Is the risk worth the reward?

Outright purchase as a funding option has been in decline for a number of years as companies moved to outsource their vehicle operations and free-up cashflow.

But there is still a sizeable proportion of companies that buy their vehicles, noticeably van-heavy fleets, public sector and smaller businesses.

This option does carry an element of risk as the fleet operator takes on the full ownership of the vehicle, its maintenance and its disposal.

But with reports of rising recharge bills from leasing firms becoming more of an issue for fleets, and a degree of uncertainty over the impending changes to the lease accounting rules, outright purchase may yet see a renewed interest.

Longer manufacturer warranties can also help reduce maintenance costs for outright purchase vehicles.

Bluelight fleets, with their heavy demands on vehicles, generally choose this option.

“We see outright purchase as the funding method for the immediate future,” says John Bradley, fleet manager at Hampshire Constabulary which has a fleet of 1,100 vehicles.

“As a police fleet we enjoy excellent discounts accompanied by the new NPA framework for police vehicles, so outright purchase works best.”

If a company buys its own vehicles, it becomes responsible for maintenance, repairs, insurance and disposal. It is also exposed to all the management issues of running the car and any changes in value at the time of disposal.

However, it also has the flexibility to sell the car at the right time – when values are high – rather than being reliant on the end date of a fixed-term leasing deal.

“If we buy the right vehicles for the right price and make sure we run them correctly, when it comes to resale we usually find good residual values” says Bradley.

“Some weeks resale can be good and others we have a loss on residuals, but overall I have been pleasantly surprised with the values.”

Leeds City Council has also found fluctuations in residuals in recent years, but has been prepared to put up with the risk compared with facing end-of-term recharges.

Carl Snowden, general manager fleet services, says: “We incurred massive end of lease charges and excess mileage costs which we believe were unjustified. Although leasing may have short-term financial benefits, we found it to be costing us more long term.”

Snowden believes outright purchase will remain the council’s funding method of choice for the foreseeable future.

“Outright purchase works for us. It is better because departments will not be hit by end-of-lease costs and we retain the control of maintenance costs and residuals,” he adds.

Nigel Allen, fleet manager at Anglian Water, believes flexibility is a key benefit of outright purchase.

“We are in complete control of the whole fleet. Everything is in-house including accident management and maintenance contract,” he says.

“We have found having flexibility, especially in-light of Vauxhall’s lifetime warranty, has been far more cost effective.”

Anglian Water took the decision to outright purchase in 2006 with the fleet currently consisting of 580 cars, 1,150 vans and 148 lorries.

Residual values remain one of the biggest challenges for companies that outright purchase.

However, Allen has seen residuals increase over the past 18 months.

According to CAP, trade values will rise in early 2011 as supply constraints continue to force dealers to compete in the open market for the best stock, which means fleets defleeting vehicles over the next few months could see a higher return than anticipated.

While outright purchase is suited to larger fleets with resources to look after the day-to-day running of vehicles, many smaller companies also believe it offers them a better deal.

The views of 12-car fleet Cordek finance director Grant Naris are typical: “Rentals are weighted in one person’s favour – and it’s not the fleet. The contract hire company bears the loss, but also the profit.”

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