According to the Fleet News Confidence survey, 36% of fleets have extended their vehicle replacement cycles in the past year.

A further 29% are considering extending their change cycles over the next 12 months.

Surprisingly, though, just 7% believe extending their replacement cycle will bring about the biggest cost savings this year.

For outright purchase fleets, the decision about whether to extend or not comes down to one simple calculation: the initial one-off financial saving versus the rise in SMR costs and the fall in re-sale values.

This saving can be substantial, as BCA found out recently.

For leased fleets, it’s not quite so straightforward. Caution is required.

The monthly leasing rate is set at the start of the contract based on the agreed vehicle lifecycle, say three years.

Beyond that point, the cost profile changes: generally, the car will depreciate less with age but cost more to maintain.

In a lease, depreciation and maintenance are averaged out over the course of the contract.

However, a car depreciates considerably more in the first couple of years than over the next few.

Paying for depreciation

So effectively, if you are paying the same price for a rental in an extended fourth year, then you are paying for depreciation that has already been covered.

In fact, paying the same rate means you may be subsidising some of the loss the leasing company was about to make on lower than expected residual values.

IFC fleet outsourcing director Paul Talbot said: “Suppliers are keen to not sell a vehicle that will show a book loss and are therefore mostly prepared to offer an incentive to extend. These can range from 5-20% for a one-year extension (usually subject to mileage limits).

“A good approach is to compare the rental difference today for a new car equivalent but bear in mind though that if the contract has already run for some time, payments already made at a higher rate should be offset against the newly-reduced level.”

Fleets need to resist any increase in rental charges, according to Stewart Whyte, director of consultancy Fleet Audits.

“That destroys the whole basis of the cost-risk-transfer that is at the heart of most contract hire deals,” he said.

Instead, fleets should be looking for an overall reduction in monthly outlay.

They also need to beware of any reconciliations on mileage pro-rating and dilapidations costs.

Whyte added: “There are many cases where it can go wrong if the client is careless about scrutinising the detail of what’s on offer.”

Industry expert Colin Tourick rejects the oft-quoted argument that extending replacement cycles suits both leasing company and fleet.

Higher contract rates

“I have seen contract extensions written at rates that are higher than in the prime lease period,” he said.

“There are many cases where the lessee is keen to keep the car and the lessor keen to get it back (eg, it has cost a fortune to maintain). The compromise is that the car can be kept but the rental rises by 25%.”

Fleet that do decide to extend the replacement cycle need to be sure about the policy of their supplier.

Whyte said: “There may be differences between a formal extension of fixed number of months; or an ad-hoc extension until ‘a better time comes along’. Individual lessors have different policies on extension rates.”

However, if period of contract is not an issue, fleets need to check the wholelife cost of a potential new replacement vehicle.

Costs for these are falling with lower funding rates and improved residual forecasts.