Flexibility, cost certainty, risk mitigation, vigilant management and reporting systems drive better fleet management outcomes. Mark Story talks to the experts.
With over 50 per cent of all new vehicle registrations going to fleets annually, corporate Australia’s preference for leasing options in fleet management is far from waning.
A finance lease is effectively a loan facility covering vehicle purchase cost, less any residual value, whereas an operating lease is an agreement to rent. Unlike a finance lease, an operating lease has no exposure to interest rate or residual value risk, and at the end of the term the vehicle is returned to the financier.
Safety and efficiency
A renewed interest in safety and energy efficiency is having a bigger impact on fleet managers’ vehicle decisions. Interestingly, while up to 75 per cent of all new Australian-manufactured vehicles used to go directly to fleet, attempts to better align vehicles with business needs means that’s no longer the case.
Ken Thompson, a Director with the Australian Fleet Managers Association (AFMA), says a growing number of fleet managers now favour imported models due to their emphasis on safety. What they’re looking for, he says, are vehicles that rate better on the ANCAP (Australasian New Car Assessment Program), which crash-tests new model vehicles.
He says fit-for-purpose – the art of aligning a vehicle to the type and amount of usage – has become the modern mantra resonating from today’s fleet managers.
“This clarion call is driving a notable migration away from the usual large company car, to fleets comprising more four-cylinder vehicles that are cheaper to run,” says Thompson.
As a case in point, organisations such as City of Sydney Council have been among the first to embrace a sustainable vehicle fleet agenda. As well as reducing the total number of vehicles, the council’s smaller and more fuel-efficient fleet is comprised of 39 hybrid (petrol/electric) vehicles.
Just as there has been a gradual shift from large vehicles to more fuel-efficient vehicles, Neil McKay, General Manager Sales from Custom Fleet Australia, says there’s also growing interest in hybrids and electric cars.
Custom Fleet Australia has supported this initiative as a foundation partner of the new Mitsubishi MIEV. While there’s been sufficient uptake of hybrids (predominantly by government) to start determining residual values, he says this will take between two and five years on electric vehicles.
But uncertainty over residual values of hybrids, which he claims are not yet cost-effective, has seen John Little, Fleet Manager Shared Services with Sydney Water, replace large six-cylinder vehicles with diesel, LPG and four-cylinder alternatives.
To remove residual risk and liability from its balance sheet, Sydney Water’s 1000-strong vehicle fleet is managed by Lease Plan on operating leases of between three and six years.
In order to ensure the government-owned corporation’s vehicles are fit-for-purpose, eco-friendly, cost-efficient and equipped with the latest safety options, Little has succeeded in reducing his fleet’s monthly fuels spend by $100,000 over five years.
“A hybrid vehicle could be up to twice the price of an alternative vehicle, and the environmental impact isn’t significantly better than many of today’s better four-cylinder vehicles,” says Little.
Keeping track of costs
Given that it’s the third single biggest impost behind salaries and rent, Thompson says it’s important for companies to take a whole-of-life approach to containing their fleet-management costs. This means clearly identifying which vehicles to obtain, how many, for what specific purpose and over what time frame.
Instead of simply paying the bill every month, he says there should be sufficient management input into minimising whole-of-life costs. Extending well beyond the initial price, insurance and registration expenses, he says the cost of running and maintaining a vehicle fleet includes operational or ‘life-cycle’ costs such as: fuel, maintenance, tyres, car parking, accident repair and refurbishment before disposal.
“Remember, a vehicle fleet is never an asset, so avoid simply going for the cheapest vehicles,” advises Thompson. “While a diesel engine could be more expensive to acquire, it may mean lower fuel costs over the longer haul.”
Similarly, Thompson suggests making the most of monthly fleet-card data to identify cost or usage discrepancies between identical vehicles. It’s only by quantifying the full cost of the resource, adds Thompson, that fleet managers can improve overall fleet performance.
Managing the process
Thompson says it’s also important to have sufficient management processes in place to ensure that those vehicles needing maintenance get serviced on time.
“Vehicles not serviced when they reach their designated milestones are at risk of deteriorating faster, requiring expensive unscheduled maintenance and losing residual value.”
It’s equally important, suggests Custom Fleet’s Neil McKay, to break down fleet expenses into controllable and fixed costs at the vehicle level. This strategy offers an effective means of tracking expenses. Also, by reporting on a cents-per-kilometre basis, he says it’s possible to compare the relative cost performance of identical vehicles within the fleet.
“The keys to good fleet management, in addition to reports that highlight anomalies in vehicle or driver performance, are strategic management, vehicle replacement planning, understanding the inherent risks of a volatile used-car market and carrying the impact of residual value risk,” says McKay.
So what are the new options for fleets, when compared with the old days and the pool vehicle system? Unlike previous operating leases that incorporated end-of-lease penalties that lowered the residual value – when kilometres travelled didn’t match lease terms – McKay is witnessing greater flexibility to match lease terms and/or kilometres to expected travel patterns.
And while most financiers will charge a form of payout penalty for early termination of an arrangement, Nicholas Scott, CEO of Southgate Fleet Management, says it is possible to arrange finance options that do not include early payout fees.
“When considering lease terms and kilometres to travel, aim for the optimal term for resale value maximisation, while keeping in mind the effective life of the vehicles and their expected annual kilometres.”