Setting the right lease budget, even in uncertain times
These days, a common question from our international clients is how best to set lease budgets in unpredictable times. Businesses are feeling the impact of increases in vehicle list prices, decreasing OEM discounts and steadily rising inflation – all of which means that some vehicles might no longer fit within your planned lease budget.
Understanding the impact of these market changes on your overall total cost of ownership (TCO) will put you in a better position to decide whether – and how – you want to adapt your lease budgets.
We’re here to help! At LeasePlan International Consultancy Services, we monitor price developments in the automotive market on a continuous basis. We use all kinds of different sources and tools to keep track of what’s going on and we publish our findings every quarter in a report called ‘Trends and outlook in leasing’, which we share with our clients. The report provides insights into the development of vehicle catalogue prices, fuel prices, TCO and much more, helping fleet managers make decisions on lease budgets and overall budget forecasting.
Looking for a simple overview to get you started? In this blog, we’ll elaborate on the different cost items that combine to build the overall lease cost, the developments we’re seeing regarding these different items and what this all means for lease budgets.
Total cost of ownership (TCO)
Let’s begin by looking at how lease costs are built up. LeasePlan’s TCO dashboard shows that, on average, the share of different cost items is as follows.1
Even given the variations between countries, fuel types and vehicle types, it’s safe to say that depreciation (the catalogue price minus the residual value of the vehicle) and fuel usually make up around two-thirds of TCO. We’ll focus on these two items in this blog.
First, a word on the remaining third of TCO: repairs, maintenance, tyres, insurance, interest and applicable (road) taxes. We assume a lesser cost impact on taxes, which aren’t directly affected by inflation. For insurance, cost development is more impacted by the trend in damages than by inflation; plus, when damages go up, potential price increases are usually delayed. During the pandemic, accident numbers were low and so effects on prices – so far – are also low.
Our latest trend report, from external data2, shows an average vehicle catalogue price increase of over 3%3 during the past 12 months in 11 European countries (although there are, naturally, differences between countries). This is a relatively modest number from the perspective of the general inflation numbers we’ve seen (up to 6%). This can be explained by the fact that vehicles in our analysis fall under the less impacted fuel types (plug-in hybrid and battery electric vehicles (BEVs)) and the less impacted vehicle segments (C, D and E). Hardest hit? Small diesel and, to a lesser extent, small petrol vehicles, as well as the larger SUVs in all fuel types.4
Vehicle cost is impacted not only by increased catalogue prices but also by lower discounts. Supply shortages are putting pressure on both sides of the equation. Our estimate is that the overall impact on the cost of vehicles is around 8%; namely, 5% from lower discounts and 3% from higher vehicle catalogue prices.
- The average catalogue price increase between April 2021 and April 2022 equals 3.1%
- Core consumer prices in European Union increased 3% in December of 2021 over December 2020.
Data is based on vehicles that have exactly the same specification over time allowing for accurate monitoring of price development. countries in scope: AT, BE, CH, CZ, DE, FR, ES, IT, NL, PL, RO (e.g. Germany, Audi A4 Avant 35 TDI S-Tronic)
Potential price effect caused through the introduction of a new model or a change in trim line name is not included
Fuel prices have been rising strongly over the past 12 months, pushed by geopolitical turmoil and general inflation. In Q2 of 2021, fuel prices were back at pre-pandemic levels, and they’re now over 30% higher than a year ago.5
Starting from Q4-2020, fuel and electricity prices have been steadily rising Diesel up> 40% over the past 12 months Petrol up > 25% over the past 12 months Electricity up almost 50% over past 12 months
Significant increase in electricity prices in: Norway: (+56%) Spain (+62%) Denmark(+67%) The Netherlands (+101%)
This can be explained by the increased demand, inflation, and geopolitical uncertainties.
Impact on TCO
So, what does this mean for your lease budgets? When we do the maths, we can see that although fuel accounts for a relatively low share of TCO (16%), the price increase is high: around 20% year on year. This results in a TCO impact of 3.2% (16% * 20%).
Applying the same logic to depreciation, we can see that its share of TCO is much more significant, at 48%. If we include the impact of increasing catalogue prices (+3%) and lower discounts (-5%), we see an 8% impact on depreciation and thus a 3.9% impact on TCO (48% * 3.9%).
Taking into account only depreciation and fuel, therefore, there’s a 7.1% impact on TCO.
For electric vehicles (EVs), the TCO share of electricity is lower, by roughly half, than that of fuel for internal combustion engine (ICE) vehicles. Depreciation, on the other hand, has a higher share for EVs than for ICE vehicles. The TCO market-wide impact is therefore relatively comparable.
Lease budgets: Steps you can take today
LeasePlan International recommends that businesses regularly update their lease budgets, so you can be sure of always being able to order suitable vehicles. Unsurprisingly, this becomes even more important in times of increased uncertainty and high inflation.
You can see an example of the impact of today’s turbulence in the graphic below. We’re looking at a car policy with a 48-month contract duration where a driver in fictional grade II can spend up to €700 per month – meaning they can hit the road in a Volkswagen Passat. One year later, the cost for the same vehicle at the same contract length has gone up to €800 per month.
However, the example also shows that when the contract length is extended to 60 months, the same Volkswagen Passat still fits the €700 monthly budget. Alternatively, keeping the same contract duration of 48 months means the same €700 budget allows for a smaller vehicle (a Volkswagen Golf). In both scenarios, although driver satisfaction may be compromised by a longer contract or a smaller vehicle, there’s no negative financial impact.
Meanwhile, if the budget is increased to €800 per month in Year 2, the Volkswagen Passat would still be suitable. Or, if the car policy allows, the driver could upgrade to a Grade III vehicle at a longer contract term of 60 months. Keep in mind this isn’t a very common approach: it means drivers of different job grades (II and III) could end up in similar vehicles.
*Pricing above for illustrative purposes only
Our top tips
1. Widen your range of vehicle brands
In times of supply chain shortages and long delivery times for new vehicles, it makes sense to investigate alternative brands to add to your portfolio. In the past, you might have limited your OEM selection to three brands, to support order consolidation and simplify administrative tasks such as ordering and contracting. Today, however, it may be helpful to widen your policy to allow any model that fits the permitted budget and other restrictions (fuel type, contract length etc.) as long as it’s a comparable vehicle segment. Try looking beyond the usual suspects: new OEMS from China, for example, are today producing some of the most exciting car on the market. 6
2. Consider going electric
As our CarCost Index shows, in many countries and vehicle segments BEVs are becoming – or are already – price competitive. Instead of adjusting your lease budgets, see which BEV options already work within your current allowance. And of course BEVs today check a number of other ESG boxes, as switching to electric is one of the easiest ways to cut emissions from your fleet and signal your company’s sustainability credentials.
3. Make longer contracts work for you
As we saw in the example above, extending vehicle contract durations might have a positive impact on monthly lease instalments. Of course, the same goes for vehicles in your current fleet, as cars depreciate more at the beginning of the lease period than at the end. While maintenance will go up as the vehicle gets older and the mileage increases, it might still be worth investigating whether extending the current contract could lower your monthly lease instalment – so your costs stay the same or even decrease, and the driver can continue to enjoy their current vehicle.
1: Average for AE, AT, BE, BR, CH, CZ, DE, DK, ES, FI, FR, GR, HU, IE, IN, IT, LU, MX, NL, NO, PL, PT, RO, RU, SE, SK, TR, UK, US. Passenger cars and vans. All fuel types 2: Source: Autovista 3: Data is based on vehicles with exactly the same specifications, allowing for accurate monitoring of price developments over time. Countries in scope: AT, BE, CH, CZ, DE, FR, ES, IT, NL, PL, RO (e.g., Germany, Audi A4 Avant 35 TDI S-Tronic) 4: Source: Autovista 5: Countries: AT, BE, CH, DK, ES, FR, DE, IT, NL, PL, PT, UK. Source: Globalpetrolprices.com 6: https://www.leaseplan.com/en-ix/blog/future/latest-evs-chinese-oems/