Several issues are currently exerting a heavy influence in the UK fleet management sector. But the two causing most turbulence are the ongoing problem of predicting residual values and the introduction in April of the new company car tax regime. This report for the Institute of Management’s ‘Motor Industry Management’ is by Arthur Way.

The topic of falling residual values in the fleet vehicle business is hardly new but has been especially virulent lately, largely due to the downward pressure on new car prices.

There are various measures highlighting the decline in used car prices over the past two or three years, but most agree that they have plummeted by between 20-30%. As a consequence, fleet management operators who pitched in with highly competitive rates based on an optimistic view of residual values are now facing serious financial problems, while those who took a more cautious view and applied higher rates have lost out in terms of volume.

It is probable that one and two year contracts will become more common, and perhaps the standard, as demand for used cars with high mileages continues to decline in line with the greater availability of nearly new vehicles, thereby increasing the residual value vulnerability of fleets on three and four year contracts. This is the view of Glass’s Information Services, which has noted a significant drop in demand for cars with more than 75,000 miles on the clock. According to Bill Carter, editor of Glass’s AutoProVision residual value forecasting system, “a few months ago cars with more than 85,000 miles on the clock were struggling for buyers, but that has now reduced to 75,000 miles and is likely to drop to nearer 60,000 miles”.

Certainly, one of the most critical aspects of fleet management concerns the ability to read the used car market several years into the future and make an accurate assessment of future values. At present there appears a division of opinion among the professionals, with some contending that the worst is over and prices are likely to stabilise around present levels, while others anticipate further falls over the next three to four years.

Residual values apart, most fleet managers are currently focusing on forthcoming taxation changes whereby, with effect from next April, company car drivers will be assessed on the CO2 emissions of their vehicles. It is inevitable that this will have a substantial impact on individual fleet car users as well as the composition of company car fleets, although the precise effects are less certain. Business car users have three main options: change to a more efficient vehicle, do nothing and pay more tax, or make alternative arrangements by sourcing their own vehicle.

The majority of fleet managers, particularly in the larger companies, appear to understand the implications, but for the most part the topic seems to be surrounded by ignorance in the case of car users. Gerard Gornall, Lex Vehicle Leasing’s tax manager, reports: “The fleet decision makers we are in contact with pretty much know all they need to know about the company car tax reforms, but the majority of corporate drivers are not fully aware of how they will really be affected from April, and this could have a negative effect on both the drivers themselves and the companies they work for.”

Already it is possible to discern a slight shift towards smaller, more fuel efficient cars. This, coupled with the growing trend towards ‘user-chooser’ fleet policies, suggests that typical fleet models such as the Mondeo and Vectra will lose out to more ‘specialist’ variants such as Mégane Scénic and Zafira. It is questionable, though, whether ‘status’ models from the likes of BMW, Jaguar and Mercedes-Benz will be affected noticeably by the tax changes. It will be interesting to see what impact, if any, the new tax rules have on diesel cars which provide greater economy but produce more CO2 per litre of fuel consumed than petrol-engined equivalents.

“Fleet management operators report that interest in diesel cars has increased recently.. “

Fleet management operators report that interest in diesel cars has increased recently due to a wider choice of models along with the better technology of engines. In addition, diesel cars have tended to maintain residual values rather better than petrol counterparts, although there is a niggling worry that this edge will erode when the end-of-contract vehicles from the current boom eventually flood on to the used market.

Schemes are being devised with the aim of blunting the effects of CO2 taxation. Interleasing (the UK’s fourth largest fleet management company) has launched a personal contract scheme, known as Alto, in which funding for the vehicle is provided to the driver, although the company still keeps control over the cars. Under these circumstances the ‘company car’ is no longer a benefit and hence not subject to personal taxation.

There are other issues, of course. There is a growing awareness – not least following the publication of the ‘Preventing at-work road traffic incidents’ discussion document – that companies are responsible for personnel using company vehicles in the course of their work. It follows that there is a duty of care to ensure that the vehicle is properly insured and maintained and also that employees are not spending excessive hours at the wheel. (A feature on this will appear in the next issue).

Other issues include the need to conform to environmental legislation together with the importance of ensuring that the sector has a pool of well trained staff. With regard to the latter, the Institute of Car Fleet Management announced at the Fleet Show in May the introduction of its ‘Key Start Scheme’, a two-day residential course for teaching the basics of fleet management to new employees and those who look after a small fleet as part of their job.

In addition to cars, truck fleet management is a significant part of the sector. Within this segment Lex Transfleet (a joint venture between Lex Service and Lombard North Central) claims to be the UK’s leading independent supplier of tailored transport and fleet solutions through the management of nearly 30,000 commercial vehicles and plant equipment. Last April, the Ministry of Defence outsourced the supply and management of its 10,000 fleet of non-combatant vehicles to Lex in a ten-year contract valued at £500m.

David Smith, Lex Transfleet’s managing director, commented: “We worked very hard behind the scenes to gear up for this important and prestigious contract. We started as we mean to go on, as a true business partner for MoD.”

The MoD example is sure to be replicated many times in the future as more and more public sector organisations see the logic of outsourcing the responsibility for fleet management to independent specialists. Venson Group has been noticeably successful in winning fleet management contracts from police authorities. In April 1999, the company assumed complete responsibility for managing the 3,500 vehicles in the Metropolitan Police Service fleet.

More recently, Venson signed a contract with Nottinghamshire Police to purchase, repair and maintain its entire fleet comprising 450 cars, vans, motor cycles and specialist vehicles. The agreement, which runs for 25 years and is valued at around £100m, represents the first vehicle fleet ownership deal in the government’s private finance initiative (PFI) programme and has been described by the Home Office as a “pathfinder project”.

According to Grant Scriven, Venson’s chairman and chief executive: “The contract confirms Venson’s leadership in bespoke fleet management for the public sector. We have worked closely with Nottinghamshire Police to ensure the solutions we provide meet their specialist needs and exacting standards.” Steve Green, Chief Constable of Nottinghamshire, remarked that “Venson’s solution will improve efficiency by increasing the availability of vehicles for deployment to frontline duties”. Venson states that the arguments in favour of outsourcing – including specialist expertise, level of service and cost savings – are impossible to ignore and that all police vehicles will be run privately in the future. If so, the opportunities for the fleet sector among  public sector organisations will provide considerable scope for expansion.

As might be expected,

“..the role of the internet and e-commerce is assuming a growing importance…”

the role of the internet and e-commerce is assuming a growing importance and, as in other branches of the motor industry, is being embraced by existing suppliers to enhance their offerings and is facilitating the entry of new players. Lex Transfleet’s customers have the option of online access to their fleet data in order to monitor real-time fleet costs. They are able to check repairs, servicing, breakdowns and invoice transactions. Lex Transfleet analyses this information to identify where its customers’ fleet costs may be reduced.

An interesting example of a newcomer is seen with Tuskerdirect Fleet Service, a web-based operation aimed at medium and large organisations. Many of the fleet management processes traditionally handled by administrative centres have been automated which, according to the company, results in a reduction in time and errors, and hence delivers a better all-round service with lower costs. Every aspect is managed through the website from vehicle selection to maintenance and disposal, and in a way which enables the fleet manager and individual drivers to interact directly during the leasing period.

With regard to the future development of the fleet management sector’s structure, there is little doubt that an intense period of rationalisation will occur during the next couple of years. The past few years have seen a number of important developments leading to the establishment of larger groups through mergers and acquisitions. The general consensus is that fleet management currently is a tough business which requires deep pockets with the result that the big players are getting bigger and many of the smaller and middle-ranking ones will be acquired. However, even some of the largest and most powerful groups are poised to make an exit and some have already departed.

Deutsche Bank has left the arena by selling its leasing and fleet management operations in six European countries, including the UK, to Société Générale. The French company now has a fleet of 300,000 vehicles in Europe and has made no secret of its ambition to be one of the region’s top three players.

Similarly, ABN AMRO planned to dispose of its fleet management subsidiary, LeasePlan which, in addition to being the UK’s largest vehicle leasing company, has operations in 23 other countries with a total fleet of around 1.1m units. However, towards the end of November ABN Amro indicated that the operation was no longer for sale due to current market conditions which prevent an acceptable price being obtained. This disappointment must be tempered somewhat by the operation’s encouraging results during the first half of the year which saw revenues rise by 28% and profits by 48%. It is understood that ABN Amro intends to review the position in 2003.

In some cases companies have tidied up their structures by welding together inhouse operations. This is seen with Interleasing, a subsidiary of General Motors Acceptance Corporation (GMAC), which earlier in the year assumed responsibility for the Vauxhall Masterhire fleet, a move which added 25,000 vehicles to Interleasing’s tally to take the total to 103,000 units.

In addition to the obvious benefits of scale, such as the chance to streamline administrative procedures and obtain large discounts through bulk purchasing of vehicles, an important element in the consolidation process concerns the importance of establishing a pan-European operating capability.

This is becoming increasingly vital as major end-users seek a single source for their fleet requirements. At present the leaders in Europe are LeasePlan (with 595,000 units) followed by

Expert Analysis

Contract Hire Under the Microscope 2001
UK focused research assessing the development, current status and the future developments of the UK contract hire market. Key market data and issues discussed include competitive issues, market trends and key drivers. Emphasis is placed on the changing tax and regulatory structure.

Arval PHH (536,000) and Avis Fleet Services, part of GE Capital Fleet Services (375,000). For the future, independent fleet management companies appear well placed to continue to benefit from the trend towards outsourcing by private and public sector organisations. In addition to the undoubted potential afforded by the public sector, there is still plenty to go for in the private sector with maybe around 50% of UK companies still buying and managing their own fleets. The desirability of outsourcing will be all the more compelling as the business of fleet management becomes increasingly complex and subject to legislative influences. If nothing else, the minefield of residual values should persuade many in-house operations to see the wisdom of employing specialists.

However, the intensity of competition, allied to the fine line between success and failure which is determined largely by the ability to forecast residual values accurately, suggests that there will be both winners and losers among the independent fleet management companies.