CAP has offered a view on the question of whether contract extensions are a viable way of better managing residual value risk for the fleet and leasing sector during the current downturn.
The question was posed to CAP by Fleet News and the following is the full text of our response, from Operations Development Manager Mark Norman.
Fleets need to do their own calculations but CAP’s analysis of actual disposals data suggests that percentage fourth year depreciation is slightly higher than for year three. Furthermore, this is most pronounced in those cars which are closest to the end of their lifecycle. However, in cash terms this additional percentage depreciation only translates into a small sum.
Generally you can expect around one percentage point of additional depreciation over the three year figure during the fourth year plus around 15% for an additional 20,000 miles. In very general terms if the vehicle is worth around £5,000 then additional depreciation will be something like £1,500. To use a real example from CAP Used Car Monitor the current value in Black Book for a VW Passat 2.0 SE TDi, 2006 55 plate, with 60,000 miles is £6175.
Our 12 month forecast with a final mileage at 80k is £4925, giving an additional depreciation figure of £1250. On an Audi A4 2.0 TDV SE we are forecasting a depreciation from £7675 to £5525 using the same parameters.Of course fleets will have to add to that the potential cost of maintenance, perhaps new tyres or a cam belt change service, coupled with the fact that the car is likely to be out of warranty.
As fleet operators will already know, on several models there can be some very high service costs once you get over 60/70,000 miles. Depending on the additional impact of these factors, running the car for another year may well prove a viable option. It is also worth bearing in mind that it is no more difficult selling a 48 months old car compared to a 36 months old one. And during a recession it may well prove quicker or easier to sell cheaper cars.
Supply into the used market has been limited in recent months and anecdotal evidence from the leasing sector indicates that contract extensions are playing some part in that although it is impossible to attribute numbers to the number of contract extensions. It is therefore only possible to say that oversupply pressure is reduced by an unknown amount in the current circumstances.
Looking ahead to the anticipated conditions next year CAP’s opinion is that the used market of 2010 will benefit from continuing weakness in the new car sector. Consumers will still need cars but their attention will remain more focused on the used market.
Lifecycle depreciation will remain higher than before the downturn began in March 2008 and a typical cumulative depreciation total next year of 12.5% at 3yrs/60,000 miles and perhaps a percentage point more at 4yrs/80,000 miles. We remain of the view that current used values will begin to stabilise around the middle of this year which means cars de-fleeted in 2010 will see similar conditions to those.
But clearly there is still a significant risk of further economic problems emerging. The fact of the matter when looking ahead is that no definitive facts can even be identified about 2009 let alone 2010 and beyond. We are in a period of unprecedented uncertainty, with an ongoing banking crisis and rising unemployment. Therefore it would be disingenuous to pretend that there are any definitive answers to these questions.
ends
The published article, including an edited version of this response, can be viewed here.
