with technology in electric vehicles and plug-in hybrids changing year after year, the residual value position of these vehicles in three-to-four years is challenging," says Hyett.

Apart from residual values, Brown believes the low popularity of these vehicles is due to infrastructure limitations. He believes that there is not enough infrastructure for charge points in the UK.

In addition, Brown says that changes in legislation have also negatively affected the demand for electric and plug-in vehicles, with the incentives for electric vehicle purchases diminished.

Current and future challenges

The regulatory changes, which arose from the establishment of the Financial Conduct Authority (FCA) have altered the way that lessors operate and have increased their costs.

Brown says: "As an effect of the new FCA regulatory changes, the businesses have to be quite introspective and look at their processes and policies, ensuring that they are treating customers fairly. I think we’ve all been looking at that over the past 12 months and it has certainly increased the cost of operation, as we need people to work in compliance."

At the same time the BVRLA states that increased taxation imposed by the UK government could have an adverse effect on the fleet lease market. Keaney says: "The government’s motoring tax regime continues to incentivise vehicles with low CO2 emissions, but it’s clear it is looking at the company car sector to generate more tax income. In the 2015 Budget, the Chancellor announced that company car tax would rise by 2% for cars emitting more than 75 g/km CO2 to a maximum of 37% until 2018-19, after which there will be a rise of 3% for 2019-20. In 2017-18 there will be a 4% differential between the 0-50 and 51-75 g/km bands and between the 51-75 and 76-94 g/km bands. In 2018-19 this differential will reduce to 3%.

"This is likely to cost the industry an extra £340m in 2019-20, according to government estimates, which is a 171% tax rise compared to what the industry was expecting from the 2014 Budget.

"It effectively accelerates the rate of increase in company car tax that thousands of motorists will pay, at the same time as putting the brakes on the take-up of ultra-low-emission cars."

Apart from taxation, industry professionals believe that the forthcoming new lease accounting rules will affect the global fleet lease industry.
The rules being worked on by the Financial Accounting Standards Board and the International Accounting Standards Board (IASB) are expected to be finalised in 2018.

The IASB states: "The existing accounting models for leases require entities to classify their leases as either finance leases or operating leases. A lessee is not required to recognise lease assets or liabilities for operating leases. Those models have been criticised for failing to meet the needs of investors and analysts because they do not always provide a faithful representation of leasing transactions. In particular, they omit important information about significant assets and liabilities arising from operating leases."

The new rules will require companies to record leases, including existing leases, on their balance sheets. They will cause alterations to corporate financial statements. Proactive companies are beginning to assess the impact of the new rules and fleet lessors are already informing customers about the changes.

Under the new rules, all leases with a maximum term longer than 12 months will be capitalised on the balance sheet.

For companies that seek to lease vehicles, contract hire will be on balance sheet. However Lex Autolease’s Hyett suggests that he doesn’t expect changes in the demand for contract hire.

"One of the main reasons people chose contract hire many years ago was because it was off balance sheet," Hyett says. "But this is not necessarily why people take contract hire now. I think it will just eliminate the difference between contract hire and other funding routes like finance, lease and contract purchase, in terms of why choose that rather than the others?"

He expects that, as a consequence of the new rules, there will be an increase in demand for employee car ownership (ECO) schemes.
"I think people will take ECO funding. With benefit in kind taxation rising and the fact that it’s off balance sheet, I think ECO will be back," says Hyett.

Another future challenge is going to be the anticipated drop – due to cyclical nature – in residual values, which have been increasing year-on-year for the last few years.

Hyett says: "The massive oversupply of new vehicles is driving down the residual values of existing vehicles because you can get a new vehicle with discounts at the moment, as big European manufacturers are discounting very heavily. This means that new vehicle prices are getting very close to a second-hand vehicle price. I think there is a huge pressure on residual values for second-hand vehicles."

Speaking at the Glass’s Fleet and Finance Summit, associate director at Grant Thornton Richard Parkin predicted that residual values will gradually decline by 10-15% over the next 24 months, as the growth in supply in the "critical three-to-four-year-old segment" will outstrip demand.
Technology has completely transformed the fleet leasing market in recent years. Apart from funding vehicles, companies now own online fleet management systems and offer drivers mobile apps.

The change in technology requirements for lessors has presented new challenges, including having to innovate constantly in order to differentiate themselves from their competitors. Product development increases their costs, which is also a challenge for companies’ finances.

"I think the technology costs of working in the fleet sector have risen dramatically, since we have to invest significantly in software," says Brown. "Increasingly we need to be ahead of competitors. It’s a very homogeneous market, so each provider needs to ensure that their technology is absolutely on the button. I think that’s a challenge all leasing providers face now."

Another possible force that could pose difficulties to lessors in the future is political uncertainty in Europe. Despite the fact that Brown acknowledges that political uncertainty on the continent could affect the market, he remains optimistic that it will not happen.

He says: "I think it comes down to the severity of what happens in Europe. I think, as we found in the last crash, we’re more interconnected and intertwined than perhaps what people previously thought. Other than Greece, it seems that the European markets are more stable than they were in the past few years.

"Any knock-on would undoubtedly have an impact on manufacturers and some of the European banks and leasing companies operating in the UK, like BNP Paribas and Société Générale. However I would like to be optimistic that a severe political uncertainty will not occur."

The market going forward

Despite the number of current and future challenges, industry professionals expect fleet lease volumes to grow in the next few years.
Competition in the market is expected to change over the next few years. GE Fleet is up for sale and there could be numerous new entrants. Brown expects that competition will become tougher.

"I think there’s noticeably been a number of venture capitalists and investment businesses in and around the fleet leasing market in recent years," Brown says. "I think some banks, which are now re-profiting from the previous recession will again look to leasing as a way to generate good steady income. If the economic conditions are kind over the next few years, we will see quite a few changes in the sector, new entrants and mergers and acquisitions. The competition is going to get tougher."

New technologies like telematics and keyless driving are likely to emerge as products and services offered by lessors.

Telematic devices provide a range of data which can be used by companies to assess the efficiency of their fleet. Also through the use of the tracking features of devises, companies can reduce recovery time when a vehicle is stolen.

LeasePlan’s chief commercial officer Nick Salkeld told Motor Finance that the company plans to install telematic devices to all of its vehicles by the beginning of 2016.

Brown says: "I believe telematics will only really take hold of our market when the manufacturers embrace it fully as they are beginning to now.
"I view telematics as a product for specific companies generally operating commercial vehicles. Very few car fleets are using telematics, but I would see manufacturers and insurance companies driving the demand for telematics and I think the leasing companies will be reactive and will pick up from there."

Hyett expects the growth of car sharing to continue in the near future and that keyless driving will emerge. "Keyless driving for us will be an absolute step forward," he says. "Sometimes you get a vehicle back with one set of keys; a key is hugely expensive to recover.

So if customers are able to access and drive the vehicle using the technology they are carrying with them all the time, it would be a big benefit to our cost structure. Once you get into the car the ignition won’t start unless the technology that allows you into the car verifies who you are and that you have booked the vehicle," he says.

European outlook

The majority of European fleet markets have started to show signs of recovery from the reduced lease volumes experienced over the past few years.

Leaseurope’s latest preliminary survey of the market finds that the vehicle segment of the leasing industry, which includes passenger cars and commercial vehicles, saw higher year-on-year growth in 2014 compared to any of Leaseurope’s other divisions. New leasing volumes across Europe in this segment have increased by 12.4% compared to 2013.

LeasePlan’s chief commercial officer Nick Salkeld believes that growth at a pan-European level will continue in 2015, despite expectations that the market will shrink in a number of countries.

"In the main we’re seeing the leasing markets of most of the European countries improving," says Salkeld. "We saw that last year, and we’re seeing that this year with year-to-date growth figures across Europe being very strong.

"On the other hand, it’s expected that the overall leasing markets in the Netherlands, Norway, Portugal, Finland and some other countries will reduce slightly this year."

The international fleet leasing firms are finding that companies and drivers are increasingly looking for more flexible leasing solutions. As a result some companies are shifting their focus onto mobility solutions, like car sharing, launching new business services in order to respond to the changing customer behaviour.

"Car sharing, flexible leasing options and short-term rental options are elements that enable us to meet the requirements of someone who wants a four-year contract, down to someone who wants a car for four hours," says Salkeld.

Differences in infrastructure and drivers’ behaviour between European countries make certain mobility solutions more appropriate for some markets than others.

Doug Hyett, director at Lex Autolease, says: "I think our European customers are more interested in mobility solutions than just pure leasing. So that’s combining your travel pass, your car, maybe interfacing with public transport.

"In the Netherlands it works right across the country, so it’s completely integrated. I think other countries may pick up on that. I just don’t see it happening in the UK which is too fragmented. Maybe it could work in London because it has the infrastructure, with the ability to use contact payment and you can lease a car or car share."

The European fleet lease companies are optimistic that the market is going to grow over the next few years. Head of marketing and business development at Alphabet, Carsten Kwirandt, told sister magazine Leasing Life: "In all European countries, finance lease is expected to outperform the total car market in the next few years. Operational lease is expected to hit 6.5 million by 2018."