Cutting costs on the road - cutting company motor vehicle costs

Nation's Business, May, 1990 by Julie Candler

Leasing and maintenance arrangements may help your firm control the expenses of operating cars and trucks.

Continuing increases in the costs of acquiring company cars and trucks and maintaining them are prompting fleet managers to search for ways to control expenses.

Many companies, for example, have found full-service maintenance arrangements to be effective management tools, helping firms not only to maintain their fleets but also to track and analyze all the costs of each vehicle. Such arrangements are popular among companies that acquire vehicles through leasing, which appears to be on the increase. Leasing this year is up 6 percent in the fleets managed by the 2,000 members of the National Association of Fleet Administrators (NAFA), the organization recently reported.

A rule of thumb in fleet management, according to Runzheimer International, a Rochester, Wis., firm that examines transportation costs, is: "If something appreciates, buy it. If it depreciates, lease it."

Depreciation can be a major cost in operating a company fleet. According to NAFA, a new car acquired by a company for business use in 1988 cost an average $12,693 and was worth $4,311 at trade-in time this year.

NAFA, based in Iselin, N.J., also reported that 20 percent of members surveyed said they plan to acquire more vehicles for their fleets and that company cars are being driven more miles in fewer months than ever before.

"My big factor is mileage," says Mary Haas, fleet manager for W.L. Gore and Associates, the Newark, Del., manufacturer of medical products and Gore-Tex water-resistant fabric. "We lease for two years," she says, "but I have associates whose cars I have to turn in at 18 months, with 35,000 to 45,000 miles on them."

A company's decision on whether to own or lease its vehicles--and how long to keep them--can hinge on the type of lease available and the projected resale values in later years for particular cars and trucks.

"Resale value is one of the most difficult parts of the total car-cost picture to calculate," says Kraig Rodenbeck, a client-services director at Runzheimer. "Professional fleet managers, for this reason, tend to stick to the tried and true. Their philosophy is that a popular new car in the 1990 model year will be a popular used car in the 1993 or 1994 model year."

A good test of a car's resale value, says auto dealer Kenneth G. Meade, is the residual offered on the car in closed-end leases. The residual is the guaranteed amount that the dealer or leasing company agrees the car will be worth at the end of the lease period. Meade is chairman of the Meade Group, a Grosse Pointe Farms, Mich., firm that includes eight Detroit-area car dealerships as well as Meade Leasing Inc. "If a guy believes in the product," Meade says, "he will give you a good residual."

A closed-end lease, or retail lease, holds the lessee responsible only for maintenance and the monthly payments, which generally are higher than those of open-end leases. At the conclusion of a closed-end lease, the lessee can walk away from the vehicle or purchase the car at a guaranteed price.

On the other hand, under an open-end lease, also called a finance lease, if a vehicle is sold at the end of the lease period for less than the residual--which often is the book value on the vehicle at the time--the lessee must pay the difference. (If the resale price is higher than the residual, the lessee receives the difference.)

"In purchasing a closed-end lease," Meade says, "the dealer or lease company will tell you what the residual value is. On expiration of the lease, depending on market conditions, you can either give the dealer back the car or purchase the car. ... Either way, you can't lose. If it's worth more on the market than the residual, you can buy the car, sell it, and make some money."

Meade advises managers of small fleets to check closed-end leases. "I would look around and find out what car brings the highest residual value," he says. "Find out what manufacturer stands behind the residual. The amount is determined by the financial source and backed by the manufacturer."

Because of high residual values, Honda Accords fared well in a 15-car analysis of 1990 car costs by Runzheimer. The Accord exhibited the lowest total annual fixed and operating costs: $5,572. The Accord ranked 11th, however, in a calculation of only operating costs--primarily gasoline, maintenance, oil, and tires. Among the cars with operating costs lower than the Accord's were the Ford Escort LX, the Chevrolet Cavalier, the Toyota Camry DLX, and the Plymouth Acclaim.

Next to Honda in total annual costs were the Ford Escort, $5,579, and the Chevrolet Cavalier, $5,614. The Accord became the lowest-costing car, Runzheimer noted, when fixed costs for depreciation, insurance, financing, taxes, and licensing were included. "The advantages of high resale are quickly apparent," according to Runzheimer.

Better residuals are also realized with the roomier minivans such as the Dodge Caravan, Plymouth Voyager, Ford Aerostar, Mazda MPV, Toyota Prensa, and Chevrolet Lumina APV. Many fleets are switching to them from passenger cars. A 1988 Plymouth Voyager that cost about $12,500 was worth about $8,800 in a trade-in this past March, according to the N.A.D.A. Official Used Car Guide, published by the National Automobile Dealers Association. A 1988 Ford Taurus also selling for $12,500 two years ago brought about $6,475 in March.