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Fleet funding for uncertain times

Date: 22 October 2018   |   Author: Sean Keywood

Does a lack of clarity about the future of company cars make leasing a more attractive proposition than ever before? Sean Keywood investigates.

If there's one thing we've got used to hearing over recent months, it's that the fleet industry has never faced a time of greater uncertainty.

Whether it's Brexit, WLTP emissions tests, clean air zones or the wait for the government to confirm future BIK rates, managers have been left battling confusion and uncertainty over the best way forward.

With this in mind, are the parameters surrounding the debate about leasing cars versus outright purchasing being rewritten? Does all this uncertainty make the reduced risk associated with leasing a no-brainer, or are the arguments for and against relatively unchanged?

Coping with the pace of change

Unsurprisingly, one person who says leasing can help in uncertain times is Ashley Barnett, head of consultancy at Lex Autolease.

He says, "In times of economic uncertainty, leasing vehicles is appealing for businesses that want manageable, predictable and flexible funding options. 

"When the legislative, regulatory and technological landscape is evolving at pace, the added assurance of expert advice from a leasing provider is also a significant benefit."

Another leasing company, Arval, says it saw evidence of a move toward leasing in its latest Corporate Vehicle Observatory Barometer fleet survey, with 33% of businesses choosing contract hire as their main method of fleet acquisition, as opposed to 31% last year - with the caveat that this also includes van fleets.

Arval head of consultancy Shaun Sadlier says while there has been a trend towards leasing over many years, driven by benefits such as predictable monthly costs, minimum outlay, improved cash flow, VAT efficiency and convenience, the company also believes there has never been a more persuasive argument for leasing vehicles than the situation that currently exists. 

He adds, "New vehicle technologies continue to evolve at pace and we're seeing a fuel transition in the market. 

"These factors are likely to have an impact on used vehicle values in the years to come, something from which businesses and individuals can protect themselves through leasing."

Barnett also says that in recent years organisations have looked to leasing to simplify fleet operations, both from a resource perspective and to manage risk around residual values and maintenance costs.

"Companies want to continue to offer desirable staff benefits and a company car remains a key component of this, as a cost-effective, convenient and user-friendly option for employees and essential users," he says.

"The difficulty is that the acquisition and management of vehicles can be costly and complex. It is often more cost-effective and efficient to outsource this to a leasing company who can provide the end-to-end solution for a fixed monthly cost."

When asked whether the size of a fleet has an effect on leasing's suitability, Barnett says the holistic advantages it offers can make it the right option, even if a cost advantage isn't present.

"Leasing is suitable for all fleets, regardless of size," he says. "A leasing company should be able to provide customers with the support and insight to help them achieve their fleet objectives.  

"In some instances, the customer's tax position and potential availability of funds may mean that leasing isn't the most cost-effective solution; however, the benefits from a risk and complexity perspective can outweigh these factors."

Sadlier adds, "Core leasing products like contract hire are suitable for fleets of all sizes and provide broadly the same advantages at any scale. 

"Whether a business has one, 100 or 1,000 vehicles, the ability to spread their vehicle costs, gain more certainty over budgeting, avoid depreciation and bolt on supporting products through a single supplier is attractive."

Purchasing plus points

So if those are some of the attractions of leasing, what are the incentives for firms to stick with buying cars?

David Oliver is procurement manager for drinks company Red Bull, which has a UK company car fleet of 220 vehicles, all outright purchased. 

Discussing the advantages, he says, "The ability to make decisions on extending or selling early at auction are ours alone. We have a mix of uses and mileage and this control avoids more complex issues around termination costs. 

"Also the in-life costs we can choose to have managed on a budgeted basis or pay on use, and mix this part way through the term. 

"Some vehicles benefit as their application and usage mean pay on use is more effective than a full maintenance package. If they go off road for any length of time, we only really have the depreciation cost."

Oliver adds that Red Bull feels that leasing is still more complex than outright purchase with a changing fleet, bearing in mind factors including mileage, condition, age, duration, off-road time and modifications.

Car Keys On The Signed Agreement Document

He also says it believes negotiating directly with a small number of manufacturers and one dealer group enables it to obtain very competitive terms versus leasing.

According to fleet operator organisation ACFO, long-established reasons why fleets outright purchase vehicles include local relationships with franchise dealers and garages, and a suspicion that paying a third party to provide and manage vehicles is more costly than doing so independently.

Also cited is tradition, where it has always been done that way with full control over how vehicles are managed and when they are sold, and being a cash-rich business, although investing in a depreciating asset in the shape of a car fleet could be seen as a disadvantage.

On the other hand, ACFO says advantages of contract hire include providing known monthly costs, freeing up capital that does not have to be used to buy cars, transference of residual value risk to the leasing company, and VAT-registered companies being able to claim costs back.

However, chairman John Pryor says that the choice will come down to firms' own circumstances.

He says, "ACFO has always been, and remains, fleet funding neutral. The choice of vehicle funding is a decision for individual organisations based on numerous different factors pertinent to their own financial circumstances at any specific point in time, tax rules - VAT and capital allowances - and the pros and cons of each available acquisition method."

Pryor added that while contract hire had been the number one fleet funding choice for many years, ACFO was not aware of any new industry data indicating a shift towards it at the expense of outright purchase.

The way forward

But what does the future of leasing hold? Lex's Barnett says that fleets' expected transition towards electrified vehicles will help increase its popularity.

"The automotive industry is going through a period of transformation, with ambitious targets set out in the government's Road to Zero strategy that are just three replacement cycles away," he says. 

"We believe leasing will continue to grow in popularity as it makes cleaner, newer technology more accessible from a cost point of view. 

 "Leasing offers fleets a means of making the transition to ultra-low emission vehicles over a few years, and gives them the flexibility to evolve their choice lists in line with increased product availability to ensure they have the lowest-emission option for the task at hand."

According to Barnett, while the recent uncertainty has seen some fleet renewals delayed and contracts extended, in other cases there has been a move towards shorter, more flexible contracts so firms can offer their employees cleaner technology more quickly.

He says working with a leasing company can be key to making this possible, and adds that Lex is working with fleets interested in more sustainable fuel options to review their policies and choice lists.

Arval's Sadlier agrees that leasing electric vehicles makes sense.

"It is a good option because it's hard to predict what they will be worth on the used vehicle market in the future," he says.

"For this reason, very few fleets have outright purchased EVs and have used various forms of leasing for acquisition."

Sadlier also sees a move towards a more diverse range of products as a key trend for the future.

"Leasing is currently undergoing a period of innovation," he says.

"While our core company car fleet continues to grow, we are also seeing demand from businesses for vehicle-related products which support their entire workforce, not just those entitled to a company car. 

"This is where we can offer products like salary exchange, private car leasing solutions, leaver offers that turn your company car into a private lease and car sharing.

"We have also launched a product called Re-Lease that offers used car leasing to fleets, employees and consumers."

Barnett also reports a move towards more varied options. "For those opting to move away from company cars, we have seen an increase in demand for personal contract hire (PCH) as there are a number of good deals available in the market.  

"It's important that customers realise they have a duty of care for all business drivers, whether they are in a company car or not.

"As an alternative, we're also seeing strong interest in personal contract leasing (PCL) or affinity schemes for all employees.  

"PCL is an attractive employee benefit as it opens up access to our buying power and affinity discounts with selected manufacturers, without the bespoke customer discounts which could give rise to BIK taxes."