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A perfect market for fleet renewal [CAR June 2012 print edition]

Reduced availability of used cars is changing the lease versus buy numbers game


July 6, 2012
by Thomas D’Monte

From the June 2012 print edition of Canadian Automotive Review

For most organizations, a vehicle is a big-ticket item and procurement decisions have long-term implications. Consequently, purchasing managers tend to look at acquisition carefully, assessing various options, including the question of whether to buy or lease.

Regardless whether your company’s fleet consists of midsize passenger cars, compact pickup trucks or large commercial vehicles, the decision to renew your fleet—whether by lease or purchase—is based largely on timing. And smart fleet managers are always on the lookout for ways to match the needs of their organizations with favourable market conditions. As it turns out, experts say the current used car market is creating a perfect storm to achieve that goal.

“The used vehicle market in North America is remarkably strong,” says Peter Nogalo, marketing manager for ARI fleet management. “There are fewer used vehicles, and scarcity drives up values.” Nogalo says the residual value of your current fleet—the value on the street—is significantly higher than it was when you acquired those vehicles three or four years ago. And by looking back over that time, to 2008 and 2009, you also find the reason behind the current surge in used vehicle prices.

“General Motors and Chrysler, everybody in our industry would concur, were building more vehicles than they were actually selling,” says Paul Wingate, national director, sales force effectiveness at TLS Fleet Management. Wingate says that forced automakers to unload large surpluses of vehicles toward the end of the year. “So you have these crazy incentives for people to come into the showroom and buy; thousands and thousands of dollars. But what does that do to the market perception of the value of that vehicle?”

The other way car makers got around the problem was by dumping those excess vehicles on short-term rental companies at substantial discounts. “It couldn’t sustain itself,” says Wingate. “So the manufacturers were forced to contract [either through downsizing or bankruptcy], and only make the vehicles they could sell. The reciprocal effect is that you have fewer used vehicles today.”

Individual consumers have also contributed to the shortfall. “If you go back to 2008-2009, the economy went into a tailspin, and people stopped buying new cars,” says Troy Campbell, vice-president of sales and client relations at PHH Arval. “And every new car is eventually a used car.”

Campbell says the decision by many automakers to shut down their internal consumer leasing programs at that time also took many vehicles off the street. “So if you are one of the fleet managers with good quality three-, four- and five-year old vehicles, and the demand is still there and the supply is not, that’s called a perfect storm.”

Now if you are in a position to take advantage of the current market and sell your used fleet at a premium, the next question is whether to buy or lease the vehicles that will replace them. Here are some factors to consider.

Capital

The first question to ask yourself is “whether you want to use your capital to buy new vehicles, or use that money to more directly invest in advancing your business,” says ARI’s Nogalo. “A vehicle purchase will require more money upfront, whereas with a lease you are only paying for what you use.”

Campbell with PHH Arval admits he is biased, but says in most cases it really does make sense to lease. “Most companies that you and I would invest in, we want them to use their cash to generate profit. If they invest in plants or technology, research and development, or even a dividend or stock buyback, those might all be better uses of cash than buying a depreciating asset.”

Type of Vehicle Class

Specialization affects resale value. “If you’re talking about a specific vehicle that you’ve put a lot of effort into building up, and it’s the type of vehicle that can be run for ten years, then it’s probably better to buy that vehicle,” says Nogalo. Some examples would be vehicles used by utilities and medical supply companies. That is, they all require a high level of up-fitting to do the job.

Accounting

Most publicly held companies are forced to purchase their vehicles due either to annual budget considerations or accountability for costs. However, “if you’re privately held, you can show your leases off balance sheet as an expense,” says Wingate. “That may be advantageous in terms of certain financial issues.” There are certain tax advantages to leasing as well.

All three experts agree that regardless of whether you lease or purchase your next fleet, you are going to save money by selling your used fleet in today’s economy. But the decision to do so, begins with a look inward.

“They should look at their corporate goals,” says Campbell. “Has the company gone on a cost-cutting initiative or sustainability initiative?” He says a company can turn around its fleet and get vehicles with better technology, substantially better fuel efficiency, improved safety equipment, and an immediate drop in overall maintenance costs with a similar, if not lower, monthly payment.

Wingate says it makes sense from a fuel-savings perspective alone. “It’s a proven fact that all vehicles today versus those that are three to four years old, should be able to get you at a bare minimum, a litre per hundred kilometres better fuel economy. Do the math, and with current escalating fuel prices it ends up being a lot of money.”

But how long will this surge in used vehicle prices continue? “Most people are saying we are good until the fall, if not next spring,” Wingate says. “But no prognosticator can look farther than six months to a year.”      c.a.r.