Early termination: Everyone's a winner?

by Tim Cattlin, light commercial vehicle consultant

A year or two ago when used LCV values within the trade were rising faster than my grandmother’s Yorkshire puddings, I was suggesting to anyone who would listen that a deliberate strategy by the leasing industry of offering its customers an early termination of their contract hire agreements (with the caveat that they take a replacement) could well prove to be a profitable move. 

Time has moved on and the market is changing – is it too late for some tactical defleeting by the contract hire industry, or by any operator that normally works to a rigid change cycle?

Registrations of new LCV’s have exploded over the last few years. At the same time demand for used vehicles has been very strong and prices across most sectors reached record levels. We are now at a point where the supply and demand balance is likely to shift very soon. Values currently being achieved at auction, although not as robust as they have been are relatively stable, particularly for clean stock requiring little preparation.

Vehicles registered during the recent ‘boom’ are nearing the end of their contracts however and will soon be appearing in the auction halls in ever increasing numbers. Sources within the remarketing industry have told me that they expect the last quarter of 2016 to be tipping point, and that as we enter into 2017 the number of available vehicles will start to exceed demand, having a consequential negative effect on values. In addition, it should be noted that the rate of growth in new vehicle registrations is rapidly easing.

As economic factors prompting vehicle acquisition are common between new and used, there is a significant threat to used vehicle demand.

So, what potential benefits might be gained by early defleeting?

• An opportunity to avoid undue exposure to the inevitable drop in values caused by oversupply next year (and beyond).
• Taking advantage of one of the healthiest areas of the used market - quality, clean two to three year old vehicles which are not under pressure from pre registration activity on new vans. Values are likely to be the last affected by oversupply.
• Every defleet pulled forward will help to ease the saturated market in 2017/18.
• Benefitting from the unprecedented financial support some manufacturers are offering for new registrations.
• Specifically 2015 /16 has been a period of facelifts / revisions across the 4x4 sector. As this is the segment most susceptible to lifecycle depreciation it is expected that ‘old model’ values will start to suffer as their fresh replacements become a familiar sight. Early defleets will avoid some of this inevitability.
• A fantastic opportunity for customer retention for the leasing companies.

So, potentially everyone wins. The manufacturer gets a new registration, the lease company or operator avoids one more potentially challenging disposal later on, achieves a better (and faster) return and the end user gets a shiny new van.

Specialist equipment, wraps, racking etc may present a challenge to some but, in the majority of cases it’s maybe worthy of consideration. Fleet managers may wish to have a quiet word with their lease company account handler or dealers. You’ll need to move fast though…