Nov 2002

For novices harbouring notions of careers in fleet management – as well as for the greybeards in the game – in this article, a spokesman for SAVRALA puts fleet management (FM) in perspective and describes the market forces impacting on the industry.

When talking fleet management, outsourcing is top of mind. Whether it’s IT, HR, logistics – or fleet management for that matter – increasingly, companies are realising the benefits to be derived from selectively apportioning facets of their non-core business to specialist enterprises.

Specialist FM companies provide a gamut of professional services. With the key elements being cost control, administrative efficiency and risk management, they are able to oversee and control the life cycle management of a single vehicle or fleet of vehicles from cradle to grave.

The services on offer may range from the design of a company’s car or car allowance policy, to the sourcing and buying of motor vehicles, maintenance, management of fuel, tyres, insurance and accidents, right through to the eventual disposal of the vehicle/s at the end of the agreed lease period.

Fleet management is a somewhat loosely used term and clients are sometimes confused by the spread of services available from banking institutions compared to specialist companies. In broad terms, a key objective of banks is to lend money and grow their asset book. To that, is added an enhanced range of sophisticated fleet services such as fuel management.

The key objective of specialist FM companies is to manage costs and risk on their client’s behalf. Financing is a consequence of their being in business, not a cause. In fact, current statistics reveal that in the corporate FM sector – which totals just under 100 000 vehicles managed by both banks and specialist companies – the split between financed and non-financed vehicle management contracts is about equal.

In recent times, the corporate sector FM business has not experienced exceptional growth. In part, this is a reflection of the general state of the economy, clearly indicated in NAAMSA’s new vehicle sales figures.

In the medium-term, several factors will continue to influence the industry’s shape and size. These include:

• The continued growth in government outsourcing its fleet management. Tenders using different precedents have been implemented with varying degrees of success. While not all FM companies are operating in this sector, government business is a reality and here to stay. In time, more FM companies will undoubtedly develop the right solution for government and parastatals,
• The continued impact of car allowance schemes. The buying and management of cars has been removed from corporate hands and placed in private buyers’ hands. This continues to negatively impact on fleet opportunities,
• The trend by motor manufacturers to incorporate maintenance plans on new vehicles at point-of-sale is increasing. Undoubtedly, in the next year or two, more motor OEMs will build in plans – management and/or service – into their vehicles from scratch which will influence the ability and need to manage fleet costs,
• In the absence of other investment opportunities, some corporates are finding it more effective to avoid debt by paying cash for their cars. The result is more vehicles managed in-house with the potential risk that inexperienced in-house fleet personnel may be inattentive to key issues such as cost controls, risk management and overall fleet efficiency.

  The challenge for the players in the FM industry is to continue to maintain professional standards in the provision of their services and to try to grow the proportion of the national corporate park that they collectively manage above the current 10%. There is certainly plenty of opportunity.

If you have not considered using the services of a specialist fleet manager, why not arrange an appointment with a member of SAVRALA to gain an understanding of the cost, efficiency and risk management benefits that they are able to provide. Please click here for details of all current members.

July 2002

One of the most complex and controversial issues relating to vehicle leasing concerns residual values (RVs) says a spokesman for the Southern African Vehicle Rental and Leasing Association (SAVRALA).

Very often, leasing customers are not entirely clear on the definition of RVs, how they are calculated and, in practice, “how they work.” For instance, a common expectation is that at the end of the lease period, they automatically have a right to buy the vehicle in question at the predetermined price. Unless negotiated, this is not the case.

By definition, a residual value is the Rand value – or a percentage of the initial or prevailing retail price – ascribed to a specific vehicle for a specific period of usage taking into account the distance to be travelled during that time. Quite simply, the RV placed on a vehicle today is an estimate of what it will be worth in the future.

Residual values are one of three major risk elements assumed by a full maintenance leasing (FML) company, the other two being credit and maintenance risks. In basic terms, the client contracts with an FML company to assume this risk either partially or fully.

Corporates often want to avoid the RV risk, but want their drivers to be able to purchase “their” vehicles at the end of the lease period at the contract residual value. As one leading FML company puts it: “This is like having your cake and eating it. Most FML contracts do not give the lessee the right to purchase the vehicle, unless at market value, and do not specify residual values”.

If the customer wants the driver to have the option to purchase the vehicle at the end of the lease period at a predetermined value, this must be agreed at the outset at an amount typically a few percent more than the FML company’s standard RV. In this case, at the end of the contact, if the market value of the vehicle is greater than the option price, the driver will probably buy, and, if it is less, the driver will return the vehicle to the FML company with no downside.

Some of the factors that play a role in determining how some of the larger leasing companies attach a residual value to a specific vehicle include:

• using statistical modeling and forecasting inflation and expected market conditions,
• the current market value of used vehicles as determined by the Mead and McGrouther guide,
• “hands-on” experience of their customer base and specific usage patterns,
• historical experience and statistics obtained through wholesale operations and retail outlets, ie. the actual market values achieved on resale,
• SAVRALA’s quarterly statistics which serve as an indicator of current forecast RVs on selected vehicle models by the industry.

Based on these factors and also as dictated by changing market trends and current models, residual values are continuously reassessed and reworked to ensure that the forecasts are as accurate as possible.

Leasing companies may be more conservative when determining RVs on some imported vehicles as there is concern that they depreciate at a greater rate and retain a lesser value at the end of the lease period.

Motor manufacturers can play a significant role in assuring higher RVs by releasing limited numbers of popular new models and not flooding the market. This serves to stimulate used vehicle prices. Excessive discounting is detrimental to the used vehicle market and car manufacturers can help to improve RVs by not resorting to discount tactics purely to improve market share.

The complexity of residual value forecasting cannot be fully covered in a few paragraphs and these pointers serve to shed some light on the definition of RVs and how they are determined. When going into a partnership with a leasing company, it is important to remember that those affiliated to SAVRALA are bound by a Code and Charters set out to establish standards of good practice within the vehicle rental, leasing and fleet management industries. They are intended to ensure that customers who obtain rental or leasing facilities from association members receive the highest levels of service, honesty and integrity in all of their dealings.

April 2002

Recent media headlines have hailed car allowance schemes as being preferable to the company car option. While this debate continues to rage, Clive Else, chairman of Savrala’s full maintenance leasing section has come out waving the flag in favour of Full Maintenance Leasing (FML) as an option either way.

“FML’s are available to companies who use them to finance company cars for employees. In addition, FML and similar operational leases with maintenance plans are popular with individuals who receive a travel or car allowance as part of their remuneration,” explains Else. “Lessors provide a number of ways in which the use of a motor vehicle may be structured, each with its own set of pros and cons.”

In all scenarios, the lessor usually bears the risk of ownership by taking a significant position on the residual value (RV) of the vehicle. This affects the lease pricing with a lower monthly payment for the lessee. “So in effect, the lessee pays only for the value of the asset “used up” over the duration of the lease,” says Else.

If properly structured, a full maintenance lease may qualify as “off balance sheet” finance under the “AC105″ current Generally Accepted Accounting Practice (GAAP) accounting convention that regulates accounting for leases. This means that the lease has no effect on the balance sheet of a corporate lessee and therefore, from a balance sheet point of view, the company car / car allowance decision is not an issue.

A typical lease has a number of equal monthly payments that will fluctuate only if the prime overdraft rate shifts. Once the asset has been returned in the agreed condition at the end of the lease, the lessee has no further obligations to the lessor, although options to purchase at fair market value are commonplace.

Prior to the introduction of the Seventh Schedule of the Income Tax Act in 1985, the value of motor vehicle fringe benefits were ignored for the purposes of calculating gross income as defined in Section 1 of the Act. “The purpose of the Seventh Schedule is to tax non-cash earnings,” explains Else.

He goes on to say that this attempt to eliminate perceived distortions in remuneration policies has introduced a number of distortions of its own. As a result, many employers have moved from the provision of company cars to the provision of car allowances in an attempt to preserve the status quo.

“The antipathy of the Fiscus to company cars has been echoed in its attitude to car allowances and we have seen an escalation in the portion of a car allowance subject to PAYE to the current level of 50%.”

The pros and cons of company cars and car allowances – from both employer and employee perspectives – have been well documented and the facts and figures can very easily be engineered to show either option in a less or more favourable light. It just depends on who is doing the motivation.

“As long as there are cars and a Seventh Schedule, the arguments for and against company cars and car allowances will continue,” says Else. “By using one or other of the operating lease products available however, the car benefits of all employees can be structured to suit both employer and employee.”

Undoubtedly the operational lease concept has proved itself as offering the motorist – corporate or individual – a highly competitive and practical method of obtaining the use of either a single vehicle or an extensive fleet by, in effect, outsourcing the vehicle management function to a specialist third party enterprise.