Lease options can shift risk

IS the trend your friend? That is a question that fleet operators need to ask themselves, according to Nigel Malcolm, managing director of Perth-based Fleetcare.

There are two clear trends in the fleet leasing market: fully-maintained operating leases, which have become increasingly popular and are now the most widely used option; and novated leases, which have also enjoyed rapid growth, albeit off a much smaller base.

There are good reasons for the growing use of these products.

An operating lease is effectively a long-term hire arrangement and the client is able to hand back the vehicle at the end of the lease term.

It is the leasing company that carries the risk as to the residual value of the vehicle at the end of the lease.

This has a lot of appeal for many organisations, according to Tim Roberts, director of Easifleet, which is 51 per cent owned by car dealer John Hughes.

“Organisations are looking to shift the end risk,” Mr Roberts said.

Novated leases are a three-way agreement between a leasing company, an employer and their employees.  The beauty of a novated lease is that employees have a lot more flexibility and choice, as to the make and model of vehicle they wish to lease.

They are not limited to a standard selection.

It also means that individuals can retain their vehicle, and the obligation to make lease payments, if they change jobs.

Mr Malcolm believes novated leases have opened up a “whole new market” to leasing.

“Certainly it has created its own market,” Mr Malcolm said.

While operating leases and novated leases suit many organisations, Mr Malcom said Fleetcare was challenging its clients to fully assess their options.

“Too often people don’t look at the options, they just stick with the trend,” he said.

Some clients who are experienced in leasing and have a sophisticated understanding of the market are opting for alternative funding models, such as a finance lease or hire purchase. In such cases, the client is exposed to fluctuations in the residual value of their fleet.

“It means you are not paying somebody else to take the risk,” Mr Malcolm said.

Mr Roberts agrees there is no right or wrong way to acquire vehicles. In some cases, an outright purchase may work best.

“In a cashed up organisation, quite often it can make sense,” Mr Roberts said.

He added that many organisations buying their vehicles choose to outsource the fleet management task so they can benefit from the economies of scale and efficiency of a specialist operator.

Orix Australia managing director John Sweeney said another trend, which could potentially benefit all players in the industry, is towards an open pricing schedule.

This means that Orix discloses to clients key details such as the purchase price of vehicles, the maintenance costs, the funding costs, overheads and profit margin.

Mr Sweeney said this practice highlighted the fact that pricing was driven almost entirely by the expected residual value of the vehicles.

“The residual determines everything,” he said.

Fleet management and fleet leasing is one of several product lines offered by Orix and is the area for which it is best known.

Mr Sweeney said Orix sees the fleet business as a core competency and is keen to expand the business.

“We want to grow it fairly aggressively,” Mr Sweeney told WA Busines News.