Total Cost of Ownership: fleet sector reveals worrying difference in preparedness for change.

30 Apr Total Cost of Ownership: fleet sector reveals worrying difference in preparedness for change.

A recent Fleet Europe survey on the worldwide impact of Covid-19 on fleet and mobility threw up some interesting results.

The survey was live from the end of March and beginning of April, of which the vast majority of Europe was living with at least a few weeks of lockdown. The survey attracted over 400 responses with participants in 34 countries.

The survey collated feedback from buyers of fleet as well as suppliers to the sector. Although many of the questions triggered the same response regardless of function, buyers appear to be a little more upbeat about tender postponements than their suppliers, with around one-third of buyers expecting tender delays in contrast to 85% of suppliers. However, both functions are anticipating an impact on their fleet strategy of C-19, [77% buyers, 85% suppliers], with 80% of buyers expecting to extend their leasing contracts and 71% of suppliers recommending this course of action.

Although the industry is anticipating a strategic impact post-C19, the immediate impact of C19 on Total Cost of Ownership [TCO] is being felt very differently across the sector, with an almost even split between an increased, decreased or stable forecasted TCO. How TCO will change across the year as a consequence of C19 will depend on a number of factors but it will mostly be influenced by the existing commercial arrangements in place.

Expected Increase in TCO
Twenty-nine percent of respondents expect the TCO of their fleet to increase this year.

Short term rental costs will be the most likely culprit as travel restrictions stop replacement vehicles being delivered and short-term rentals being used as a stopgap: at a considerable premium when compared with normal leasing costs. The extension of an expired lease on default terms will also impact TCO across the year, as unless these terms have been negotiated at the beginning of the contract, they are likely to be punitive.

During a time when much of a company car fleet will be sitting idle during lockdown, the reduced mileage across the fleet provides opportunity to reduce operational cost. If a car fleet contract was established where the lessor and client would share the benefit of lower mileage, then costs to the client could be reduced beyond the fall in fuel spend.

Expected Decrease in TCO
Thirty-five percent of respondents expect a reduction in the TCO of their fleet.

A well-managed fleet with good commercials in place should be able to reduce their TCO without too much intervention. Pre-existing terms for contract extensions on expired leases will remove punitive charges, whilst effective negotiation at the outset of the contract will mean a share of the benefits from reduced mileage, maintenance and consumables.

Contracts that are due for transition will need to be managed effectively to reduce the impact of lockdown and stalled activity. Communication with outgoing suppliers will need to constant, so that movement restrictions don’t impact on vehicle change-over and result in cost penalties.

No change in TCO
Thirty-two percent of respondents expect their TCO to remain stable.

A reasonably managed fleet is likely to be able to control their costs so there is little increase on TCO. They will be able to play a balancing act that counters any increased rental costs with the benefits of reductions that come from static vehicles. However, this doesn’t need to be regarded as acceptable as a fleet that is very well managed and has the correct commercial terms in place should be able to reduce their TCO at times when usage and consumption has stalled.

A detailed understanding of fleet dynamics and effective negotiation at the outset of the contract means costs are tightly controlled and changes in circumstances can be anticipated. Obviously, this does not mean social lockdown can be anticipated, but it does mean that changes in usage, reduced spend against budgets and contract extension defaults can be anticipated and planned for.

Creating water-tight commercials at the beginning of a contract is vital to control costs within a complex category like fleet. Experience shows that under normal circumstances approx. 25% of costs within a car fleet are variable and outside of contract, meaning these costs attract additional supplier margins and fees. So, as the situation we find ourselves in has inflicted massive change, contracts with no reference to these charges will face much greater out of contract charges, and consequential supplier fees: all impacting negatively on TCO.

Knowing the fine detail of company car fleet contracts is vital to contain cost on such an expensive category. To discuss how to ensure you don’t fall foul of commercial trapdoors of a car fleet contract then speak with Graham Rees at Fleetworx on +44(0)1926 353 300 or email grees@fleetworx.com