From keeping cars for longer to cutting fuel use through new technology, companies are exploring new ways to slash fleet costs as the credit squeeze continues

No one expects running a fleet to be cheap. For many companies, vehicle management will be one of their biggest operating costs, often beaten only by the payroll, the plant or manufacturing equipment and whatever property they own. So amid the economic gloom it is perhaps not surprising that the priority for business owners and fleet managers over the past 12 to 18 months can be summed up in three words: take costs out.

Whether it's through hanging on to vehicles for longer, shifting to lower-tax, low-emission cars, using technology to reduce mileage costs and fuel claims, changing the way vehicles are financed, or training drivers to use the road more efficiently and safely, employers are looking to shave fleet budgets wherever they can.

This has led to much more negotiation and scrutiny of options
between employers and leasing or rental companies. David Brennan, managing director of leasing provider LeasePlan, explains: "Often the CFO or CEO will lay down the challenge for a business to reduce costs by so much, and then the company will come to us and ask what can we do to help them meet that agenda."

Since last October the fleet sector has seen a 30 per cent increase in
contract extensions, with most firms looking to lengthen deals for
between six to 12 months, says John Lewis, chief executive of the British Vehicle Rental and Leasing Association (BVRLA), which represents the £11bn fleet rental industry and £10bn fleet new car industry. "If things come to the worst, they want to be able to reduce numbers and have flexibility without running the risk of heavy penalties from an early exit," he points out.

In March, telecoms giant Vodafone told its 10,000 UK employees that anyone driving a company car would now have to keep it for four years rather than three, or do 80,000 miles instead of 60,000 before being given a replacement. Where companies have cut their headcount, they have often been more inclined to reallocate a car rather than terminate a deal early, says Mark Sinclair, director at leasing firm Alphabet, part of BMW. "We are also seeing a lot of formal or informal extension of contracts," he adds.

More employers have been switching to leasing rather than purchasing vehicles because of cash still being tight, says Brennan. "And we are seeing companies using salary-sacrifice schemes to try to be more flexible with their remuneration policy. So they are offering a better car, more healthcare, more pension provision and so on. The car is just one element," he explains.

The large car rental firms have all reported record levels of business customers opening accounts. This is down to the flexible nature of rentals. Renting, as opposed to leasing or buying, can prove an attractive option because, if a business is suddenly not doing so well, it is very easy to change.

In this uncertain climate, short-term leasing or rental deals, of
between three to six months, are becoming more popular, agrees Lewis. "There is a minimum commitment and upkeep required and you get to keep a reliable car on the road," he says.

Contract hire deals that stay off the company balance sheet, so freeing cash for use elsewhere, are also common. On the other hand, with the jobs market still wobbly and credit hard to secure and expensive
when you do find it, personal contract purchase schemes (PCPs) or
employee car ownership schemes (ECOs) are less attractive.

Employers increasingly prefer to control the types of vehicles their staff use, normally for two reasons: the tax benefits of driving a lower-emission car and, against a backdrop of tougher health and safety rules as well as demands for greater fuel efficiency, an employer's duty of care to an employee on the road.

In April, new tax rules came in designed to encourage firms to pick cleaner, lower-emitting vehicles. Cars emitting more than 160g/km of CO2 now incur taxes higher than those at or below this level, with
businesses buying this greener vehicle able to offset twice as much of the cost of depreciation against their corporation tax bill. Companies that buy vehicles producing less than 110g/km of CO2 will, until 2013, be able to write off the full cost in the first year.

This has had a profound effect on the market and the make-up of fleets, with firms moving to "cap" the vehicles offered to ensure they are in the lower tax bracket. One firm that has done this is Hertfordshire cleaning and hygiene products manufacturer JohnsonDiversey, which has 380 car users out of a UK workforce of 800. Last year, it brought in a cap to ensure its fleet consisted of vehicles emitting only 160g/km or less. "We are now going through a tendering process with various manufacturers, such as Toyota and Hyundai, to look at the possibility of switching to even greener hybrid vehicles," says fleet manager Sandra Clews.

But Chris Chandler, from leasing consultancy Lex Momentum, reckons this does not mean everyone is driving around in "Noddy" cars.
"Manufacturers have worked hard to produce lower-emission versions of executive cars, so it is a question of trading down to a smaller engine rather than a smaller car," he says. "We're seeing drivers going for a car in a lower category but of a higher specification, with better seating, stereo, sat nav or other gizmos."

Firms such as JohnsonDiversey use technology to drive down fleet costs. The company operates a system whereby drivers can use their cars for both private and business purposes but then pay back the price of private fuel usage. It has invested in a "mileage capture" system called MileageManager, developed by The Miles Consultancy. This means its drivers, mostly sales personnel, can submit private and business mileage returns online from any location at any time. The technology allows the company to calculate the average pence per mile for each trip, based on the cost of petrol bought, and work out the split between business and private mileage.

"We now have better records and data," says Clews. "It has helped us to analyse what we are paying for, when and where, as well as educating drivers about the benefit of buying cheaper fuel. We are able to monitor our carbon footprint and, for the small number of people driving their own cars, it means we know they will have submitted a signed declaration that their car is properly taxed, serviced and insured."

The issue of driving private cars for work—known as a company's grey fleet—has been spotlighted this year, with the introduction in January of the Health and Safety (Offences) Act 2008. This significantly
toughens up the law. Managers ignoring disqualifications, lack of insurance, poorly maintained vehicles or who force employees to drive long hours—leading to accidents—can find themselves being jailed for up to two years and/or paying a £20,000 fine.

"Many companies are trying to reduce the number of grey-fleet cars they have and bring people into more structured schemes. There will generally be less control over emissions when they give people cash and there are corporate governance issues involved," says Colin Thornton, sales director at Lloyds TSB Autolease.

With the government calculating that one million company cars on UK roads are involved in an accident each year, firms are offering
drivers advanced training to boost safety and road awareness, cut
insurance claims and premiums, and boost fuel efficiency. The BVRLA is campaigning for the introduction of NVQ qualifications for business drivers as well a national accreditation scheme for trainers.

Since 2005, 200 staff at carmaker Audi have taken advanced driver training, says UK managing director Jeremy Hicks, and accident claims have fallen by 34 per cent. "It is about teaching drivers when to take their foot off the gas and to be more careful, which gives you environmental and health and safety benefits but also leads to economies in fuel usage," he explains. "People are planning their fleets better. They know how many miles they are doing, they know what their servicing costs are, and they are trying to manage driver behaviour."

10 ways to protect your fleet as cashflow slows

1. Look at your driver profile and who really needs a car, rather than just allocating by grade or position.

2. Reassess the "whole-life" cost of your fleet, or its impact from purchase to disposal. Can you can save on model selection, allowances, residual values, premiums or mileage?

3. Revisit what you pay for mileage. Does using HMRC's Authorised Mileage Allowance Payments mean you are you overpaying? Consider investing in a mileage-capture tool.

4. Ensure your fleet is as tax-efficient as possible, particularly in terms of emissions targets, consider capping driver choice or adding incentives.

5. Look at extending your contract or leasing agreement, though adding a maintenance option may make sense if you do so.

6. If you have a large sales force with the need for similar cars, speak to the manufacturer to see if they can offer you a volume discount.

7. Consider whether keeping a grey fleet is the safest and most value-for-money method of travel, or whether you should switch people to company cars.

8. Examine the benefits of owning versus leasing and whether you are offering the most cost-effective options.

9. Implement a training programme and use technology to reduce accidents, increase fuel efficiency, offer better duty of care and reduce insurance premiums.

10. Use a well communicated, regularly updated driving-at-work policy.