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REMARKETING: Maintaining the diesel differential

Date: 23 March 2010

As CO2 emissions and whole-life costs continue to dominate fleet buyers' decisions, the price premium of diesel models over petrol looks set to stay for the foreseeable future. Rachel Burgess reports

Fleet and lease diesel cars continue to enjoy a substantial price premium over petrol, despite the differential in fuel costs and the fact that diesel cars are sold at a higher average mileage, says BCA.

According to its latest data, the premium narrowed at the start of 2009 but has widened again in recent months; in February this year it stood at £1000.

However, leasing company Alphabet says there has been an overall market trend over the past few years for petrol car prices to rise more quickly than diesel and gradually close the gap.

"The average price premium commanded by diesels we have delivered so far in 2010 is around 16% over petrol, whereas three years ago it was nearer 20%," says Alphabet director Mark Sinclair.

He acknowledges that petrol and diesel pricing patterns have been unusual in the past two years with fleets moving toward four-year contracts and diesels being "the order of the day".

"Last year's reform of capital allowances has lessened demand for cars between 160g/km and 200g/km CO2, which has predominantly affected orders for petrol cars.

"The tax reform had less of an impact at the high end of the market, where many senior executives prefer petrol, so although petrol car volumes declined, cars tended to be more expensive, which raised the average price.

Sinclair adds: "As a result, the differential between the average list prices of diesels and petrol cars delivered by Alphabet shrank to an unprecedented 3% last year after narrowing to 11% in 2008 at the start of the credit crunch."

Price performance indicated by residual value expert Cap (see 'The View from Cap') echoes this formula, with diesel routinely outperforming petrol by several percentage points, says BCA communications director Tony Gannon.

"One area where fleet and lease petrol and diesel diverge quite sharply is in the mileage at remarketing time. For petrol cars it is around 30,000 miles, for diesel, quite often double that figure."

Under orders

As CO2 emissions become more and more important, it looks unlikely that diesel's hold on price premium will change.

"Unless or until petrol models can compete with diesel on total operating costs and perceived longevity, fleets' preference for diesels will ensure they maintain their price premium over petrol," says Sinclair.

Alphabet has seen the proportion of diesels ordered by customers increase substantially, from 70% four years ago to 85% last year.

Petrol cars have regained some lost ground in recent months but are still losing out to diesels in the medium and upper medium segments because fleets are increasingly restricting drivers to cars emitting 160g/km CO2 or less.

Popular diesel models still broadly equate with larger cars, lifestyle and working vehicles, so larger saloons and estates, 4x4s and MPVs where power and torque can be an issue.

"In the modern 4x4 market, petrol examples are few and far between, which does give those few petrol examples a veneer of desirability that might surprise some people," adds Gannon.

Bigger cars such as the BMW 320d are successfully challenging the perception that green car choices are, by definition, small, unglamorous and underpowered, says Sinclair.

He adds: "The fact that an environmentally and taxman-friendly car can also be dynamic and prestigious has proved to be an eye-opener for may drivers."

Gannon continues: "Diesel penetration of the smaller saloon and hatchback sectors is relatively much lower, because the benefits in terms of cheaper motoring are much less clear cut and the latest generation of smaller petrol engines are frugal, powerful and CO2 efficient.

"In the supermini and city car sectors, it's very much petrol all the way, although there are odd exceptions - Mini diesel, Fiat Panda, Citroen C1 and Toyota Yaris, for example."

In terms of de-fleeting diesel cars, Gannon says there is little you can do to make these vehicles stand out due to their prevalence. However, since diesels tend to be sold at a higher mileage, cosmetic damage, such as stone chips, bumper scrapes and kerbed alloys, is more likely and worth addressing.

Defleeting is also a time for fleet buyers to keep an eye on the future, recommends Sinclair: "Look at the average CO2 of the cars that replace the defleeted vehicles. How does it compare with expected levels for new cars in three or four years' time?"

Average new car emissions are expected to be 135g/km in 2015 and 95g/km in 2020.

To conclude, when acquiring cars, make sure a diesel is the right tool for the job.

"If there is no benefit to the operator in terms of running costs, then question if the higher purchase cost is justified," says Gannon.

"Finally, a good specification at the front end makes it a potentially easier sale as a used car three years later."