MT Fleet car: How the company car came back from the dead

After car sales suffered a devastating fall last year, it would have been easy to write off the fleet market as a casualty of the crisis.

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Last Updated: 09 Oct 2013

Recession, swingeing government cutbacks, pressure on corporate perks, the need to go green - it would be easy to think the company car is an endangered species. And fleet sales have been falling. Not only has the new car market shrunk - it dropped below two million units in 2009, a big fall from the heady days of 2003's record 2.58m sales, but the fleet car share of the market has been sinking too. In 2006, it was 56%, but by the end of 2009 it had fallen to 44%.

So is this the beginning of the end of the era of the Mondeo-mounted rep, blasting along the nation's motorways from meeting to meeting, via the odd cholesterol-rich trip to a Moto or RoadChef? The car industry's 2009 turmoil certainly did nothing to dampen this idea.

Virtually every car manufacturer turned down the wick on its factories as sales in most major markets plummeted by as much as 40%. During the first half of 2009, British new car sales fell by 26%. Some manufacturers even temporarily shut factories - Honda UK was one - while anxiously awaiting recovery. Not since WW2 had car sales suffered such cataclysmic contractions, not even during the oil crisis of 1973.

It was for these reasons the government introduced the scrappage scheme, which provided a ú2,000 incentive - half from taxpayers and half from manufacturers - to anyone trading in a car of 10 years or older against a new one. And it worked, sales lifted by more than a fifth during the second half of the year, but only up to a point - it benefited private buyers but not business, which doesn't operate vehicles that old. It's no surprise, then, that fleet sales didn't show the same improvement.

But, despite the lack of incentives, fleet is recovering. UK new car sales are up by 15.1% in the first seven months of 2010 and fleet sales have almost matched that with a 14.8% rise. Since company car sales traditionally account for half of Britain's total new car sales, this is good news for the industry, which cannot thrive on scrappage-boosted retail business alone.

The Society of Motor Manufacturers and Traders' chief executive, Paul Everitt, says this growth suggests 'improved business confidence and strengthening economic recovery. The motor industry always places a high importance on fleet vehicle registrations as each month they make up around half the total market. This year, even more attention is focused on business purchases as, post-scrappage, the private market is expected to be comparatively weak. In July, as private registrations dipped by 3% compared with 2009, fleet figures were up by 25% as businesses that had held off purchases through the recession intensified their fleet renewal.'

That said, the SMMT expects sales to sink in the second half of the year as the government's public spending cuts begin to bite. But that drop will be short-lived, according to Jay Nagley, managing director of industry consultants Redspy Automotive, who believes that the fleet market in the UK is going to grow next year.

In part, he says, that's because fleet will be less affected than retail by the imminent rise in VAT to 20% and partly because many fleet managers delayed renewing their cars in 2009/10 because of the recession. Those cars now need replacing - keeping them would be a false economy since running costs mount as vehicles age. 'So there should be a decent fleet market next year,' says Nagley.

Peugeot fleet sales boss Phil Robson, perhaps surprisingly, reckons that 'not a great deal has changed' since the recession kicked in. 'The larger companies keep going - they're almost like oil tankers and they don't change their policies at a snap, although some may have extended their change cycles.

'But,' he adds, 'small and medium fleet sales are suffering, because these companies tend to be more reactive. A lot of them extended contracts in 2009, especially as the strength of the euro pushed up new car prices. Plus there's been uncertainty in their business - they don't want to commit to new cars for another three years.' Now, however, those extended contracts are ending, 'because the cost of operating cars at five years old is prohibitive, so they will get new lease agreements,' he says.

For the cautious, the nature of these agreements will change. According to short-term vehicle leasing specialist Equalease, growing numbers of businesses are looking into short-term leasing, rather than the more traditional contracts lasting three or four years because of the continued economic unease. Equalease managing director Paul Ashton reckons increasing numbers of businesses are renewing three and six-month leases on a rolling basis because they're worried about the lack of growth in the economy. This despite the additional 20% to 25% monthly cost for a short term lease, explains Ashton, who says this is a premium some fleet managers are willing to pay to retain flexibility.

It's for similar reasons that Kevin Griffin, Ford's head of fleet, has noted a 30% rise in sales of rental cars this year. 'It would appear there are a lot of companies taking short to medium decisions (on cars), taking them almost on a semi-rental basis, for six months rather than two to three-year leases. So rentals are growing, although the snow in the early part of the year could have been boosting sales.'

Of the contract hire segment, Griffin reckons the market is 'steady but sure. In the past 18 months the trend has been to keep vehicles on. Now we're getting to the point of vehicle replacement because it's cheaper than keeping the car into the fourth or fifth year.'

The Motability market, which enables disabled people to use their government allowance to part-fund a car, has enjoyed healthy growth of 22%, he says, but he adds the rest of the fleet market is 'relatively flat'. 'The fleet industry is historically one million units, but last year it dipped way below because of the credit crunch, poor residual values, pressure on funds and cost reductions. This year it's up 15% overall.'

That does not suggest the fleet market was beginning to wither away. Audi fleet boss Ian Carmichael says: 'Until there's a compelling alternative to the car, fleet will be here forever.' Peugeot's Robson concurs: 'Cars are business tools, not perks.'

But Carmichael does see new developments. 'There are changes within the fleet market, but no overall change. The UK is unique in this, but it's so engineered in that it's not going to go away.' In fact, there are positive signs of a shift away from the previous government's one-time desire to penalise the company car, with a combination of duty of care legislation and the tax on cars' carbon dioxide emissions actively encouraging fleet sales to grow.

A company's duty of care to its employees now extends to the cars that employees drive on business and that includes the so-called grey fleet, of privately owned cars used on company business. A company has little or no direct control over the condition of these vehicles, their insurance status and so on, but companies need to take notice of this because they are legally liable. For this reason, many increasingly prefer to get their employees into company cars that they can control.

IT giant Fujitsu is one of them. It has around 6,000 employees and runs over 2,000 cars, but there are 1,000 who take the cash alternative. 'That was easy once,' explains fleet manager Martin Coulton, 'but now there's duty of care. The choice is part of people's benefit so we can't force them and also there's a cost - running vehicle fleets is all about cost control and cash management, so I can't throw cash at the problem.' Peugeot's Robson sees cost as a similar impediment to meeting this obligation. 'There's been lots of talk in recent years about grey fleets, but it couldn't have come at a worse time last year because companies can't afford to do it.'

But one way of doing it is to use the so-called salary sacrifice scheme, in which employees pay a monthly fee to their employer for a car. That way they get a new car, benefit from fleet discounts and are obliged to maintain it properly, 'although it does affect a company's balance sheet', says Robson. 'There are National Insurance savings, you can write off the car against corporation tax and some of the lowest-emission models are taxed at 10% in benefit-in-kind terms - half the lowest rate of tax.'

That's led lease companies such as Alphabet to develop schemes encouraging employees back into company cars because they save money, especially as they benefit from the reduced monthly rental fee that stems from a lease company's bulk buying. 'Salary sacrifice could work well on low CO2 cars,' says Robson, 'because you can use it to lower your carbon footprint for corporate social responsibility reasons.' Also many tenders require companies to declare their carbon footprint as part of the bidding process - cutting CO2 emissions on fleets can have a big impact here.

Indeed, the SMMT's latest analysis shows that fleet buyers tend to consider emissions to an even greater extent than private buyers.

According to Everitt, 'the drive to cut emissions, encouraged by lower company car tax bands and higher fuel costs, is increasing registrations of eco-vehicles. Registrations of these models and their alternatively fuelled stablemates have risen 135% in the first half of 2010.'

'The influence of CO2 is definitely accelerating,' says Peugeot's Robson. 'People are being challenged to justify costs and you can save a phenomenal amount of money. That's the primary driver, then CSR. And a lot of makers now offer sub-120g/km models.'

Companies like Fujitsu are using this as a means of encouraging its employees into company cars. It offers incentives to people who choose low emission cars which 'is self-funding, because fuel costs are 25% of your running costs. So we save money on fuel and reduce our carbon footprint. We're also considering incentives to go for sub-120g/km models. Our average CO2 is falling - it's currently 135g/km, and was 168g/km 20 months ago.'

Saving money has become a major fleet theme in the past couple of years too. As Robson says: 'It shouldn't take a recession to prompt a focus on cost control, but it did, for everyone. So fleet managers have been under huge pressure to save costs and justify them. What that did was move some fleets away from user-chooser to a restricted car choice, or a solus agreement with one maker. Employees are understanding of this - they're more fearful of losing their job than losing their car choice. Running costs are increasingly important. Mpg and CO2 are linked - usually if you want to go green it costs money - but car procurement is one of the few areas where you can go green and save money.'

Network Rail fleet boss Chuck Ives has been impressively effective in reducing costs and carbon emissions. His 8,000-strong fleet includes over 1,000 cars and around 1,500 small vans. For the car fleet, Network Rail uses only sub-120g/km Ford Focuses, 'so there are no car park politics', and among the one-tonne vans he has been running downsized 1.3-litre turbodiesels instead of 1.8s. 'We get the same power and performance, but a 20% to 25% mpg improvement. Across 1,500 vans doing 20,000 miles a year that's a huge saving.' Another initiative has been 'zero tolerance about maintenance - a car will be withdrawn from service until it's done', says Ives, adding: 'Running costs have fallen, reliability has improved and we have high vehicle availability.'

There's a lot more than mere car choice involved when it comes to controlling fleet costs. Nick Chambers of TMC (The Miles Consultancy) explains that 'procurement is now pretty sophisticated - you can't squeeze much more out of buying the piece of tin, so managers are looking at other ways to make savings.'

TMC's business is measuring people's mileage claims accurately and consistently. 'Most leasing companies only deal with the car. We deal with all business miles, whether for a company car or a person's own car because of the cash allowance they get. We've noticed that people taking the cash allowance and doing big mileages are moving back to fleet cars.'

Chambers reckons that the speed at which CO2 emissions and fuel consumption are falling is encouraging fleet managers to renew ageing fleets sooner, and that encouraging more employees into company cars 'is an easy way for companies to get hold of costs and control them. Companies find it hard to measure mileage and fuel consumption, which is where TMC can help. It's difficult to get employees to accurately record their mileage, but it's amazing how many use a rule of thumb. Around 20% to 30 % overclaim miles because they're too busy to check.'

That's one way to tighten costs - the coming revolution in propulsion is another, the arrival of electric vehicles, diesel hybrids and extended-range hybrids, such as Vauxhall's Ampera, all offering lower costs and emissions. These are developments that have not escaped the attention of Birmingham City Council, which as part of its 'Birmingham Declaration' will only buy cars that are either LPG fuelled or powered by electric motors from 2015.

So the fleet market is changing, with vehicle technology and the need to go green combining to contain costs, while the need to fulfil corporate duty of care requirements looks like expanding fleet sizes. Unless there is a true transport revolution, this is not a business that is about to wither away.

THE GREEN FLEET

No question - cars are getting greener. Since 1997, when the sales-weighted carbon dioxide emissions of new cars first started to be measured, the average stood at just under 190g/km. By the end of 2009 the figure stood 149.5g/km, a 5.4% drop from 2008, when it was 157.6g/km. The current company car average, at 151.0g/km, has been slightly higher than for privately bought models because of the distorting effects of the scrappage scheme that ended in March, which encouraged sales of small cars. The rapidly rising interest in low emission models among fleet managers, for tax, running cost and corporate social responsibility reasons, is likely to intensify the sales of low emission cars, as will the availability of greener models. So while the Ford Focus and Vauxhall Astra are today's fleet favourites, there's likely to be growing interest in more radical models like Vauxhall's extended-range electric Ampera and the all-electric Nissan Leaf.

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