A closer look at vehicle finance: Rental
The UK’s topsy-turvy economic outlook has increasingly pushed vehicle operators towards rental, as have other factors including low emission zones and warier finance companies.
The legislative abyss that has stared the UK in the face since the referendum over Brexit in June 2016 has understandably caused a lot of operators to hang fire on investments, including both new vehicle purchases and long-term contract hire commitments.
Rental has proved the answer for many firms that want to keep rolling without locking themselves into hefty finance agreements. Do it for long enough and yes, it will cost more, but it ticks the right boxes when you’re staring into the unknown as so many have been, and on the whole suppliers are reporting solid demand for short-term hire vehicles as a direct result of the country’s long-running political paralysis.
“There’s a lot of uncertainty around, but demand’s been good for the last three or four years.” Steve Cartwright, head of sales and marketing, Hexagon Leasing
“Traditionally, you would see utilisation start to rise around September and October for the Christmas period, but we actually saw peak demand kicking in around July,” adds Prohire group sales and marketing director Andrew Morley. “Part of that could be that people are not getting off the pot and committing to longer contract hire or buying, and therefore they’re filling the gap with rental, given the current economic climate.”
But there are other factors at play that have also contributed to what is widely acknowledged to be a strong rental market: the introduction of London’s Ultra Low Emission Zone (ULEZ) in April, the disappearance of some well-known providers, and difficulty in acquiring finance have all helped to foster demand, in particular.
ULEZ and administration driving demand
The ULEZ is a pretty obvious driver, as operators working in the capital need the newer, ULEZ-compliant vehicles often found on rental companies’ books. “There’s obviously been a bit of change in the environmental legislation with the ULEZ, and some people have got older vehicles that they want to get out of, and before they’re committing to new vehicles, they want some shorter-term rental,” says Cartwright.
Then there’s the fact that there are now fewer vehicle rental providers than there were two years ago. Everyone CM spoke with for this article alluded to the demise of T.O.M., Gulliver’s and Axis, and their absence has certainly created more business for this pocket of the industry.
Meanwhile, the finance companies are becoming warier of lending to commercial vehicle operators for fear of collapse, according to Dave Potter, MD of contract hire and leasing at Asset Alliance. “Credit and risk sign-off on customers is becoming tougher and tougher. I don’t know if it’s been analysed, but we have certainly seen a greater volume of transport companies hitting administration or going into voluntary administration,” he says. “That accounts for more people going into rentals because obviously, the dynamics of financing a shorter-term, older piece of equipment are less than the investment on a new one.”
An alternative view on demand
Not everyone thinks demand for rental is quite as hot as it could be, though. Acknowledging that many operators are holding off on contract hire, Ryder’s network operations director, Paul Probert, describes short-term hire as “surprisingly flat”. “It’s probably average, at best. Compared to this time last year, we have similar numbers of vehicles currently on rent, which is below what we would expect given the uncertain market conditions. However, there are some vehicles with higher levels of utilisation,” he comments.
In November 2018, Ryder vice-president and MD David Hunt told CM’s sister title Motor Transport that it would “add no more rental trucks to the UK fleet until October 2019 at the earliest”. By contrast, Prohire ordered 60 new units comprising rigids, tractors, refrigerated vehicles and panel vans in February, a move Morley claims has paid off.
“We invested quite heavily in temperature controlled vehicles, particularly for London and the ULEZ,” he says.
“At the moment, our rental utilisation on tractor units, despite having put more on the fleet, is running at the high 90s most days.” David Hunt, vice-president and MD, Ryder
All of the specialists to whom CM spoke believe that the balance will swing back towards contract hire after Brexit, when operators have a clearer idea of what lies ahead, with rental likely to return to more normal levels of demand at that point. However, the reverse has been true in some cases, as certain institutions have sought to beat the upheaval.
“I would completely agree that a lot of the people who you would expect to have made decisions [about contract hire] have delayed, although people have pulled forward orders to make sure they’re ahead of the curve, thinking WTO rules will apply with a hard Brexit, and therefore there could be tariffs,” says Potter.
“We’ve been encouraging them to do that from two perspectives: to mitigate the risk of tariffs and also to mitigate the impact of the currency exchange rates, which have massively hampered purchasing products from Europe – so it’s a double whammy.”
Attitudes to rates
Rental providers continue to wrangle with rates, to which different attitudes apply. They are used to customers who want the bare minimum at a rock-bottom price, but some claim the market is maturing, and more operators are willing to pay rates reflective of appropriate equipment. “There’s such a lot of demand on a vehicle operator in terms of maintenance legislation – a lot of people want to walk away from that and let someone else have the headache,” says Mike Williams, director of contracts at Hireco.
“A good operator – a real quality one, in my opinion – isn’t always looking for the best price. He wants quality service. Mike Williams, director of contracts, Hireco
I’m not saying they want to pay a high price for it, but they’re certainly prepared to pay a fair rate, and I think more people are ready to do that.”
“There is a view that trucks are a commodity, and in the minds of some customers there is a disconnect between the value of a rental truck and the value of the lease truck,” adds Probert. “There is a reluctance to pay what should probably be something like a 25% difference between the daily rate on both. Equally, we believe that customers do value being able to choose a good quality rental vehicle at the right specification.”
“What we’re finding is that companies are looking to have better spec vehicles both on rental and contract hire,” says Morley, who agrees with Williams that operators are now more accepting of slightly higher rates.
“You’ve got to bear in mind that when the ULEZ gets pushed out to the North and South Circular roads in 2021, you’ve then got the Direct Vision Standard coming into play, which means anything above 12 tonnes will need to be Fors silver compliant.” Mike Williams, director of contracts, Hireco
“The challenge to the operators – and I do feel for them – is whether or not their customers will ultimately pay, because there’s a lot of pressure on distribution companies in the UK in terms of cost per pallet moved. If they’ve got to incur additional fuel costs, additional costs for hiring vehicles because of the spec, then legislative demand, then clearly, someone’s got to pay somewhere.”
Three vehicle rental firms ceased trading
Vehicle rental firms T.O.M., Gulliver’s Truck Hire and Axis ceased trading in March 2018, November 2018 and May 2019 respectively, creating an inevitable fallout for short-term hirers. The general consensus is that it hasn’t done the surviving rental companies any harm, as the competition is obviously down by three. There’s more to it than that, though. The three companies were all known for supplying vehicles at below-market rates, which many in the industry believe encouraged customers to seek similarly low prices elsewhere.
“People ask why T.O.M., Axis and Gulliver’s all went out of business and the common denominator with those three is that they were all cheap,” says Hexagon Leasing’s Steve Cartwright.
“They were probably putting tractor units out at £40 to £50 a week less than everybody else.” Steve Cartwright, head of sales and marketing, Hexagon Leasing
The bargain hunter attitude is unlikely to disappear with the ill-fated firms, of course, but some reckon their demises have caused customers to think twice about rates. “I think people are realising now,” says Prohire’s Andrew Morley, who claims to have seen an increase in rental utilisation since the three rivals closed. “Customers knew they were getting £80,000 to £90,000 tractor units at rates of less than a few years ago, and that wasn’t sustainable. I think we’re fulfilling the demand, but we are getting what I’d call appropriate rates for the value of the vehicles now.”
A less positive upshot is the effect on used equipment prices, as the firms’ vehicles washed onto the used market. “There are less smaller and mid-sized operators out there to buy used equipment, which doesn’t help,” says Asset Alliance’s Dave Potter. “With the effects of T.O.M., Gulliver’s and Axis, it’s putting a lot of used equipment into the auction houses, and prices for some of those products have definitely been depressed.”
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