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12 Mar 19

TCO, risk and productivity drive US leasing growth

The US vehicle leasing sector enjoyed positive growth last year on the back of rising new car sales and a thriving economy. Total auto sales of 17.2 million light vehicles in 2018 were up 0.5% on the year before, boosted by new tax laws that provided incentives for companies to acquire new light trucks for their businesses, according to the North American Dealers Association.

The tax change increased the amount of depreciation that businesses can offset against their tax, and helped total fleet sales exceed 2.7 million registrations, a year-on-year rise of 7%, said Cox Automotive.

Commercial fleets drive vehicle sales

Reviewing last year’s market, Ted Davis, vice president, North American Supply Chain, ARI, said, “Overall, new vehicle sales remained extremely strong throughout North America, particularly in the U.S. Favorable economic conditions for much of the year helped propel vehicle sales at a macro level with the commercial fleet segment driving much of this growth. Trends in the fleet sector mirrored those across the automotive industry as more organizations shifted away from sedans in favor of crossovers/SUVs and trucks.”

Drilling down into the detail of the areas that drove this growth, Natalie Sievert, managing director, global, Element Fleet Management (pictured above), identified four factors that are driving fleet behavior; cost, productivity, risk and driver satisfaction.

“A focus on managing fleet-related costs has resulted in re-amortization of leases, reassessment of vehicle choices, an increased demand for analyses surrounding replacement, ordering, and servicing choices,” she said.

Telematics data driving fleet strategy

Sievert also highlighted how fleets are applying telematics data to achieve their goals, using vehicle tracking technology to improve productivity and raise safety levels.

“It’s not just a matter of installing a telematics device in a vehicle – it’s knowing what to do with the resulting information and having the support infrastructure needed to manage it. The combination of advanced fleet technology and telematics hardware with knowledgeable consulting and customer support can help take the performance of a fleet to a whole new level,” she said.

Monitoring driver behavior is not simply a case of identifying incidents of excessive acceleration and braking, however, given recent legislative changes in the USA. Employers now face the challenge of “prohibiting marijuana usage as it becomes decriminalized and/or legal in certain regions,” said Sievert, with drug-driving representing a newer risk alongside longer standing dangers such as mobile phone use.

Drivers desert cars for SUVs

Element has seen a trend for companies to set minimum safety standards for vehicles and to give drivers a greater choice of car, which has led to a shift to SUVs and crossovers from saloon cars and hatchbacks. Light trucks accounted for 69.2% of all light vehicle sales in 2018, while the car market accounted for its lowest ever share of the US new vehicle market, with sales down 12.7% according to NADA.

In terms of fleet finance, Chicago-based Wheels which manages 330,000 vehicles and is a member of the ALD global alliance, said the USA remains “an open-end leasing market,” with an increasing appetite for outsourced fleet administration services.

Purchasing departments involved in fleet deals

This demand is witnessing, “a greater involvement of the procurement function, and a higher frequency of RFPs [tenders]” said Ahsan Rahim, chief operating officer, Wheels.

Analysis of the total cost of ownership is helping leasing companies to overcome misconceptions that leases are more expensive than purchase or finance alternatives, although Jesse Mann, director, Lease Portfolio Management, ARI, acknowledged that there’s no ‘one-size-fits-all’ strategy appropriate for fleets.

“The data shows that leasing is often an attractive option for many companies,” he said. “In many cases, a hybrid funding solution comprised of purchasing, financing, and leasing vehicles can provide significant benefits for most organizations.”

Among leasing products, an operating lease remains the most popular funding solution for the majority of companies, although ARI has recently seen more businesses consider a capital lease structure (called a finance lease in Europe) as an alternative. Capital leases can offer significant tax and accounting advantages to certain organizations, with interest payments and depreciation both being tax deductible.

Replacement cycles under scrutiny

The focus on TCO efficiency is also prompting fleets to conduct an analysis of vehicle replacement cycles, with leasing firms reporting a trend towards variable contract terms.

“We’re closely working with our customers to help them use advanced analytics to examine the economic service life of each asset,” said Mann. “Economic service life is the ideal length of time you should keep a vehicle based on capital and operating expenses with the goal of achieving the lowest average annual cost. Most organizations will benefit greatly by viewing the asset holistically – operating expense, productivity, criticality to business operations [and] capital investment.”

He added that this approach is also leading a number of clients to transition towards a strategy of replacing a consistent number of vehicles annually in order to avoid the difficulties or replacing a large number of vehicles at any one time.

“This consistency also increases reliability and in turn eases operational struggles,” said Mann.

Prospects for 2019 growth

Looking ahead to the rest of 2019, Wheels is bullish about the prospects for the rest of the year, with the company anticipating that growth in fleet sales will outstrip increases in individual car ownership.

In the longer term, however, the development of mobility solutions presents both a challenge and an opportunity for established leasing companies.

“The market for mobility solutions such as ridesharing and car hailing services is maturing rapidly,” said Rick Tousaw, executive vice president and chief commercial officer, ARI.

“We anticipate these companies will need significant operational and logistical support as their fleets continue to experience exponential growth. There’s significant potential across the mobility sector.”

Authored by: Jonathan Manning
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