Extended contracts are proving to be a win-win for both fleets and lease companies, but experts warn that there are risks.

In this climate, extended contracts are being pushed by lease companies as they stand to gain an additional year’s income from a car that they would currently find hard to sell on. 

Claudia Rose, corporate sales director, Lloyds TSB Autolease, said a typical fleet that extends into the fourth year can see significant savings: “It is hard to quantify the savings but typically they would be between 7% and 20%,” she said.

“Six months ago we were seeing a level of interest but not so much take up,” said Ms Rose.

“Now we are seeing take-up accelerating as the economy gets worse.”

It is no more difficult selling a 48-month-old-car compared to a 36-month-old one.

However, while much of the depreciation has already come into play for a three-year-old car, lease companies can still be hit in the fourth year.

“Fleets need to do their own calculations but CAP’s analysis of actual disposals data suggests that percentage fourth year depreciation is slightly higher than for year three,” said CAP’s Mark Norman.

“Furthermore, this is most pronounced in those cars which are closest to the end of their lifecycle.

"In very general terms if the vehicle is worth around £5,000, then additional depreciation will be something like £1,500.”

For example, a VW Passat 2.0 SE TDi, 2006 55 plate, with 60,000 miles will depreciate by a further £1,250 after a year and another 20,000 miles.

An Audi A4 2.0 TDV SE CAP is forecast to depreciate from £7,675 to £5,525 using the same parameters.

While these depreciation costs are calculated into any extended contracts, fleets will still enjoy lower monthly charges compared to taking on new vehicles.

But fleets that have non-maintenance contracts face additional expenses if they opt to extend as vehicles move out of manufacturer warranty cover and begin to require MoTs.

“As fleet operators will already know, on several models there can be some very high service costs once you get over 60 or 70,000 miles,” said Mr Norman.

“Depending on the additional impact of these factors, running the car for another year may well prove a viable option.”

Tyre replacement costs will also be an issue.

“With many fleets now opting to keep vehicles for longer, most low mileage vehicles averaging 10k a year will need new rubber in the fourth year, although for some fleets as many as 20% will already have replaced tyres due to damage, meaning the tyre is not living its full life,” explained Steve Bury, head of national accounts at ATS Euromaster.

“Keeping vehicles for longer naturally also brings the risk of increased maintenance costs and unexpected downtime.”

Therefore fleets should contract with a supplier that offers exhausts, brakes, shocks oil and MoTs as well as tyres.

But even with non-maintenance contracts, a typical fleet will still see savings by extending its contract, says Ms Rose.

To help lease companies manage these additional maintenance issues, third-party providers are also seeing an increase in business.

The start of the year saw record levels of service and maintenance business between fleets and dealers through the Epyx 1link Service Network e-commerce platform.

The platform is used by leasing companies to buy service and maintenance from more than 12,000 franchise dealers, independent garages and fast-fit centres.

Ken Trinder, head of business development at Epyx, explained that a number of factors were behind the rise, but one in particular: "Many of our leasing companies are seeing more year four contract extensions.

"This has maintenance implications and is a trend we expect to see grow during 2009."

Fleet managers are also looking at short-term rentals as a stop-gap solution rather than taking more vehicles on contract that may not be fully utilised.

Rental providers have been quick to offer tailored solutions aimed specifically at fleets.

ALD Automotive has just launched Rental Solutions, which offers cars and commercial vehicles on non-contract, short-term rental.

ALD deputy managing director Nigel Fletcher said: “Businesses are analysing all aspects of expenditure and are reluctant, in some cases, to commit to long-term contracts.

“As a result, many are seeking shorter-term vehicle solutions with the added ability to rent more vehicles or hand vehicles back as and when business levels demand without penalty.”

The final success story to come about as a result of the downturn is sale and leaseback.

Some estimates suggest that up to 50% of fleets still outright purchase their vehicles, while others lease.

However, with credit harder to secure and residual values at an all-time low, many outright purchase fleets are considering sale and leaseback options, which frees tied-up capital from their vehicles.

While lease companies are reporting an increase in such business, the most recent survey of fleet attitudes (FN 20.01.2009) suggests less than 5% are considering sale and leaseback.

What fleet must consider is that the deals will value their vehicles at the current market value, which means they will most probably have already have taken the majority of the residual hit.

Arval recently completed a sale and leaseback deal with ArjoHuntleigh for its 200 vehicles.

Arval already supplied ArjoHuntleigh with fuel cards as well as around 140 contract hire vehicles.

As part of the agreement Arval will also provide accident management and rental as well as a downtime management service.

With most of these solutions, lease companies are betting on residual values improving by this time next year.

“Lifecycle depreciation will remain higher than before the downturn began in March 2008 and a typical cumulative depreciation total next year of 12.5% at 3yrs/60,000 miles and perhaps a percentage point more at 4yrs/80,000 miles,” predicts Mr Norman.

“We remain of the view that current used values will begin to stabilise around the middle of this year which means cars de-fleeted in 2010 will see similar conditions to those.

“But clearly there is still a significant risk of further economic problems emerging.

“The fact of the matter when looking ahead is that no definitive facts can even be identified about 2009 let alone 2010 and beyond.

“We are in a period of unprecedented uncertainty, with an ongoing banking crisis and rising unemployment.”