ON THE MONEY: There is a downside to contract extensions

For the first half of the year the fleet industry has kept new car retail alive. Even to the end of June, by which time the economic slowdown was a reality, not a headline, fleet sales were holding steady – up 2% year-on -year. Now, it’s starting to slip.

What’s happening?

The most likely explanation is contract extensions. Faced with an uncertain economic future, business car managers up and down the country are choosing not to replace cars when they come to the end of their lease contracts. Instead, they defer the decision for three or six months and extend the contract into the ‘secondary period’.

This is perfectly natural behaviour and entirely predictable.

It was first mentioned to me about three months ago, when a carmaker fleet boss said he was starting to see the early signs of companies delaying their contract renewals. Then, just last week, the managing director of a regional dealer group with local contract hire operations said he too was experiencing a slowdown.

The major contract hire and leasing companies have been expecting this for some time.

“The slowing economic growth will have an effect on car fleets,” said Jon Walden in BusinessCar in early July. “People slow down replacement cycles and extend contracts; even the well-off look to cut costs.”

But is it sensible?

My dealer group MD says his customers are taking the pragmatic view that they don’t want to be committed to a new three-year contract at this stage. Instead, they are happy to sign up for an extra six months, with the option to get out at any time.

This sounds entirely sensible to me. And, of course, rather than lose them as customers, he is happy to agree. But there are risks attached.

Extending the contract gives the leasing company a chance to review the residual value it has set on the car, potentially shifting some of the risk back to you, the business car manager. It is perfectly entitled to put the rentals up, if it finds itself out of pocket.

Plus, of course, there are the risks of driving a hard-used car even further and longer leading to higher maintenance costs. And the motivational issues of telling ‘Ronnie from sales’ that he is going to have to stick with his old Ford Mondeo, when he keeps seeing the shiny new model on the motorway.

For some help, I turned to fleet consultant Colin Tourick. He told me: “By and large, extending a lease is a good thing. It can reduce costs and buy some time.

“The best advice for the fleet operators is to talk to their leasing companies well in advance of the end of the lease and tell them what they plan to do. Do it this way and the rental may reduce; extend without discussion and it won’t.”

All of which sounds like good advice to me. But don’t neglect to discuss it with your employees too.