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Special Feature – Fleet: Park your costs – the expense of running a fleet

Sale and leaseback
A company car park can be the biggest hidden bank account a company has,
according to Roddy Graham, commercial director for Leasedrive Velo. In a sale
and leaseback deal, a leasing company buys a company fleet at market value and
leases it back to the client company. In a climate where corporate credit is
hard to find and where existing credit agreements are slashed, it is a good
source of cash and an opportunity for companies to make money from an asset that
is guaranteed to depreciate. It also provides predictable cashflows through a
monthly rental fixed for the period of the lease and could also bring a
headcount saving in an internal fleet department.

Companies that have undertaken sale and leaseback contracts include wholesale
distributor Palmer and Harvey, in a £2.1m contract with Leasedrive Velo; Merlin
Professional Claims Services, with Zenith Provecta; and contractor Speedy Hire
with Lex.

“We inherited a fleet of 800 vehicles when we purchased a section of the
Hewden business in 2007,” says Speedy Hire’s fleet manager, Ian Leonard. “It
used to purchase its vehicles, so they came as assets on the books; we lease
ours.

“Our vehicles were newer and safer, designed to make loading and unloading of
plant as easy as possible. We quickly identified we would like to turn the
Hewden vehicles into cash and put them into our stricter replacement schedules,
so we sold them to Lex and leased them back on 1 August, the day we took over
Hewden, and put £4m in the bank,” he explains.

Owning and managing cars simply isn’t a core activity for the vast majority
of businesses. So the issue of sale and leaseback should be seen as a strategic
decision about whether to lease or own cars outright ­ rather than as a purely
finance-driven decision.
“If you lease, you also diversify your sources of funding, attach specific
vehicle market knowledge to the acquisition, management and disposal of your
vehicle assets and insulate your company from residual value risks,” says
Alphabet’s Sinclair. “Outright purchase, on the other hand, ties capital up in
depreciating assets.”

Flexible rental
“Unless a company is achieving a minimum 75% utilisation rate for each pool
vehicle, running a pool fleet is seldom economical,” says Leasedrive Velo’s
Roddy Graham. Enter flexible rental agreements. These can vary from short-term
leases to short bolt-on agreements that extend a lease.

Leasedrive Velo offers rental agreements that aim to bridge the gap between
daily rental and longer term leases. “Both products have seen an increase in
uptake over recent years, with 90% of rental covering employee probationary
periods,” says Graham.

Fuel card provider Arval provides vehicle rental for anything from 28 days to
12 months, in 28-day cycles, giving more flexibility. In addition, some of the
car rental companies have stepped into the breach created by economic pressure,
expanding the market for flexible contracts. “Avis Flex provides companies with
a flexible option for longer-term vehicle use, with a minimum period of one
month,” says Avis UK’s sales director, Anthony Ainsworth.

Majestic Wine Warehouses uses Arval service to cope with large seasonal
orders starting every November. Majestic’s retail support manager Liz Holmes
says the orders are mostly for delivery in a short time frame, between the first
week of December and New Year. To fulfil them, the company uses an extra 50 or
so vehicles at in addition to the 170 vans and 40 cars on its full-time fleet.
“The reliability and flexibility that Arval offers is an important consideration
when it comes to deciding whom we use for getting the right vehicles to our
stores at the right time,” Holmes adds.

However, things are beginning to change after the initial strong reaction
when recession began to bite, which sparked an upsurge in demand for short-term
fixes such as flexible rental. “Now that businesses have restructured, demand
for longer-term funding methods is returning and we are seeing a significant
increase in tenders from companies looking to fundamentally change their car
schemes,” says Alphabet’s Sinclair. “A key driver is the opportunity to
introduce funding products, such as salary sacrifice or motivational leasing
that maximise the tax advantages and cost benefits of providing employees with
low CO2-emitting cars.”

Grey fleet
Around four million UK employees use their own cars for business journeys,
according to leasing company Alphabet, which creates a vast ‘grey’ fleet that
runs up billions of pounds in mileage claims and travel time costs every year.

The cars may be off-balance sheet, but their costs are not. For example, a
grey fleet of 200 employees claiming 100 miles per month at 40p per mile will
cost their employer £8,000 per month. “Some employees find that a nice source of
income, so where they could find alternative ways of doing the job, they don’t,”
says Alphabet director Mark Sinclair.

In the current climate, drivers may also delay servicing their vehicles to
save money, or where they take cash to buy cars, they may buy a cheap vehicle
and pocket the difference ­ creating safety compliance risks. Corporate
manslaughter legislation dictates that companies are as liable for employees
driving grey fleet vehicles as they are for those driving cars from their owned
fleet, and in the event of an accident, companies must be able to demonstrate
they have taken all reasonable precaution to ensure the car is fit for purpose.

It is crucial, then, to have control over the grey fleet. But this is fairly
simple: it means asking drivers to declare with expenses claims whether they
have comprehensive insurance, if they have checked their tyres, and serviced the
car in accordance with the manufacturer’s guidelines. It is also important for
companies to check that driving licences are clean ­ and if they are valid.

Car clubs
Championing responsible car use by way of reducing emissions, charity Carplus is
developing a national network of car clubs ­ literally, getting a lift to and
from work or even to meetings with someone else, rather than driving yourself
and on your own. But there are savings to be had at a corporate level with this
concept, too. “Where there are pool cars or if a company is looking at reducing
its core fleet, then a car club will almost certainly save hassle and money,”
says co-director of Carplus, Philip Igo. “In a grey fleet, we would expect
mileage driven to fall when switching to a car club, partly because use is
traceable and partly because people make fewer non-essential trips.”

Car clubs can often manage their own administration and maintenance, and when
they sign up to a scheme run by Carplus, organisations can also sign their
entire pool over to be run as a car club. Eligible employees get individual
smart cards and the company receives a report on time and distance travelled,
which can be attributed to chosen cost centres ­ from which it can calculate its
carbon footprint. “The average car club reduces mileage by 57%,” says Igo.

Eurostar has used Streetcar to supply its car hire business since November
2007. “At the time, people paid for a hire car and claimed on their expenses, so
we set up an account with Streetcar,” says Richard Lettres, an analyst at
Eurostar. “Our average monthly bill is £230 and if you consider the cost of car
tax, fuel and congestion charges, it comes out well.”

Containing costs
• Define what vehicles are in the fleet, who drives them and how far
• Write cars and driving into your travel policy and communicate that clearly
and comprehensively
• Assess the grey fleet in every detail, from drivers’ licences to the
roadworthiness of their cars
• Sale and leaseback releases cash into the business and outsources fleet
management and the burden of falling residual values
• Flexible rental is more economical than a large pool fleet and removes, or
reduces, termination charges
• Car clubs offer flexibility and cost savings
• Think smarter. A make and model that costs more
per month than another may work out less expensive after tax, fuel and servicing

• Shorter contract hire allows companies to take advantage of technological
advances in car manufacturing and ensuring low CO2 emissions
• Salary sacrifice schemes allow companies to give a net benefit to employees.
The employee benefits from corporate buying power, savings on income tax and NI
contributions. The lease company buys cars at a discounted rate and leases them
back. The rental rate then is deducted from drivers’ gross salaries and drivers
pay benefit in kind
• Be aware of all legislative duty of care requirements

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