If delayed gratification is a key pillar to human happiness then psychologists must be purring at fleets’ restraint in ordering new vehicles. Yet as more than a third of fleets decide to add a year and 20,000 miles to their cars, the market conditions the underpinned such a policy may already have changed.

 

Last year the business case for extending company car holding periods was incontrovertible. The secondhand car market was in freefall, interest rates were rising and access to credit was difficult. Add into the mix corporate uncertainty about future staffing levels, and it was a straightforward decision for executives to postpone the costly replacement of cars.

Fast forward 12 months and interest rates are at an all time low, credit lines are reopening and the used car market is doing a fine Lazarus impression in its rise from the dead. Suddenly the cost saving case for adding a year and 20,000 miles to a car’s company life is not so clear cut.

First though, the case for extensions, which for the vast majority of cars should mean a shallower depreciation curve in their fourth year, without a sharp increase in maintenance costs. Consequently, outright purchase fleets can avoid the capital outlay on new cars and keep their cash reserves for areas of the business that better need them, while leasing customers should expect their monthly rentals to fall by 5% to 10%.

“The savings grow even further if you compare the reduced lease rental with the cost of a new, like-for-like replacement car,” advises Andrew Cope, chief executive of Zenith Provecta.

Delaying the replacement of cars also allows employers greater flexibility with staffing levels. Where a new car involves a minimum three year commitment to the corporate headcount (or a costly early termination charge), a 12-month extension to a car’s fleet life gives the employer a year’s grace to assess the economy before making a decision.

So far, so commonsense, but the case against extensions is far from toothless. Expensive components such as catalytic converters and clutches can start to fail, and every car runs the annual gauntlet of an MOT test once it’s three years old.

Fleet managers will already be familiar with rogue cars that have spent more time in the workshop than Michael Owen has spent on the treatment table over the past three years, and it makes no sense to prolong this maintenance madness for another year. Leasing companies will send a clear signal about such cars by raising, not cutting the rental charge.

Moreover, the used car market remains obstinately wary of high mileage cars, Martin Ward, manufacturer relationship manager at CAP, bluntly declaring that “anything over 100,000 miles carries a death sentence, such is the stigma attached to it.”

The hight mileage burden

A handful of cars can survive a high mileage burden without compromising their residual values (Volkswagen Golfs, Audi A3s and A4s, BMW 3 Series), but Ward cautions that this resilience does not extend to executive models and adds, “some of the French cars might look a little tired” at 100,000 miles. He also raises the concern that keeping cars for longer could expose fleets to savage depreciation depending on the vehicles’ place in the model cycle.

“You might not just have the old model, but the old, old model,“ he says. In two years time, for instance, a four year old Vectra might have been superceded by the Insignia and even a face-lifted Insignia, such is the pace of model renewal, with painful consequences for secondhand values.

Maximising residual values is a bit like comedy, the secret lying in the timing. Sell into a used car market where supply is low and demand high, and you’re laughing all the way to the finance director’s door.

So while contract extensions suited both fleets and leasing companies during the residual value doldrums of 2008, Julie Jenner, chairman of the Association of Car Fleet Operators (ACFO), suggests the tide may already be changing.

“Residual values have made such a remarkable recovery that there’s actually a shortage of cars coming back to the market at the moment,” she says. “Will the market fall next year when all the contract extension cars come back? Will there be a glut?”

Assessing which cars should be extended and which terminated according to their original schedule calls for a smart fleet manager or outsourced fleet management, advises fleet consultant David Rawlings, director of Vertivia.

He also raises the issue of staff tolerance to keeping cars for longer, with the implicit decline in status. In a climate of salary freezes, most employees will understand the cost-saving case for extending holding periods, but the policy needs sensitive handling.

While the delivery of a new car shows a three-year commitment to the employee, a one year extension carries the conviction of a football club chairman’s infamous vote of confidence in his manager.

“The way employees talk about their cars always amazes me, and employers need to realise just how important it is,” says Rawlings. Employees will stick where they are while the job market is difficult, but the lesson from the last recession was that driving an old car, “could be a trigger to change jobs when the economy picks up.”

Rising repair bills

The mileage of cars raises different concerns for Jack Pryde, secretary of ACFO Scotland and supplier relationship manager at Dunfermline Building Society, which last year increased its fleet holding period by 12 months to a maximum of four years and 100,000 miles. The experience has made him reluctant to see the thresholds stretch into five years.

“Your repair bills are beginning to wrack up, staff would not want to be seen driving five or six year old cars, and in business you have a duty of care to employees and older cars have a higher chance of breaking down,” he says.

Neville Briggs, managing director of CFC Solutions goes even further, warning that keeping cars and vans beyond the three year replacement cycle “creates additional emphasis on ensuring that your service and maintenance is taken seriously. Modern cars and vans that are four or five years old are, of course, more than capable of taking very high mileages while remaining completely safe.

“However, the recent Corporate Manslaughter Act makes it clear that fleets must be able to demonstrate that they are following exactly manufacturer and other regular service and maintenance actions throughout the life of a vehicle. On older cars and vans this issue becomes ever more acute because the chances of wear failure increase.”

Still thinking of extending your replacement cycles?

 

Your next steps:

  1. Negotiate contract extensions with your leasing company. Expect savings of 5-10% on your monthly rental. Beware any increases in lease rentals - it’s a clear signal that the car is not worth keeping.
  2. Outright purchase fleets should analyse any cars with unduly high maintenance records. Don’t let repair costs sabotage depreciation savings.
  3. Explain the policy clearly to drivers. Show how their benchmark lease rental now equates to a lower category car.
  4. Explore the opportunity to reallocate cars within the fleet, switching high mileage cars to low mileage drivers and vice-versa. Some businesses are exploring elegant solutions whereby the employee who loses out by taking delivery of a high mileage car gets a vehile above his standard grade.
  5. Outright purchase fleets need to keep a close eye on the used car market. Sell the right car with the right age / mileage profile at the right time, and the financial benefits could outweigh the advantages of extending holding periods.
  6. Emphasise to drivers the importance of regular oil and tyre checks on older, higher mileage cars.
  7. Decide whether the longer holding period will become corporate policy so that any new cars are sourced on the basis of a four or even five year calculation.
  8. Consider dedicated fleet management software that will track maintenance spend per car and trigger alerts when services are due.

State of the market

  1. A third of fleets on traditional 3 year, 60,000 mile contract hire agreements are looking to extend these contracts. This means around 150,000 customers this year expected to do it.
  2. Some companies are opting to lease second-hand cars instead of new ones to save money.
  3. About 10% of lease contracts are usually running over by up to three months because of the lack of availability of new cars.
  4. Average contract mileages are reducing, which makes it easier to extend the length of the contract until they do meet the mileage limit.

Source: British Vehicle Rental and Leasing Association