Company Cars - The drive of your life

You can demote somebody, cut their salary, give them a smaller officeaff happy while saving money. minus the glass-topped coffee table and rubber plant, you can even take away their mock-leather swivelling chair, and their upper lip won’t so much as twitch. But try taking away their BMW company car and replacing it with a Toyota, and the howls of protest will be heard in the next town.

Not that there is anything wrong with Toyotas. It is just that a BMW is, well, a BMW, and has far more social cachet than anything with a Japanese name on.

Up to the marque

All those drivers of volume cars could find themselves at the wheel of a BMW or a Mercedes-Benz sooner than they think, however, if more companies switch to a vehicle allocation policy determined by whole life costings rather than retail list prices.

That is because the most important element of a car’s whole life cost is depreciation – and while BMW and Mercedes second-hand values remain rock-solid, the used values of certain other makes sink like the proverbial stone.

‘As a consequence, you can end up with BMWs and Rovers in the same bracket,’ says Shaun Price, sales and marketing director at Fleet Management Services, part of the Abbey National Group.

‘A Citroen XM and a Mercedes E200 might cost roughly the same to begin with, but the XM will fetch less than half of the Mercedes in three years’ time,’ observes Nigel Underdown, director of marketing at Bank of Scotland subsidiary Godfrey Davies Contract Hire.

‘It’s the same with a Vauxhall Omega and the equivalent BMW model,’ he continues. ‘Omega is well built, reliable, and does the job well, but the BMW will still hold its value better because Omega has a Vauxhall badge.’

Underdown calculates that if a car costs #5,000 a year, depreciation will account for #2,500, fuel and funding will be responsible for #1,000 apiece, while just #500 will be down to maintenance and repairs. That is in part because all cars are far more reliable than they used to be, and many manufacturers supply generous mechanical warranties – Nissan provides three years or 60,000 miles, for example.

Garage bills play a less significant role in the costing equation because intervals between services have been progressively stretched. ‘Peugeot has doubled its intervals from 10,000 to 20,000 miles, for example,’ says Underdown. ‘That doesn’t halve the cost of servicing, because the car will need more work doing on it when it eventually goes into the garage, but it does reduce it considerably.’

While maintenance costs have fallen, there can still be big differences between cars that fall into the same band if a list price policy is used. ‘Take a Ford Mondeo 2.0I Ghia and an Alfa 156 1.8TS,’ says Underdown. ‘Over three years or 60,000 miles you’ll spend #1,384 on servicing and tyres for the Mondeo, but #1,842 on the Alfa.’

But which would you rather drive, or be seen in at the golf club? Therein lies one of the big problems in setting a company car policy – it cannot be uncoupled from all the emotion that surrounds an inanimate lump of steel, glass, and plastic. ‘Careful consideration needs to be given to the recruitment and retention of key staff for whom the car is a considerable factor in job satisfaction,’ says Price.

Down with the diesel

That could mean ruling out diesels, despite their frugality and the longevity of their engines. ‘A lot of people simply won’t join a firm if it’s going to put them in a diesel,’ he says.

Not that you will lose out too much in the fuel consumption stakes if you do not buy diesel, given that some modern petrol engines are almost as frugal. ‘A Mitsubishi Carisma 1.8GLX can average almost 45mpg,’ Underdown remarks.

‘Diesels still have a slightly higher residual than the equivalent petrol model, but they do cost more to maintain,’ he adds. ‘If you’re doing less than 20,000 miles a year, then forget diesel from a whole-life costs viewpoint.

At 25,000 miles, the figures start to look interesting, and at 35,000 miles, diesel’s cost advantages become significant.’

‘The cost of repairing cars after an accident should perhaps also be included in any whole-life costs calculation, although it would be true to say that most companies stop short of this,’ says Underwood.

FMS says a survey conducted among its clients reveals that only 9% of fleet managers responsible for more than 50 cars are using whole life costs to set their vehicle policy. Lex Vehicle Leasing says about 5% of customers show an interest in this approach, possibly because devising a policy can be quite a challenge; but it’s worth the effort, Price contends.

When you are drawing up your policy, make a distinction between employees who need a car because they do the mileage, and those who are entitled to one because of their status, he says. ‘Need usually arises if somebody is driving more than 10,000 miles a year on business,’ he says.

‘Calculate average annual business and private mileages for each user category, then analyse those averages into groups of employees in common job roles,’ he continues.

‘Decide on the vehicle grades relative to the need, status and pay level of each employee entitled to a company car. Balancing need and status means that a high-mileage sales or service executive could receive a company car with the same specification as a more senior office-bound employee whose car is granted purely as a perk.’

The next step is to establish a ceiling cost for each grade using pence per mile whole-life costs based upon the types of vehicle you would expect to see in each grade, says Price. Companies like FMS hold all the necessary data, and the fleet car magazines regularly publish running cost tables.

‘Once you’ve done that, choose a selection of vehicles which sit within that ceiling cost. Alternatively, allow freedom of choice up to that cost with the exception of certain types of vehicle; convertibles and so on,’ he suggests. ‘Thus, whatever a driver chooses, you’ll know they’ll all be run at similar cost.’

Freedom of choice could allow a driver to go up a grade and contribute to the extra cost out of salary, says Jackie Smith, director of client services at VELO, or down a grade to cut income tax liability and benefit from a salary increase.

It might even permit two small cars to be allocated, she says – one for the employee, and one for a partner – just so long as the ceiling cost isn’t breached. Choice may have to be limited, however, she warns, if drivers have to carry loads, for example, samples, and really need hatchbacks or estates.

Bradford & Bingley Building Society has gone the whole-life costs route with VELO, and offers cash, which can be used for a personal contract scheme, among the choices open to employees. That enables the employee to avoid any benefit-in-kind liability.

Kept on a leash

‘If you are doing less than 2,500 miles a year you may be better off going for a personal lease plan,’ says Mike Scott, national sales manager at Freeway. One of the country’s leading personal contract purchase suppliers, Freeway, is part of the Bank of Scotland Group.

If you’re acquiring your vehicles under a contract hire with maintenance agreement, you can use the rates quoted by your supplier to help you create your whole-life costs programme.

Remember, however, that they do not include everything – fuel, for instance, is not part of the equation.

So how long should you keep your cars? ‘There’s a move towards four-year policies,’ says Smith. ‘Cars are built to last longer these days, and if you’re doing up to 20,000 miles a year, a vehicle can go to four years quite comfortably – although there is a marginal increase in maintenance costs.’

‘Remember, though, that if you go beyond 70,000 miles you may be into a replacement clutch, cam belt replacement, maybe another set of tyres,’ says Nigel Harris, marketing manager of finance products at PHH, which provides a wide variety of services to fleet operators. ‘That said, most of a car’s depreciation occurs in the first three years of ownership, so a four-year-old vehicle will only fetch a bit less than a three-year-old one.’

‘Four years is long enough,’ Price concludes. ‘Giving people cars that are five years old will only result in demotivated employees.’ Steve Banner is a freelance journalist

HOW FLEET MANAGERS CAN SAVE THE PLANET

Smelly and environmentally unfriendly diesel and petrol engines are slowly being ditched by fleet operators in favour of clean, green, gas.

Volvo aims to sell 100 of its S70/V70 bi-fuel cars in the UK this year – they can run on either compressed natural gas (cng) or petrol – while Peugeot is about to launch a version of the 406 in the UK which can run on either petrol or liquefied petroleum gas (lpg). Volvo’s new S80 will be able to run on either cng or lpg from 1999 onwards.

Not to be outdone, Vauxhall has lpg/petrol versions of its Astra, Vectra, and Omega, and a spokesman predicts that they will fetch #300 to #400 more on the used market than standard models. You pay a #1,000 premium for the privilege of running on gas, but that can be offset by government grants of up to 75% of this differential, says Vauxhall.

Most drivers will notice very little drop-off in performance when running on lpg, but power output drops by about 10% when you run on cng. The availability of gas remains a problem.

Although there are well over 100 fuel forecourts with lpg nationwide, there were only 18 cng refuelling points at the last count.

But at least you won’t be causing too much pollution in your search for a pump. Cng generates 77% less carbon monoxide than petrol, and 20% less nitrogen oxide.

While gas is cheaper than petrol, its calorific value is lower, so you burn more.

The equation still comes out in favour of gas, though. Electric cars still suffer from two problems – the weight of their batteries and shortness of range (typically 60 miles) between recharges.

Mercedes has been working on an alternative method of producing electrical power, however. It has been developing fuel cells in conjunction with Ballard Power Systems of Canada.

Fuel cells generate electricity through the reaction of hydrogen and oxygen, and the only major emission is water vapour.