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CREDIT CRUNCH SPECIAL: Steer a path through the economic slide

Date: 31 October 2008

What action can you take to help your business in these treacherous times? Paul Barker seeks expert advice from some of the industry's leading figures

If someone set fire to your house and then came back a few minutes later with a hosepipe to put it out, does that make them a hero?

That was the damning verdict from one industry commentator, who shall remain nameless, regarding Gordon Brown's time in charge of first the economy as Chancellor and then the country as Prime Minister. His recent bank bail-out may have at least paused the plunge into an economic abyss, but it's still the toughest time in at least a decade for business car operators.

Yet despite the spectre of that 'r' word (whisper it - recession), sensibly run companies taking sensible decisions can make it through any downturn relatively unscathed if they tackle the three key areas of their fleet business: acquisition, operation and disposal.

Acquisition

Vehicle acquisition is where fleets will first start to feel the bite as demand falls away and rates start to rise.

September saw a 16.1% year-on-year drop in fleet registrations on top of a 13.4% and 7.3% falls in the previous two months, while the year-to-date figure plunged from 2.0% up on 2007 at the half-year point to 3.3% behind at the end of the third quarter.

"With used car values slumping and the cost of credit rising, the inevitable consequence is some upward pressure on short- and long-term rental rates," says boss John Lewis, boss of the British Vehicle Rental and Leasing Association.

As a result, the word on everyone's lips at the moment is 'extension'.

"The most fundamental way to save money is to delay vehicles by extending contracts," says Julie Jenner, chairman of the Association of Car Fleet Operators (ACFO). "I'm hearing that some fleets are saying, carte blanche, no new cars for the rest of the year, or for the next six months. It makes sense."

Like the banking sector with which it has close links, the leasing market is volatile at present, and for fleets that don't need to replace vehicles urgently, many experts suggest holding off to see the impacts of the bank bail-out.

"We did some research recently looking at five cars across the major leasing companies, and I've never seen such a range of pricing," says David Rawlings, fleet consultant and boss of Business Car Finance. "Leasing people are saying that if they can only write a certain volume of business they'll do it at a margin that suits them."

Despite that, leasing still makes sense.

"Why would you want to outright purchase your vehicles in the current climate?" is Jenner's view. "Yes, you can keep the car for as long as you want because you're not locked into a contract, but you own the RV risk."

Rawlings adds that when times are tricky businesses should focus on what they do best, and use the right service suppliers for the right jobs.

"If you make widgets, do you really want your money tied up in vehicles when you could just be making regular monthly payments?" he asks.

Jon Walden, boss of the UK's top leasing company Lex, is surprised how few extensions his firm is seeing so far.

"People are talking about it but not yet doing it. I thought it would have happened by now," he says.

Lex looks at client requests on a "case-by-case basis" depending on the scale of the extension in terms of time and vehicle numbers. However, despite being "quite relaxed" about extensions - "Are we happy for a three-year contract to go to a four-year contract? Yes" - Walden is nervous of vehicles coming back at getting on for 100,000 miles.

. How to extend

Extending contracts doesn't have to mean sticking to the same monthly payments that have ticked along for the past three years. A car's depreciation curve flattens out with age, so it won't necessarily lose as much value between year three and four as it did in any of the first 36 months. That could mean a reduction in your monthly rate if you talk nicely or negotiate keenly with your lease provider. As one industry insider put it: "Lease firms saw extensions as a licence to print money going into the last recession."

There can be other advantages. For example, a three-month extension taken now will take us into early 2009, which remarketing specialist Manheim says is an easier time to dispose of a car, meaning everybody wins, and at least one leasing firm will even look at the possibility of switching your entire contract to a four-year rate and backdate payments accordingly, leading to a nice little rebate that will go towards running the vehicle.

People who have already edged their way beyond the industry's typical three-year contracts, could face a problem, however.

"We've seen a gentle move in the industry from 36- to 48-month rental over the last year and a half" says ACFO's Jenner. "If you've already got a four-year policy you're a bit snookered because the time has not yet come for five-year contracts."

. Alternatives

There are alternatives to extending leasing contracts, with long-term daily rental being a primary one. Predictably, Neil McCrossan, boss of rental broker Nexus, is an advocate.

"We're saying that now isn't the time to sign a contract hire [leasing] agreement: extend or use rental. Don't commit to buying or leasing, and if you need to dispose of something then take the first loss because it won't get any better.

McCrossan claims the cost of long-term rental is "very competitive" compared to contract hire or ownership, although you trade a driver's ability to choose colour and trim for the extra flexibility.

"We're certainly seeing movement towards long-term rental - the number of vehicles going out is increasing every day," he says.

Regardless of how you acquire your vehicles, falling sales mean there are currently good deals to be had, although Rawlings questions whether they will last.

"What will manufacturers do? If they go to three-day weeks then it kills oversupply, which means the end of the great deals," he says.

He advises sticking with your current vehicle provider rather than flicking around for the best deal on individual cars.

"People become so fixated by price that they miss the fact that running a good fleet requires continuity of supply and good relationships with suppliers," he says. "You'll have very unhappy staff if one employee is given a certain car that's then not available to others because you can't get the same deal."

CONTINUED...



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