For many fleet manager/ operators a comprehensive vehicle cycling policy is of upmost importance. Managing the accumulated cost of vehicle maintenance versus the ultimate resale value and capital costs is a task with which fleet managers must contend. “A few years ago everyone kept their cars for 80,000 kilometres and that made it simple to administer,” said Steve Somers, Regional Sales Director, Eastern Region, Jim Pattison Lease. “What you want to do now is to look at a number of keys; you want to look at maintenance on the vehicles, resale value of the vehicles plus the capital cost and ideally what you want to do is find that time frame where when you are selling the vehicles you have kind of hit the minimum amount of expense that you possibly can.”
Many factors are at play when determining a ‘best’ time to cycle vehicles (as seen in the table below). One factor, with which lessors agree generally, is that timing the sale in spring or fall can be beneficial as most OEMs release new vehicles then, so new car as well as resale markets are strong. Another important factor is depreciation. As a rule of thumb, the older the age of the unit, the less the vehicle will bring at re-sale.
“The policy a company uses is often based on the number of months in service, a kilometer threshold or a combination of the two. It serves as a guideline to identify potential replacements. Additional analysis should then be performed to identify the feasibility of replacing a vehicle earlier or later than the guideline,” said Paul Wingate, National Director Client Services, Transportaction Lease Systems Inc. “For example, this may be the case if the projected replacement date for a vehicle does not take advantage of the benefits of selling it in the fall and spring markets.”
Replacement policy decisions today are increasingly based on the calculation that many vehicles will provide a longer service life than in the past. Consequently major vehicle maintenance is now standard for vehicles with higher kilometer readings than in the past.
“The product is getting better so you keep it longer and where we historically saw that sort of uptick in maintenance, I think that is now drawn out over a longer time line so that the maintenance portion doesn’t really start to uptick until well after 100,000 km and even into the mid-150,000 km. Then you start to see that sort of unplanned maintenance event whatever that might be,” said Greg Vercaigne, President, GDV Fleet Solutions. “The line has been pushed out much further so I really believe that the mileage point is further out than it has ever been.”
As a result, an increasing number of fleets have adopted a strategy of keeping vehicles in service longer. Recent economic conditions have reinforced such inclinations. “We are confident that the strategy of holding off on replacement orders by an extra cycle can prove beneficial for a lot of fleets,” said Pat O’Connor, Manager of Remarketing Regional Sales, Wheels Inc. “The 2010 used vehicle market rebounded in December after the preceding 11 months saw at or near double-digit drops in resale values. We anticipate a much stronger start to 2011 and therefore expect to see greater resale percentages than we experienced last year.”
As an example, a large fleet operator, Merck Canada Inc., changed replacement cycles for sales vehicles from 36 months at 80,000 km to 36 months at 100,000 km. Merck also extended the life of executive vehicles from 36 months at 80,000 km to 48 months at 80,000 km. This change alone is expected to produce an estimated increase in sales income of over $200,000 for fall 2010 deliveries.
“Increasing the life cycle of our vehicles has been a great way to make sure we weren’t trying to sell our vehicles when no one was buying them,” said Scott Lauer, Manager of North American Fleet Administration, Merck. “This year we’re anticipating a resale environment that will deliver strong return on investment and reduction in overall total cost of ownership.”