AMID claims that four-year replacement cycles are a false economy, Nigel Underdown, head of customer relationships at Bank of Scotland Vehicle Management, says fleet chiefs must not jump to conclusions on the matter.

'Exactly what is the most advantageous term is a perennial question asked of fleet suppliers, especially by customers keeping a weather eye on falling residual values and, as a result, trying to second-guess tomorrow's second-hand market.

News suggesting that keeping a car for a fourth year, as opposed to the industry norm of three, results in a 20% to 30% loss, has to be placed into perspective. No-one expects a four-year/ 80,000-mile car to command the same figure as a three-year/60,000-mile equivalent, certainly not the likes of us leasing companies whose profit or loss depends largely upon correctly forecasting the second-hand worth of vehicles.

But, before going too far too early, let's begin with some basics. Firstly, funding and running vehicles for four years as opposed to three has always been cheaper on pence-per-mile basis. Why? Because although depreciation occurs on a sliding scale, to paraphrase the words of the old Cat Stevens song, 'the first cut is the deepest', meaning the biggest slug is wiped off in the first year of the vehicle's life.

Viewing this long-term, say over a 12-year period of supplying a driver with a car, the higher the number of first years that can be eliminated the better. Three four-year cycles would be more cost-effective than four three-year cycles.

No-one will argue with the fact that the current state of the second-hand market has served to narrow the gap between the two routes. Without doubt, however, it still exists.

A four-year term will produce savings in the order of 8% to 10% over a three-year term. Even adopting the pessimistic viewpoint that although a three-year-old offering might clear CAP clean, a year on it could only be expected to muster CAP average, the benefit slips only slightly, to the 6% to 8% band.

The argument that service, maintenance and repair costs are likely to be higher in the fourth year does not take into account, as we do, the greater reliability of today's cars, with their 100,000 mile-plus lifespans. If there is a major component fault it is just as likely to fail in the first month as in the 48th.

A clear cut case, therefore, in favour of four-year cycles? Not necessarily so…

There will always be exceptions to the rule and extremely high mileage is one. A four-year term with 25,000 annual mileage, meaning the vehicle would tip over the magic 100,000-mile barrier, could indeed have an inordinate effect on the residual value. And there is the question of model replacement. Once a car falls into 'old model' territory it will lose a few points in value and factoring in launch dates is relevant, as are the many other criteria that go to make up residual value forecasters' daily fare.

Increasingly though, there is a far greater consideration employers have to heed – the driver. I suspect that most reading this article will have experienced receiving notification (normally two-and-a-half years into a term, when the mental reselection process has already begun) that the company has decided to economise by extending the company car cycle from three to four years. Remember the disappointment?

Under the emissions-based company car tax regime the implications of such moves are more than cosmetic, they impact upon drivers' pockets also. To remain tax neutral drivers have to reduce the emissions performance of the cars they drive each year, and they need to be given the chance to do so by their bosses. Locking a driver in to a lengthy term, such as four-year cycle, effectively reduces this opportunity and results in the payment of additional and avoidable tax. The company may be saving money, even though it is costing the driver dear.

With organisations attempting to balance corporate gain against employee benefit, the debate will continue.

Of course, some could choose to take the middle-ground and elect for three-and-a half-year cycles. Now there's a thought...

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