Cost drivers

1 February 2008

February 2008 | John Maslen

Are you paying too much for your fleet cars? There's more to it than the price tag, as John Maslen explains

The purchasing department of a major company has been asked to choose a new company vehicle and is shown two cars: one is £18,000 the other is more than £21,000.

Which is cheapest? It seems like an obvious question, but when it comes to company cars, it pays to look beyond the obvious. Although one car might have a lower front-end price, in the long run the actual cost to a business could be the opposite when depreciation, insurance, maintenance, fuel economy and reliability are taken into account. These whole-life costs can help a fleet operator to identify how much each vehicle costs on a pence-per-mile basis.

Running costs
For example, take the company above and its seemingly obvious choice.

If the cars were a Vauxhall Vectra 1.9 CDTi Life, costing £18,097, and an Audi A4 1.9 TDi SE, costing £21,255, then at first glance the decision would be simple.

But if you look at how much the cars actually cost over a typical fleet life cycle of three years or 60,000 miles (the usual fleet benchmark), then it's a very different picture.

The Vectra loses 77 per cent of its new value over the cycle, equivalent to nearly 24p per mile (ppm). By contrast, the Audi loses 58 per cent of its value, equivalent to just over 21ppm, according to fleet car running cost guide The Cost.

The Audi costs more to service and maintain, at more than 3.6ppm compared with the Vauxhall's 2.9ppm, while the two cars are matched on fuel costs. Overall, because of its stronger used values, the Audi comes out at just under 35ppm, compared with the Vauxhall's 36.5ppm, so the "more expensive" German car is actually £1,000 cheaper over the vehicle's life.

It's a well-known fact in car sales that no one pays list price, but the fleet buyer can take this running cost information into account when comparing discount offers from company car providers.

From this, it is pretty easy to see why depreciation is such a big issue and needs to be watched closely. Jeff Knight, forecast manager at CAP Monitor and an expert in vehicle valuation - a core part of monitoring running costs - says: "Depreciation tends to be the biggest factor in the ownership costs of any vehicle, and this is generally directly related to brands and how they are perceived in the marketplace.

"For example, German brands are typically stronger in terms of residual value than other European names."

The impact can be even more marked with luxury vehicles. Consider two luxury cars from Audi and Peugeot in today's market. A one-year-old Peugeot 607 3.0 V6 Executive auto had an original value of £28,792 and is valued, with 10,000 miles, at £13,900. An Audi A6 2.4 Quattro S Line manual of the same age had an original value of £29,940 and is valued, with 10,000 miles, at £18,750.

Knight explains: "In this example, the additional front-end cost of £1,148 turns into a gain for the A6 over the 607 of nearly £5,000. Even when the higher original cost new is factored in, the owner of the Audi enjoys an advantage of just over £3,700. Translated over 12 months that is a monthly difference of more than £300 in ownership costs."

These differences occur in every sector of the market and it pays to investigate the vehicles' residual value performance when looking for the most cost-effective fleet choices.

Just a quick trawl through the vehicles available to fleet operators reveals the potential savings available by choosing the right car, with residual values at three years/60,000 miles ranging from as little as 19 per cent to more than 60 per cent depending on the vehicle.

As a general rule, matching low production volume with high demand is a recipe for residual value success. High volume and high discounts or low demand is a recipe for disaster.

These whole-life cost issues affect whether a fleet operator buys its vehicles outright or leases them.

By purchasing its fleet outright, it can ensure it is investing its money wisely and that the largest amount is returned when the vehicle is sold.

For a company with a leased fleet, whole-life costs can be used to benchmark target leasing rates. They can also show whether a leasing company is offering competitive leasing rates by passing on discounts.

But it isn't only choosing the right car that is important: putting the right equipment in can also pay dividends at disposal time.

On a prestige brand, the total options bill for choosing sat nav, leather upholstery and electric sunroof can add thousands of pounds to the total asking price, but in the used market those features might only be worth a few hundred pounds, adding a huge amount to the whole-life costs of a vehicle.

Colour also plays a significant role in used car values, with badly chosen colours - such as the reviled "doom blue" - actually reducing a vehicle's asking price on the used car market.

Fuel efficiency & maintenance
Although residual values make up the bulk of a vehicle's running costs, fuel costs shouldn't be ignored. Depending on the car, about 20 per cent of its whole-life costs are fuel-related.

Fuel costs are seen as a necessary evil that have to be accepted because nothing can be done about them, unlike areas such as funding and maintenance.

However, according to Arval, a provider of fuel cards, this couldn't be further from the truth for most companies. Monitoring and managing fuel costs effectively can save thousands of pounds.

For example, opting for a fuel-efficient diesel Ford Focus 1.6-litre TDCi, which achieves a claimed 62.7 miles per gallon, rather than a 1.6-litre petrol model, which achieves 42.2mpg, would save £1,944 in fuel over 60,000 miles. This saving more than outweighs the £1,105 premium on the diesel model.

Bear in mind, though, that these predictions are conditional upon drivers actually achieving the expected economy figure. On-road tests have proved that some drivers can return as much as 30 per cent below the official mpg figure.

Jato Dynamics, a global provider of automotive data and intelligence, urges a note of caution when it comes to examining fuel costs alone because the true picture only emerges when all whole-life costs, such as servicing, are taken into account.

Nasir Shah, global business development director, says: "The increased service cost of newer diesels with particulate filters can seriously reduce their advantage over an equivalent petrol car."

For example, over three years/60,000 miles, the two Fords cost roughly the same in terms of servicing, at £774 for the diesel and £647 for the petrol.

But if a fleet extends the replacement cycle by a year, then work on the diesel particulate filter increases servicing costs to £1,974, while the petrol increases to just £1,007.

Whole-life costs also take into account the tyre costs that a fleet might incur, and these can vary depending on the rubber fitted to a fleet vehicle.

Shah adds: "The specification of the car chosen can have a significant effect on the cost of ownership. Tyre sizes are often a major contributor to this.

"For example, the 195/45R16 tyres on the Fiesta Zetec S are significantly more expensive to replace over three years/60,000 miles [£820] than the 195/50R15 tyres on the mechanically similar Fiesta Zetec Climate [£500]."

With millions of items of data to examine and consider when preparing a fleet choice list using whole-life cost models, it is little wonder that technology is the key to success.

Jato Dynamics has launched a "Total Cost of Ownership" tool aimed at helping the industry to identify these hidden costs and savings. It takes into account the vehicle's purchase price, residual value, tax and insurance costs, service expenditures, maintenance, work and parts.

Consultancy Deloitte has also produced Car Selector, a new whole-life cost calculator that considers every parameter for running costs, including the driver's tax bill and the company's Class 1A National Insurance Contributions, which are often a hidden fleet cost.

There is also a free online running costs database provided by Fleet News (www.fleetnews.co.uk), which is available by clicking on "fleet data".

Andy Leech, business leader at cfc solutions, a fleet software company that supplies many of Britain's operators, says: "Fleet software is the tool used by most fleets for monitoring running costs. This allows managers to see easily which areas require attention and take action.

"Also, most suppliers are now able to provide the raw data that the software needs through online links, so the information needed for decision-making can be accessed easily."

All of this investment costs money, but considering the potential savings available from effective whole-life cost management, the question should be whether you can afford not to.

Selling & returning vehicles
Even with the most careful planning focused on getting the most cost-efficient vehicles, budgets could be left in tatters once vehicles come to be sold or returned to the leasing company.

Although residual value guides and experts can predict what a vehicle is worth, it is the used car buyer who will actually decide.

They can reject vehicles or reduce their bid for a number of reasons.

Most ex-fleet vehicles are sold on to car dealers, either directly by the fleet or by the leasing company. These buyers have specific requirements.

Simon Henstock, a director with BCA, a major vehicle auction company, says: "The fleet manager must work with the remarketing partner to get that car before the most appropriate buying audience.

"Buyers will look closely at service intervals and if a car is being offered needing a major service very soon, this can be a real turn-off.

"It could well be worth having the work done in advance and getting this declared when the car is sold. If you change your cars at three years, get the first MOT done as well."

With this in mind, remember that professional buyers put great value on a full set of documents being offered with the vehicle at the time of sale.

Henstock explains: "Whatever you do, get any minor repairs to paint and trim done. Repairs can be done at the point of sale and can represent excellent value for money. Typically expect to get back around three times [what you spend on repairs in resale value]."

Outright purchase fleets will incur these repair costs directly or see the value of their vehicles fall, but for companies that lease their vehicles, the supplier could pass these charges on.

Nearly all of the vehicle leasing industry adheres to Fair Wear and Tear Charges drawn up by the British Vehicle Rental and Leasing Association.

These rules set down the acceptable level of damage that a vehicle can incur during a typical fleet lifecycle, such as small scratches to paintwork and small dents. If there is more damage than this, then the leasing company can recharge the customer.

According to the annual FN50, a comprehensive analysis of Britain's contract hire and leasing industry, an estimated 170,000 lease vehicles returned each year incur damage recharges at an average of £246, which puts a £42 million hole in fleet budgets.

David Brennan, managing director of LeasePlan, one of the world's largest vehicle leasing companies, says: "The key to benchmarking is to look at the whole-life cost rather than the monthly rental. Fleets need to check how early terminations, excess mileage and excess damage charges work in the contract, so that they're not paying over the odds when it ends.

"Leasing firms should be as transparent as possible in their pricing structures, while fleet managers need to ask the right questions before they sign."

Reduced damage
Andy Brown, operations director at leasing firm Inchcape Fleet Solutions, adds: "We are seeing fewer vehicles with substantial body panel damage. Fleet operators increasingly understand the recharge process and are encouraging drivers to report damage when it happens and then ensure repairs are undertaken immediately.

"Internal damage is also reducing. This is due to fewer drivers smoking so cigarette burns are not as prevalent. Additionally, advances in technology, such as the increasingly widespread availability of Bluetooth phone technology, mean that the fitment of mobile phone holders, for example, is being confined to history.

"Most damage on returned vehicles is therefore limited to dents and scrapes. We try to educate fleet operators and drivers that it is important to ensure any damage is rectified as soon as it occurs and not left until 'defleet' time."

However, just because a vehicle has been repaired does not mean it will escape a charge.

International leasing firm ALD Automotive has seen an increase in substandard paint repairs on returned vehicles. Keith Allen, managing director, says: "Drivers and fleet managers need to be more vigilant when accepting a vehicle back from repair and ensure they are happy with the standard of work."

Brown adds: "It is in both our interest and that of the client if all vehicles are returned in a condition that correlates to age and mileage."
 

To read the rest of this article you need to sign in:
Don't have an account? Register here

JOIN CIPS

Not a CIPS member? Why not join CIPS to access a full range of benefits, including:

  • Access all areas of the CIPS Knowledge on-line library including tools and templates and Supply Management stories.
  • Enhance your network and get connected to a global community of 120,000 in 150 countries.
  • Stay in touch and up to date through member only events and branch meetings.
  • Annual subscription to Supply Management magazine.
  • 10 per cent discount on all training courses, workshops, seminars and conferences.
  • Up to 15 per cent discount on books from the CIPS book store, including course books and a range of further reading text books.

And much more. Click here to join >

LATEST
JOBS
Cornwall
£37,191 - £44,697
Cornwall County Council
Hounslow, Heathrow /Richmond upon Thames
Competitive salary depending on experience plus generous share award
Tails.com
SEARCH JOBS
CIPS Knowledge
Find out more with CIPS Knowledge:
  • best practice insights
  • guidance
  • tools and templates
GO TO CIPS KNOWLEDGE