Coronavirus: Remote working drives fleet replacement cycle quandary

Fleets are being urged to hold fire on making wholesale changes to company car replacement cycles, with the full impact of Covid-19 not yet clear.

Remote working and fewer face-to-face meetings have seen mileages tumble for many car fleets, leading some to question whether four years/80,000 miles should remain the norm.

“We’re seeing many of our customers come to us for advice on what changes, if any, they should be making to their mileage terms,” said Caroline Sandall, specialist consultant at LeasePlan UK.

“Many of them wonder whether they should act now or wait until later. The challenge is that we’re still in the midst of a pandemic and so it’s hard to predict the scale of change.”

A new study suggests change could be significant, however, with more than half (53%) of businesses no longer requiring employees to come into the office five days a week.

Almost a third (30%) are expecting employees in the office between one and three days per week. One-in-seven (14%) said they will not require employees to visit the office at all.

"Contracts will need to be monitored as we return to a sense of 'normality'," Gavin Davies, Alphabet (GB)

COVID-19 IMPACT

According to HR technology firm Applaud, which commissioned the YouGov survey of 500-plus HR professionals, more than a quarter (26%) of UK businesses will either close, downsize or consolidate their offices in the coming months, as companies move to hybrid working.

Duncan Casemore, co-founder and chief technology officer at Applaud, said organisations are embarking on an era of “unprecedented” change.

“Driven by employee experience, business leaders are turning away from the traditional five-days-in-the-office format, instead moving to provide more productive flexible and remote working scenarios,” he said.

“While there has been great clamour from the workforce to implement more flexibility in the way we work, the pandemic has provided the catalyst to initiate these changes.”

At the start of the lockdowns, it was thought that video calls and no one working in offices would be the ‘new norm’. However, Venson client management director Simon Staton said most employers have now chosen a more balanced approach, with hybrid working and social contact both appealing to employees.

A recent survey by the vehicle leasing firm found that fewer than one-in-four employees (24%) is looking forward to returning to their workplace as the latest lockdown is lifted. 

However, almost two-thirds of respondents (64%) to the survey said they value collaborating face-to-face, instead of using video calls.

“The likelihood is that mileages may reduce because of fewer face-to-face meetings, business events being held etc. or it might increase for some people where they find that they are having to take on increased responsibilities due to colleagues being made redundant or a change of focus for their organisation,” continued Staton.  “The number of vehicle contracts may reduce, but the mileage could be set to increase.”

Alphabet, however, expects to return to more regular face-to-face meetings from 2022. Gavin Davies, general manager of customer account management at Alphabet (GB), told Fleet News this will probably be the case for many across the industry and average mileage, while reduced overall, will continue to be variable as fleets adapt.

“Contracts will need to be monitored as we return to a sense of ‘normality’, but with new ways of working likely to remain in some capacity, we suspect lower mileage profiles might become more commonplace,” he said.

Hitachi Capital Vehicle Solutions managing director Jon Lawes said that, while this won’t be the case for all, as some businesses will be unable to operate virtually, he also expected business mileage to fall in the short- to medium-term.

“We also expect the use of video conferencing services such as Microsoft Teams and Zoom etc. to continue and remain prevalent moving forwards, with fewer meetings needing to take place face-to-face, particularly those that are longer distance,” he said.

WHOLELIFE COSTS

Fleets will typically employ a pooled mileage approach, based on an average four-year/80,000-mile replacement cycle per car. One vehicle may be over while another company car will fall below the threshold.

“It’s not normally an issue,” said Ashley Barnett, head of consultancy at Lex Autolease. However, he is urging fleets that are considering changing the mileage terms of new company car contracts to do the maths and make sure they do not miss out on potential savings.

If a fleet alters the mileage threshold for new company car contracts, without also changing the financial value of the allowance, the driver will benefit instead.

“Essentially, you’re giving somebody a better car and the business is not going to save any money,” added Barnett.

Using the example of a Tesla Model 3 and an Audi A4 diesel, Barnett said that in the case of an A4, based on 70% business mileage, the wholelife cost of the vehicle equates to an allowance of almost £770 per month.

However, with the reduced mileage, the actual cost of the car, over 48 months/60,000 miles, rather than 48 months/80,000 miles, falls to £680 per month.

The difficulty, said Barnett, is communicating to drivers a cut in their allowance will still allow them access to exactly the same car.

Comparing the Audi with the Tesla, Barnett also explains the wholelife costs show how the monthly rental for the A4 (£392) is much lower than the Tesla (£577), but on a wholelife cost basis the Tesla is cheaper to run (£753 vs £770 per month), based on 20,000 miles per year.

“Interestingly though, when you take the annual mileage down to 15,000 miles, the A4 is cheaper – a fundamental swing,” said Barnett.

James Pestell, board member at fleet representative and training body the Association of Fleet Professionals (AFP), says some fleets, particularly in the SME (small-to-medium enterprise) sector, risk missing out by not applying wholelife costs.

“The larger fleets have got a firm grasp on it, but one of the big things with SMEs is education about wholelife cost modelling,” he said. “A lot of fleets are now realising that policies based on a rental cap are not cutting the mustard.”

The switch to electric company cars has further highlighted the issue, with those not employing wholelife costs struggling to make choice lists work.

Pestell, national sales manager at the IFC Group, said that all the fleets it speaks to, which had not been employing wholelife costs, were now moving to that model.

“If you’re just basing it purely on rental, you just can’t make the maths work,” he added.

CONTRACT REVIEWS

Going forward, monitoring and measuring fleet data will become “increasingly important”, said Sandall, as fleets will need to commit to reviewing their contracts on a more regular basis.

Staton anticipates that many organisations will undertake some form of fleet review this year, starting with what vehicles they currently have on fleet, how they are used and what is their true cost to the business.

“If cost savings can be achieved through, say, moving from a prestige marque to a lower cost alternative, then many businesses will no doubt feel compelled to understand what savings can be made,” he said.

“However, the flip side to understanding how cost savings can be achieved is understanding what impact it might have on staff retention and staff recruitment if, say, the number of vehicles an employee can choose from is reduced.”

Barnett recalled how the financial crisis of 2008 was the last “seismic shift” in fleet cycles. “That was when we saw people move from three- to four-year contracts,” he said.

Employees understood the financial pressures employers were under and, with job losses mounting, were prepared to share the pain. However, he said it is too early to fully understand how the pandemic will impact businesses and no one, as yet, is rushing to change replacement cycles.