Choose the right replacement cycles for your fleet

Long gone are the days when choosing the right replacement cycle for a company vehicle was an automatic choice.

The traditional three-year/60,000-mile cycle which served the industry for so long no longer dominates, as many fleet decision-makers realised it was not necessarily the most cost- or operationally effective term for their needs, while improved vehicle reliability meant it was a simple choice to hold on to vehicles for longer if they wanted to.

“With Covid and the credit crunch, over the past couple of years everything has been driven by cost, and one of the easiest ways to reduce annual expenditure is to extend the life of your assets,” says Paul Hollick, chairperson of Association of Fleet Professionals (AFP).

As a result, many van fleets have moved to five, six or seven years’ turnover. “Product quality is good these days, especially when a vehicle has not done huge mileage,” he adds.

“Fleet managers might replace them after 150,000 to 200,000 miles and, with modern servicing and repair techniques, as long as they are repaired within manufacturers’ and leasing companies’ recommendations, that’s fine,” he says.

“This will bring higher SMR charges but that is far outweighed by the reduction in leasing and finance costs.”

With cars, the future of benefit-in-kind tax rates was uncertain for early adopters of EVs until in 2022 the government confirmed the tax rate until 2028.

With the potential threat of BIK rising to 15%, fleet managers took short leases but now they are returning to four years.

Arval UK is seeing an average of 43 months and 55,000 miles for cars, though this ranges from 54,000 for EVs to 72,000 miles for diesel.

“For vans, in 2023 we saw a trend towards 48- and 60-month contracts, rather than 36 months and 87,000 miles; modern vehicles are able to absorb more miles over time,” says Shaun Sadlier, head of consultancy at Arval UK.

The much-documented shortfall in new vehicle supply is finally receding and although the former eight to 10 weeks is still a fantasy, lead times are now down to six months or less. And at least shortages gave managers a taster of extending leases.

“Policies that have been adapted to what fleet managers can get their hands on, rather than what is necessarily right for the role or driver will need unpicking,” says Christopher Caddick, head of business development at JCT600 Vehicle Leasing Solutions (VLS).

“They have also had to absorb increased funding and SMR, often leading to extended replacement cycles.

“The majority of fleets will have simultaneously seen a heavy weighting of replacements in the past 12 to 18 months as supply issues eased.”

He also suggests that while OEMs are navigating EV and CO2 targets, there may be continued price volatility if mitigated by tactical deals and discounts, although businesses may struggle to benefit from these if they have low renewals ahead.

Either way, Caddick forecasts excellent EV deals on salary sacrifice schemes this year.

Creative fleet management

Replacement cycles provide many opportunities for creative fleet management, provided operators understand the pros and cons inherent in reducing or extending them.

Reducing them gives greater flexibility, allowing fleets to change vehicles more regularly, test EVs on a shorter cycle or take on new vehicles or technology, potentially bringing better fuel consumption, lower SMR on EVs and reduced CO2 emissions.

The downsides include the greater administration inherent in this, plus, “higher lease rates, which are already elevated due to rising interest rates, increased list prices and for vans, larger fit-out and body costs”, says Sadlier.

Conversely, lengthening cycles may reduce monthly outlay by allowing fleets to fix expenditure over a longer period.

But there may be a negative impact on reliability, driver acceptability, recruitment and on customers, who may see older, more tired vehicles.

Largely, funding methods do not affect replacement cycles.

Contract hire makes sense for lower emission vehicles such as EVs. “They are generally more expensive than their combustion engine counterparts and, as the industry has seen, the used car market is proving slower to adopt them,” says Sadlier.

“Outright purchase exposes the company to the higher upfront cost of the vehicle and an uncertain residual value for technology with which operators will not generally have much experience.”

VLS recommends working with funding partners to build a strategy with flexibility, including quotes on different terms for varied replacement cycles.

In addition, “fleet managers who favour flexible leasing could consider the provider's strategic plans for fuel mix and their own replacement cycles to ensure they have a partner able to support them,” says Christopher Caddick.

“Those purchasing their fleet must consider and manage volatility in vehicle pricing.”

Depreciation and SMR

Two of the major factors which affect the cost of operating a vehicle and are directly influenced by the length of replacement cycles are vehicle depreciation and service, maintenance and repair costs.

As a general rule, vehicles depreciate faster in the first few years after registration before flattening out when the vehicle gets older.

For example, according to the Fleet News company car tax calculator, which uses data provided by cap hpi, a Ford Focus 1.0 EcoBoost mHEV Active petrol will be worth £12,875 (44%) of its P11d price of £29,065 after 36 months/30,000 miles. This is equivalent to losing £5,396 a year.

After 60 months/50,000 miles, the same vehicle will be worth 33% (£9,525), or £3,908 a year over the extended cycle.

It is the same story in the battery electric vehicle sector, where the used market is currently more volatile.

Volkswagen ID3 77kW Match Pro, P11D price of £39,995, is worth £20,500 (51%) after 36 months/30,000 miles, a drop of £6,498 a year. After 60 months/50,000 miles it has a residual value of £15,275 (38%), an annual fall of £4,944.

Leasing companies use residual values to calculate the monthly rentals of vehicles, and the greater the depreciation, the higher the lease rate tends to be. This means a vehicle kept for longer tends to have lower monthly rentals than if it was kept over a shorter period.

However, the older a vehicle is, the greater the maintenance costs will be, meaning fleets will need to find the right balance between SMR and leasing costs.

Extended replacement cycles also bring the need for MOTs after three years, vehicle warranty expiry and managing SMR charges as a vehicle ages.

Using the same vehicles as in the previous examples, cap hpi says the Focus will have an SMR cost of £756 over three years/30,000 miles. Over the longer term, this rises to £1,745. For the ID3, these sums are £1,383 and £2,690 respectively.

“There are only 50 moving parts in an EV and upwards of 1000 in an ICE vehicle, but SMR charges are similar; this is partly down to tyres and glass from a leaseco perspective,” says Paul Hollick.

“As the uptake of EVs in retail grows, parts and labour should reduce but until then, fleets cannot factor in SMR savings.”

Company strategy

Replacement cycles can be used tactically by organisations to help them achieve strategic goals, such as the decarbonisation of their fleet on a set timeline.

They can either extend or shorten cycles so they match certain events, whether that is the launch of new EVs which are fit-for-purpose from range or payload points of view, or the availability of suitable charging infrastructure.

“As a result, fleets are keeping diesel vans longer, in the expectation these factors will improve in the short- to medium-term, something that we may now be seeing with 100kW vans becoming available,” says Shaun Sadlier, head of consultancy at Arval UK.

Some organisations which want to electrify their van fleet quickly are taking on electric SUVs as an alternative – possibly for just one or two replacement cycles – until suitable electric vans are available, adds Ben Edwards, a consultant at Arval UK.

“It’s quite a radical idea in itself – replacing vans with cars – but it does have many benefits as long as a model with sufficient carrying capacity can be identified,” he says.

“Supply is one of them as, generally speaking, new electric SUVs are more easily available than vans, certainly for some of the models that fleets are adopting.”

Electric SUVs will tend to offer better range than vans, often up to 250-300 real-world range, while accessing public chargepoints is easier in a car.

“As a strategy, this is very much a reaction to current conditions when it comes to electrification,” adds Edwards.

“The businesses making this move have often made corporate environmental commitments with comparatively short timescales and this is a significant driver behind their current decision-making.

“They want to electrify quickly and the eSUV route is allowing them to achieve this.”

JCT600 VLS suggests fleets take a strategic approach to the length of replacement cycles. “Fleets could look at curtailed replacement cycles and take advantage of short-term extensions while waiting for vehicle or technology improvements,” says Caddick.

Hollick adds: “Some fleet managers have set rotations so that a whole van fleet can be changed to EVs in one year,” says Hollick.

Conclusion

There is no right way to approach this taxing issue, with advantages and disadvantages attached to both longer and shorter replacement cycles.

The answer is to know your fleet and your drivers, test your thresholds – both in financial and human terms – and most important, take a longer view, so that you cater not only for the here and now, but also for the future.

Even though the world will not return to its happier pre-Covid state, delivery times are already getting shorter, parts shortages are beginning to diminish and the EVs that are having teething problems will overcome them, ensuring that fleets can progress smoothly towards net zero emissions with replacement cycles that fit their business imperative and fleet profile.

It is a matter of planning and strategy.

By Catherine Chetwynd