Lease is more for fleet managers

Written by John Lewis, Director General, BVRLA

Friday, 08 August 2008

Some good reasons to lease company vehicles rather than buy.

Like many industries, the UK vehicle leasing sector has spent much of 2008 coming to terms with a dramatically different business environment, dominated by a worldwide financial crisis and economic downturn.

One immediate impact of the credit crunch has left leasing companies dealing with a much less benign funding environment. A number of banks have cut back on their loan books and, as across the whole banking sector, are charging interest rates that are way higher than official lending rates.

The economic downturn has seen the UK hit by rising inflation and a fall in consumer confidence. Leasing companies have had to accept an increase in the cost of new vehicles at the same time as a significant fall in the value of their used vehicles. This discrepancy has caused a steep increase in the level of depreciation on their fleets, which has hit margins.

Meanwhile, a steady increase in fuel prices, a growing focus on the environment and a poorer business outlook has led to a reduction in company car mileages. As well as laying-off staff, some companies have taken steps to deter employees from making non-essential road trips.

This decline in mileages has resulted in some customers asking to amend their leasing contracts, while others have chosen to extend existing contracts rather than take on new vehicles.

Reasons to lease

Despite a move towards fewer company car journeys, the outlook for vehicle leasing is positive. The most recent quarterly Company Car Trends report from GE Capital Solutions Fleet Services found that 72.4% of fleet decision-makers expected demand for company cars to increase over the next twelve months.

There are a number of reasons why organisations are moving towards leasing vehicles instead of the alternatives – outright purchase or grey fleet (employee-owned vehicles used on company business).

One reason for this is a growing awareness from employers of the duty of care owed to their employees driving on business. Around one in three road accidents involve a vehicle being driven for work.

In financial terms this is costing UK industry over £2.5 billion each year, but it is the human cost that is most frightening – around 200 work-related deaths or serious injuries every week.

The arrival of new corporate manslaughter legislation and a tighter focus on the application of health and safety regulations has shown that the government is also cracking down in this area.

As a result many companies are changing their attitude to the grey fleet. The evidence is clear – lease vehicles (average age around 18 months) are safer, more reliable, more fuel-efficient and less polluting than the grey fleet (average age over six years).

Another factor that is rapidly rising up the fleet manager’s agenda is the environment. Vehicle emissions make up a major part of many organisations’ carbon footprint, and it is not surprising that many fleets are being targeted as part of any environmental strategy.

The emission mission

As a result, more companies are choosing to outsource their fleet management to a leasing company, which can help them create a vehicle choice list that ensures drivers are using the most environmentally friendly cars or vans for the job.

The statistics speak for themselves – the average CO2 emissions of leased fleets stood at 157.4g/km in 2007, well below average UK car emissions, which were 164.9g/km.

Another persuasive factor driving companies towards leasing is cost management. More and more organisations, particularly in the current economic climate, are attracted by the idea of fixing their motoring costs in the form of a monthly leasing fee.

This type of lease, called contract hire, transfers all of the risk to the leasing company, which is left with the potential downside of rising maintenance and repair costs and falling used car values.

Leasing can also free up cash that an organisation could spend more productively elsewhere. Rather than buying a car and tying up money on a fixed, depreciating asset, it makes sense to invest it where it can produce a healthy return.

Finally, tax is set to become a key factor in fleet decision making, particularly from April 2009, when a new corporation tax regime will introduce major incentives for employers and employees to opt for lower emission vehicles.

The government has set two key emission thresholds, at 120 and 160g/km of CO2, meaning that two almost identical cars with an emission difference of just 1g/km could have a very different post-tax cost to an organisation.

Cost conscious organisations will have to measure the tax impact of their fleets car by car, and it is not surprising that many are turning to a leasing or fleet management company to do the job for them.