Fleet Decisions - Residuals hit again.

Although over-supply of the market plays a major part in depressing residual fleet values, it’s not the only contributory factor. The change in registration plates has also taken its toll. “Y registration cars are just over one-year-old, but the change of plates twice in a year has created a perception that they are older, which has an impact on what people are prepared to pay for a used car,” says Velo operations director Mike McRae.

Also, new car sales are still growing, spurred on by lower interest rates. Traditionally, they have been around the 2m mark, but last year sales hit 2.4m and the forecast for this year is around 2.5m.

Rael Winetroube, sales and marketing director of DaimlerChrysler Services Fleet Management, says: “The average value of a basket of three-year-old, 60,000-mile vehicles fell from just over £8,000 in January 1999 to just under £6,000 by June 2002 – a drop of around 25 per cent in just 42 months.”

Not surprisingly, these figures encourage companies to move fleet residuals risk elsewhere and, to that end, contract hire has become an increasingly popular option. It also has the advantage that it takes the fleet off the balance sheet. Contract hire is also 50 per cent VAT reclaimable and the fixed monthly payments can help with financial planning. Another alternative to fleet ownership are structured employee car ownership plans, which transfer car ownership to the individual, while the car ownership company carries the risk.

Nick Sutton, MD of Provecta Car Plan, says: “More organisations have sought to divest themselves of fleet liabilities through contract hire.

This way, they can pass the risk on to a leasing company without bearing financial and administrative burdens such as servicing and maintenance.” The unpredictability of residuals makes it difficult for FDs to decide when to acquire and dispose of vehicles. The most severe depreciation comes in the first two years of a vehicle’s life, the first being the worst because resale in that period puts the vehicle in competition with the many nearly-new daily rental units that are sold on. After this, depreciation slows and becomes more predictable, which facilitates financial planning.

However, a very slow turnover of a fleet isn’t an option, since employees see cars as part of their motivational package. “Running a fleet of four-to-five-year-old vehicles isn’t likely to be popular with staff, nor will it do much for the corporate image with clients,” says Winetroube. “Furthermore, a vehicle with 80,000 miles on the clock is now virtually impossible to sell.”

Chris Stalker, Velo’s FD, says: “With residual values declining, a company that owns its fleet may not have charged enough depreciation over the life of the car, so when they sell they will have a book loss on the P&L account. If they recognise this early, they can re-evaluate according to the forecast and charge the extra depreciation. But many organisations that own cars will not have the expertise to assess future residual values and they are in for quite a shock.”

Stalker suggests that the alternative to this scenario is for companies to move into contract hire through sale and leaseback of their fleet.

“We would buy at market value or net book value, giving the company a financially neutral switch,” he says.