Since March every business in Australia has reviewed its expenses and asked, do we need to keep that cost? How has your fleet fared? Feedback to FAN from the industry suggests two fleet trends are emerging. The first is replicating the GFC events back in 2008. The second is good news for car manufacturers and dealers.
When there is uncertainty corporate businesses don’t buy new cars. They extend (operating) leases so they can wait and see where the market is going for their core products, and remain nimble in case cuts need to be made. Lease extensions are disappointing for drivers that have been dreaming of that new car smell. They are great for leasing companies and their customers get what they wanted (generally) with a lower monthly rental.
Extensions keep fleet management organisations (FMO) busy because the process can be complicated. It’s not as simple as preparing a new lease quote because there are several unknown risks that need to be considered. The first risk for the FMO is residual value. They use complicated models and mountains of data to predict used car values for a new car that will travel 120,000 in four years. Though, when it’s a four year old car with 84,000 kilometres already, and it may travel another 46,000 in the next 18 months, what’s it worth at the end of the lease?
If the used vehicle market has shifted down since the original residual was set, the FMO will want to recover from that loss. But when the market has already fallen, how will it look in 18 months? Will the recovery be fast or slow? Will the fleet vehicles be the right type in the used market post-COVID? Will consumers still want petrol cars?
Maintenance costs are the other risk for the FMO with a lease extension on a Fully Maintained lease product. Everyone knows cars cost more to maintain when they get older. But how much more? There will be more services which are predictable costs with brakes and other unplanned maintenance being a risk. Tyres will need replacing again which is great for service providers like Bob Jane T-Marts.
The obvious thing to point out is – FMO are not charities; the main ones are public companies with shareholders to please. So any estimates will be conservative to reduce their financial risk.
The second trend is being driven by the government’s instant write-off incentive. Businesses that own their fleet have a great opportunity to changeover older vehicles and claim a tax deduction normally not available to assets like vehicles. Data shared by ACA Research back in 2018 showed there were 400,000 businesses running fleets of less than 20 vehicles. These are the ones buying new cars now.
Feedback from dealers in June is that retail buyers (which is also many small businesses) are active as well as some government fleets. Though fleet orders are down with not much activity.
FMOs have been trying to reach smaller fleets for years to convince them of the benefits offered by a fully maintained operating lease (FMOL). Though when the government offers incentives to fast track asset depreciation, many small/medium businesses choose to continue owing their fleets.
Let’s see what else happens as the COVID recovery gets going.