Leasing trends Pt 1: Sustainability is new driver of leasing sector

With the clarity of the most compelling political messages, the blunt slogan from Bill Clinton’s successful 1992 presidential bid still resonates today: “It’s the economy, stupid.”

Those four words kept his election team focused amid the myriad distractions of the campaign trail.

Three decades on, the leasing sector could sum up its future in an similarly pithy phrase: “It’s sustainability, stupid.”

As companies emerge from the worst of the pandemic, the sustainability of their fleets and entire business operations has moved front and centre of corporate thinking.

With barely two vehicle replacement cycles left before the ban on the sale of new cars and vans with internal combustion engines (ICEs) comes into force, fleets of all sizes are investigating and implementing the electrification of their vehicles with unprecedented intensity.

Placing new demands

The most obvious fleet route to net zero is the migration from ICE to electric, a transition that is placing new demands on leasing companies in both pricing and service delivery.

As a fledgling market, there’s still a significant lack of data surrounding the operating costs and residual value (RV) forecasting of electric vehicles  (EVs), while fleets are wrestling with the operational challenge of EV range and recharging.

In the words of Matthew Walters (left), LeasePlan’s head of consultancy services and customer value: “My role and my team’s role have changed. Three-to-four years ago it was financial fleet consultancy, but the job is now EV consultancy; charging infrastructure challenges, staff surveys and decisions over whether to introduce hybrids as short-term solutions.”

In lieu of cost savings, clients have, instead, applied a laser-like focus on “ESG (environmental, social and governance), carbon reduction and environmental sustainability”, says Walters.

“We are investing in our people, in knowledge centres, and creating podcasts, webinars and driver portals so we can answer all those questions about how to go electric by 2025.

"I’m not having any conversations about 2030 – all corporates are talking about 2025.”

Fleet customers are also looking for a range of products and services that include both company cars and vans, as well as cars driven by the wider employee base, in a bid to reduce both their
Scope 1 greenhouse gas emissions (fleet vehicles) and Scope 3 (commuting).*

According to Zenith CEO, car and van division, Ian Hughes: “More companies are starting to see the opportunities they have to deliver a significant benefit through a salary sacrifice car scheme while the tax position is so favourable for ultra-low emission vehicles. There has also been notable growth in company car drivers taking EVs where they may previously have chosen a cash option. While the benefit-in-kind (BIK) tax rates are so low, this is an easy choice for many company car drivers and has led to significant growth.”

Shortage of new cars

Meeting this demand has proved a challenge for all leasing companies in the face of a critical shortage of supply of new cars, due to the semiconductor crisis. Encouraging clients to widen company car choice lists to more manufacturers, especially for EVs, has created new sources of fleet vehicles, but lead times of six months-to-a-year remain common.

The silver lining to these delays is the time it gives fleets to establish the operational practicalities of running battery-powered vehicles, particularly with regard to charging requirements.

“The past few years have created a desire for a more hands-on service from providers,” says Stuart Cunningham, head of corporate and international sales at Alphabet.

“Customers want added value from their suppliers and ease of service, but this will look different for EVs when compared with ICE vehicles.

“As such, leasing companies and manufacturers alike are having to provide services that enable people with EVs to have easier journeys and simplified, streamlined services – particularly when it comes to the initial transition to the technology. It is key that leasing companies take the lead on this, and create consolidated solutions that offer customers a one-stop shop when it comes to electric.”

This one-stop shop covers everything from overseeing the installation of domestic and workplace chargers (how many and what speed?), as well as access to public charging networks and reimbursement solutions for electric business miles.

The lower ‘per mile’ cost of electricity compared with fossil fuels is a key element in the competitive wholelife costs of EVs, but wider inflationary pressures are bearing down on lease rentals.

The cost of borrowing is rising as the Bank of England nudges up interest rates, while manufacturers are introducing frequent price rises and cutting back on fleet discounts as they attempt to transition profitably to the production of EVs.

In the short term, being nimble and ultra-sensitive to the market has helped to protect fleets from lease rate rises, says Ogilvie Fleet sales and marketing director Nick Hardy. He says: 

“We have learnt to communicate even faster with our customers to keep them in the loop.”

"As soon as we sense list price rises are imminent, we advise our customers to place orders and get price protection. We have some vehicles in our order bank that have been the subject of two price rises since they were placed.”

Residual value confidence

The buoyant RVs of the past 18 months, which have delivered record profits to leasing companies, have helped to offset some cost increases in lease rentals, but the demand for used cars will not outstrip supply indefinitely.

The encouraging news is the growing confidence among leasing companies in the future RVs of EVs. LeasePlan’s Walters says:

“The residual values of EVs will strengthen – the world is becoming much more positive about EVs.”

He also suggested that manufacturer price rises will slow down and fleet discounts will return to some degree when the supply situation returns to normal.

And there are other factors, too, which will help to restrain EV lease rate inflation. Contract mileages are falling due to hybrid working practices between home, offices and Zoom, while service, maintenance and repair (SMR) costs of EVs are lower than those of their ICE equivalents.

This paves the way for longer holding periods, allowing leasing companies to amortise depreciation over a longer period without the risk of a spike in SMR costs in the final few months, leading to lower monthly rentals.

“Coupled with OTA (over the air) software upgrades, you can have a four-year-old car with up-to-date technology running in it,” says Tom Brewer, fleet sales director of Volkswagen Financial Services (VWFS). “Also, from a sustainability perspective, while a greener car fuelled by green energy is absolutely a plus, fewer vehicles being made (due to longer holding periods) is also a positive.”

Perhaps the biggest unknown in the forecasting of prices is the impact of the combined purchasing power of ALD and LeasePlan.

The acquisition of the latter by the former will propel the joint enterprise to the top of the FN50 chart, with a fleet size of 316,000 vehicles, 12% bigger than its nearest rival. Official documents say the transaction is expected to generate “operational and procurement synergies of €380 million (£318m) a year before tax.” A rough calculation puts this saving as about £90 per vehicle per year or £7.50 per month, although there is no indication of whether these economies of scale will be evenly distributed across countries or how much of the savings might be passed on to customers.

Executives at rival leasing companies doubt that much of these savings will be achieved through enhanced purchasing terms, which are already considered to be close to maximum, given that both companies are in the top five of the FN50 listing.

But the opportunity for efficiency gains by consolidating back-office functions and running more vehicles per employee clearly exist. New ALD is targeting a cost-to-income ratio of about 45% in 2025, compared with 46-48% at present.

The quest for this type of efficiency gain is apparent across the leasing industry in investments ploughed into digitising operations, from online sales platforms to SMR, where in the not-too-distant future, vehicles will communicate directly with garages and leasing companies without any driver intervention.

“Using connected vehicle data to help create efficiencies in servicing and maintaining fleets will allow for a more proactive and cost-effective means of keeping vehicles on the road,” says Hughes. “For commercial vehicles, data aggregation is crucial to delivering this and will play an increasing role in our ability to predict issues and proactively manage our customers, both reducing time off the road and reducing cost.”

New opportunities

Digitising operations also paves the way for a host of other products and services, such as remarketing used vehicles on second-life leases directly to the public, as Zenith’s ZenAuto and Arval’s AutoSelect are doing. Moreover, access to a retail audience, whether B2E (business to employee) or the wider public creates new opportunities beyond the supply of vehicles.

Arval, for example, has pioneered a scheme that allows employers to offer leased e-bikes to their staff, cleaning commutes by making zero-emission travel more affordable.

Arval UK commercial director Paul Hyne says: “Our view is that businesses and their staff will increasingly be looking at a wider selection of mobility solutions and that a car – potentially an EV – and an e-bike will each be the right solution at different times.”

Evidence, if any were needed, that the future can be summed up by, “it’s sustainability, stupid!”

*Scope 2 refers to indirect emissions from electricity bought and used by an organisation.

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e-LCVs drive van

The transition to electric and alternatively-fuelled, low emission commercial vehicles is providing a stimulus for leasing, after the pandemic spurred rapid fleet expansion in industry sectors such as home delivery.

Zenith, which has acquired three commercial fleet operations including the Cartwright Group in the past five years, says the shift from traditional outright purchase to leasing is partly due to the proportionately higher capital cost of zero and low emission commercial vehicles, as well as the relative lack of data and associated residual value risk. Plus, leasing frees up capital to invest in infrastructure upgrades for depot chargers.

The rising demand for commercial vehicles has also coincided with the introduction of clean air zones and mounting pressure on operators to meet net zero objectives. The result has been a degree of asset changes within fleets, including trading down from trucks to vans for urban operations, while certain trunking operations have traded up to double-deck trailers, says Martin Jenkins, CEO commercial division at Zenith.

Commercial fleet focus

“Operators of commercial fleets are focused on compliance, cost, vehicle availability and efficiency, and sustainability,” he says. “Fleet management providers have required agility and innovation to support
ever-changing customer demands and evolving operating models.”

As a result, digital technologies have become enablers to deliver efficiency through fleet management processes.

“Service and maintenance models have also evolved and are increasingly embracing mobile solutions to help drive vehicle availability, an area where Zenith is both investing and innovating,” says Jenkins.

But commercial vehicle fleets are still wrestling with the operational challenges of running vehicles that require plugging in. Loaded with cargo, tools and equipment, an e-LCV’s real world range plummets below advertised figures.

Moreover, says Tom Brewer (left), fleet director of Volkswagen Financial Services, “the use case can be more difficult because of the need to minimise downtime, as well as the fact that some drivers do not have the luxury of home charging and so have to rely on public charging infrastructure.

"We are investing a lot of energy to support this population make the transition.”

He believes that, by 2025, economies of scale will start to lower the acquisition costs of e-LCVs, especially in the 3.5-tonne sector, while proposed Euro 7 emission standards are likely to drive up the cost of petrol and diesel models, closing the wholelife cost gap in favour of zero emission models.