UK: THE FLEET'S OUT. - Fleet managers are having to adapt to a world where outsourcing and contract hire are increasingly attractive options.

by Vaughan Freeman.
Last Updated: 31 Aug 2010

Fleet managers are having to adapt to a world where outsourcing and contract hire are increasingly attractive options.

Two clear messages have emerged this year from the UK's full to overflowing company car parks. First, that the car industry is confident, strong and getting stronger. Second, that the growing trend towards contract hire and the outsourcing of company cars spells a significant change in current fleet management techniques.

Increased company car activity is largely responsible for the industry's healthy sheen. In 1994 the total of new car registrations in the UK rose 7.45% to 1.91 million due largely to increased company car fleet sales which rose by 15% on the previous year. This year the launch of an array of glitzy new models, new VAT legislation, big fleet purchases, and a belief that used-car values will be high in the future are all contributing to the industry's continued upbeat mood. Company car registrations will pass one million for the first time this year, forecasts BRS Car Lease.

'Company cars accounted for 45% of sales in 1994 - topping the boom of 1989 when they accounted for 35% of the 2.3 million new car sales,' reports the 1994 British Vehicle Rental and Leasing Association statistical survey. Moreover these figures may underestimate the size of the company-car sector. Experts suggest that 70% of new cars sold are company cars, if you include business-use sales (fleets under 25 vehicles), sales to the self-employed and those working in a partnership, who buy their car with a company cheque but do not get counted as a company-car user.

Last year's biggest winner among car manufacturers, says industry analysts Sewells International, was Honda which increased its company car market share by 88%, closely followed by Fiat's leap of 78%, SEAT's 76% increase and Nissan's 61% climb. Moreover the big names have responded to the challenge. This year Vauxhall launches its reshaped Cavalier, called the Vectra, Rover, its new 400 saloon, and Honda, the new Civic. Additional competitors are also entering the fray: Daewoo recently completed a £25 million deal with Avis to put 2,000 of its Korean-built cars on the Avis fleets over the next year.

The health of the company car market is underpinned by increasing employee demand. A 1995 Lex Report reveals that 61% of companies believe employees would leave if they were no longer given a company car. Only 8% of employees now view the company car as a perk as opposed to 15% last year. Women drivers are increasingly important suggests the Cowie Group which estimates that one in three fleet decision-makers are women and that the number of women business-car users is growing at a faster rate than their male colleagues.

Women drivers are leading the move away from traditionally popular company cars (for example, the Vauxhall Cavalier, recently voted Fleet Car of the Year for the ninth time by the Association of Car Fleet Operators) to a wider choice. The radically styled Fiat Punto and the Renault Laguna have made spectacular inroads into the fleet market. Where formerly fleets were locked into 'solus' agreements taking only cars, for example, from one of the 'Big Three' - Ford, Vauxhall and Rover - pressure is growing from employees for greater variety. 'Nobody is making a bad car. The Cavalier is an excellent car but people like to drive something a little different,' suggests Neil Pykett, managing director of Cowie Interleasing. 'Who would have imagined the Laguna would prove so popular in the fleet market?' he says. 'The Fiat Punto too is growing in popularity, yet it is a radical looking car.' Wider choice includes an increased interest in 'greener' cars. More than half of company car drivers say they will consider having a diesel car in future, says the 1995 Lex Report. Diesel cars took 25% of fleet sales in 1994 compared to just 1% 10 years ago. A problem, however, may be to square the circle of company car drivers who want diesel and fleet managers whose passion for diesel is fading. The Cowie Group believes that the diesel bubble has burst and that the traditional advantages of diesel, such as better fuel economy and longer-lasting engines, are now being matched by advanced petrol cars. Higher maintenance costs for diesel cars, says Cowie, can mean £6 a month premium over 60,000 miles for a turbo-diesel Ford Mondeo 1.8LX against the 1.6LX petrol equivalent.

Conversely BRS Car Lease product director Mark Hughes believes that diesel's days are far from over: 'Diesel technology has always been behind that for petrol cars,' he reasons. 'Now there is a revolution in the making with vehicles like the BMW turbo diesel showing the way forward. With the BMW diesel engine also being used in cars like the new Vauxhall Omega, diesel is coming strongly into the executive car market.'

A more significant cause of turbulence in the industry, however, is the new legislation effective from 1 August which eliminates the double VAT penalty on contract hire rentals, and which allows lessors to reclaim the full VAT on the capital cost of cars - a saving to be passed on in part or in full to customers. Asset finance company Barclays Mercantile estimates the change will mean potential savings totalling £1,015, or £28 a month, on the cost of leasing a £12,000 car over 36 months.

'The VAT change represents a major reduction in costs to the industry. I think it will change forever the way people acquire cars either privately or corporately,' explains Neil Pykett, chairman of the British Vehicle Rental and Leasing Association's Accounting and Taxation Committee. Hertz Leasing reports that, even prior to the new VAT rules, outright purchase (currently 38% of fleet cars) had fallen to second place behind contract hire (39%) as the main method of fleet acquisition. Indicating, says Hertz, 'a more cautious approach to fleet decision-making by senior personnel'. Stephen Barrett, general manager of Hertz Leasing, explains: 'In discussions with financial directors we have noticed a reluctance to take risks, and a need to access capital to invest in growth. Under such circumstances, contract hire offers an ideal solution.'

A move towards contract hire may also be accompanied by changes in fleet management techniques. Colin McLean, managing director of Highway Vehicle Leasing, says: 'With the VAT changes and its advantages, people are looking at the total costs of running a fleet themselves. The two issues go together. And I think we will see outsourcing develop further. We are getting more interest in it and are gearing up for a move towards contract hire.' 'Outsourcing will further penetrate the fleet market as more and more companies decide to concentrate their limited resources on core competencies,' concludes Barrett. Research suggests that 75% of companies believe that fleet management has nothing to do with their core business, yet only 33% of companies outsource this function. However, of those who seriously consider outsourcing, 90% opt for it.

In future, firms will be looking for a 'one-stop shop' from contract lease and hire firms able to produce a tailor-made service of car finance, supply and management, says Lease Plan sales director Ian Tilbrook. 'The key will be in providing flexibility of service. We have to be able to allow fleet-users to pick and choose services.'

But these changes need not spell the demise of the fleet manager. Rather they could open the door to new opportunities. 'Fleet managers need not shy away from adopting a policy of outsourcing,' argues Barrett. 'They can then become the thinking link between the company, its fleet and the outsourced managing company: professional managers able to take a longer-term view.' The 1995 Hertz Leasing report claims only 10% of fleet managers add value. To remain in that 10%, concludes Barrett, fleet managers may need to make a rapid gear shift.



Fleets greater 25 851,000 44.5

Other fleets/business sales 120,000 6.3

Private 940,000 49.2

Total 1,911,000

Source: SMMT.

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