London - according to new research from market analysis firm Datamonitor, the British love affair with the company car is one of the factors behind the high prices paid by UK consumers for new cars.

In the UK, company cars now account for over half of all new car registrations - well above the European average of 37%. The fierce competition between manufacturers to win fleet business has meant that discounts to the fleet sector have increased and margins are low. The very public downside to this is the extra pressure put on the retail prices of new cars.

According to Datamonitor:

The huge size of the UK company car market is a factor behind the high prices paid by UK consumers for new cars

Operational leasing now accounts for one-quarter of the company car parc and almost 10% of new car registrations in Europe

The impact of competition for fleet business has resonated throughout the automotive industry in the UK. The drive to secure high volume fleet deals, which generate significant turnover, is one reason for the relatively high prices of new cars in the UK. In other European countries, company cars account for a much smaller proportion of new car registrations - in Spain, for example, they account for just 9.5%. Because of this, the retail market has assumed more importance in much of continental Europe, putting extra downward pressure on retail prices.

Operational leasing gains popularity across Europe

According to Datamonitor, the most popular acquisition methods for company cars in Europe are outright purchase, finance leasing and, increasingly, operational leasing (contract hire), the leasing agreement through which customers avoid the depreciation risk of vehicle ownership.

During 1999, the number of company cars funded through operational leasing in Europe grew by 8.6% to reach 3.5 million cars. Operational leasing now accounts for 9.6% of new car registrations and 24.5% of the European company car parc. This growth has been fuelled by the desire of corporate clients to predict and minimise their fleet costs. Operational leasing fulfils these desires through its off-balance sheet status, but its popularity has also been fuelled by the appeal of the ancillary services offered by lessors.

Services offered to clients have diversified - but price is key in winning fleet business

Operational lease contracts in the UK often now include services such as accident management, maintenance management, and even driver training. As the market has become more mature, so the services offered to clients have become more diverse as lessors try to differentiate themselves in the market.

However, range of services is not the only arena of competition between lessors. Price has become key to new business, as lessors have discounted their prices in response to the discounts they have received from manufacturers.

Manufacturer discounts for the bulk orders of the fleet industry are not a new phenomenon, but the recent intensity of competition in the manufacturing sector has meant that discounts have increased as the value of fleet business has risen.

According to Datamonitor analyst Michael Wood, 'UK markets for both company cars and operational leasing are the most mature in Europe, and account for a higher share of new car sales than in nearly every other European country. This year, company cars will account for around half of all new car registrations in the UK - with operational leasing contracts accounting for one-quarter of the total. If retail prices are to be reduced in response to public demand, then it is likely to be business that will pick up the bill as manufacturers are forced to reduce discounts.'