Concerns over duty of care and corporate manslaughter, particularly on cash-for-car schemes, are driving small to medium fleets towards leasing providers.

SMEs are the fastest growing part of global leasing giant LeasePlan’s business in the UK, responsible for the lion’s share of its fleet expansion over the past five years.

Its investment into dedicated products and services targeted at this part of the market is paying off, according to David Brennan, LeasePlan UK managing director.

“We have grown from a fleet of 100,000 cars five years ago to 137,000 units now with more than 30,000 clients,” he says.

“Half of our clients are blue chip large fleets; half are SME, from one or two cars up.

“We see more growth opportunity in the SME sector because the leasing industry targets the blue chip brands and the public sector.

Once you get into the 20-40 car fleets, many leasing companies don’t have the sales approach or products for that market – that’s why we try hard in this sector.”

LeasePlan’s operation is divided into four components: LeasePlan for large fleets; Network, which provides leasing services for SMEs via 200 franchise operators; Auto Leasing for the public sector; and Fleet Line, a phone/web-based service for SMEs. Network and Fleet Line are the over-achievers.

Brennan predicts a decline in the number of brokers who have traditionally served SMEs as companies like his pay greater attention to the sector.

Manufacturers, by setting up fleet specialist networks, are also eating into brokers’ share.

“We will see the number of brokers reduce to 300-400 from 2,000-3,000,” he adds.
He predicts a stagnant leasing industry fleet size of around 1.4 million vehicles for the next couple of years, pointing to Datamonitor’s research which shows a small growth in 2011-2013.

Grey fleet in decline

The recession has seen many companies reduce their headcounts, leading to an estimated 5-10% reduction in company cars.

However, this has been offset by demand from ex-cash-for-car scheme drivers moving back into company cars.

The grey fleet is in decline, says Brennan.

The increasing complexity of fleet management isn’t just persuading companies to outsource part of their fleet department; more and more are outsourcing their entire operation.

Often this makes the role of the fleet manager redundant – Brennan says LeasePlan is increasingly sitting down with company directors to talk about fleet policy and risk management.

They are also requesting more advice on what they should be doing, for instance on car policy, product choice and lifecycle times, fuel, problem drivers and duty of care.

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“The recession is triggering companies to think about how they run their businesses.

"When the finance director wants savings, then things that have stayed the same for a long time get challenged,” says Brennan.

“Fleet is becoming non-core.”

Will they revert back to in-house operations once the recession ends? “It can take a long time to change back.

They will have discussions every few years but if it continues to work, they will not change – it will still be a complex market,” says Brennan.

Key to the discussions with fleet partners this year is lifecycle times and the decision about whether or not to extend.

Of LeasePlan’s 35,000 cars due for renewal this year, Brennan estimates that up to 10,000 contracts might be extended into 2010.

He insists this is not just for LeasePlan’s benefit – the company hopes to minimise losses caused by the 22% collapse in three-year/60,000-mile residual values (it wrote down values three times last year) by waiting for the predicted recovery over the next year – it also benefits the fleet operator.

“We have conversations over the cost per month of leasing a new car compared to the cost per month of extending the current contract.

"It’s often cheaper to extend because of the inflationary price rises on new cars and the fact that residuals on the new car will be lower than those set on the existing car which makes it more expensive to fund.”

Reacting to suggestions that fleets might prefer to take advantage of the unexpected surge in residuals of 12% at the start of this year, Brennan insists that it is entirely their own choice.

He adds: “We are very open with our calculations.

"At the end of the contract we show the client all the information. If there’s more profit left than forecast because we guessed the maintenance wrong, then we share that with them – we don’t pocket all the profit.”

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Open book policy

This open book policy dates back to LeasePlan’s earliest activity in the leasing sector and continues to underpin all its conversations today.

“It was and still is a point of differentiation,” claims Brennan.

He believes the average LeasePlan contract will rise from three years/60,000 miles last year to around 3.5 years/70,000 miles this year.

He expects to be managing a lot more four-year contracts, but concedes that the maintenance cost does rise significantly over the extended period.

Around three-quarters of LeasePlan contracts are sold with a maintenance package.

The cost is driven more by mileage than age: there’s a spike above 60,000 miles and a second surge above 80,000.

“I wouldn’t want to push anything above 100,000 miles,” adds Brennan.

Despite the impact on profits of last year’s residuals slump, and the recessionary demands to cut costs, LeasePlan is withstanding the pressure to make sweeping redundancies.

Instead, it has looked to reduce marketing and training spend.

“We want to be the strongest company when this recession is over,” explains Brennan.

“We are carrying higher costs in overheads by keeping people in their roles when we could take them out to save money.

"But we need our account managers to spend more time with clients now to help them in their business.

“We have to be ready for when the economy returns to normal.”

The sales pitch: saving you money

The fleet management policy, brands, fuel, process for allocating company cars, additional services like daily rental and accident management, finance, insurance – adding them together will establish the total cost of managing the fleet.

LeasePlan’s objective is to reduce that cost.

“The type of conversations we are having with company directors now is about what’s happening in the marketplace, where’s it all going and where their company is looking to go,” says Brennan.

“We introduced account managers in 2007 and they became fully operational in 2008.

"This is where our added value service comes in – we’ve seen an immediate impact on our relationships, retention rates, and satisfaction rates.”

According to Brennan, 95% of clients will recommend LeasePlan, up from the mid-60s prior to the account manager set up. Satisfaction levels are running at more than 80%.

He dismisses suggestions that the leasing model, at the end of the day, is all about price. “Price commoditises the product. It’s all about the people in this industry.

“Last year we were the most expensive in many sectors because we took action on the residual values drop faster than our peers.

"Now we are priced in the middle of the market – that’s where we want to be.”

New owner, but it's business as usual

Europe’s largest vehicle management and leasing company is slugging it out with GE to be the world’s largest.

Present in 30 countries, LeasePlan’s UK operation is the company's second in volume terms (behind USA) and second in profit terms (behind Netherlands).

The company’s ownership structure will change shortly. Volkswagen, which currently has a 50% stake, will conclude a deal to buy the rest of the business by the end of the year.

Brennan is confident that being a wholly-owned Volkswagen division will not change the way LeasePlan conducts its business.

“We are successful because we offer multi-brand advice – Volks-wagen understands that. If they put pressure on us it would undermine our independence and customers want independent advice,” he says.

“Volkswagen and Audi also want all leasing companies to treat them equally so they are probably more cautious with us to be seen as fair.

“We might get more insight in residual values or know about models sooner, but the financial relationship is the same.”

Brennan believes the relationship will also not affect LeasePlan’s discussions with other manufacturers.

Although LeasePlan no longer runs the back office functions for Fiat or Nissan, it is close to going live with another carmaker. “It’s not Volkswagen,” he stresses.