Fleet Selection Detailed Guide

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1 Fleet Selection Detailed Guide Version Control No Date Comment 1 December 2009 Original version 2 May 2010 Minor word changes Fleet Selection Detailed Guide Page 1 of 8

2 THE FLEET DECISION Introduction Overall Fleet Management in today s world is more than just the buying and selling of a vehicle. Gone are the days when a vehicle was like any other piece of equipment used in doing the job. Today, more and more, Government Policy is driven through the fleet asset as it is a tangible aspect of a government s operation. This guide aims at putting some of the standard fleet principles into the vehicle selection. The Fleet Selection Step Guide should be used in making the actual fleet vehicle selection. Fleet Cornerstones Fleets are managed on the four key cornerstones and these cornerstones are: Operational (Fit for Purpose) Financial Safety Environment Government Fleets like most business fleets are composed of passenger vehicles which support the office based activities of the Agencies and operational vehicles which support the field based & in some cases emergency activities of the Agency. Cornerstones of Fleet Management Operational Financial Safety Environment Page 2 of 8

3 The management of a Government Fleet therefore requires a fine balance between continuing to meet operational needs and making all attempts to provide cost efficient, safe and environmentally friendly vehicles for those activities. The over reliance or concentration on one fleet cornerstone will throw out the other spokes in the wheel, causing an ongoing financial burden that will take some years to recover. For instance, concentration on emissions may limit the available vehicles, may not provide fit for purpose vehicles, cause the over representation of Hybrid models so increasing depreciation of the vehicle through over supply and thus loss on the asset at sale. Similarly a move to long lease terms such as 48 months can have the same effect by moving the risk out into an uncertain future and where safety, environmental and running cost benefits through engine improvements, etc cannot be implemented as quickly as they would with shorter lease terms. That said an operational need will generally be the overriding decision on the type of vehicle selected. Government Policy Unlike the private sector, there is an impact on managing Fleets in the public or Government Sector due to the policy outcomes required by Government policy generally. Rarely does a Government of any jurisdiction issue Policy without ensuring that their own Agencies or Departments have complied with the policy. This is more than relevant in the fleet industry where the safety and environmental policies over the last few years have lead to Cleaner Fleet Policies and Safety Policies for government fleets. Public Perception The selection of a range of make, and subsequently models, is probably one of the first decisions made by a Fleet Manager. An aspect in Government, and a lesser extent in business, that is taken at this early stage is the public perception of that make. The selection of European makes like Mercedes, Volvo, BMW, Citroen etc are not generally considered for Government Fleets because of the negative public perception that such a decision could incur. This does not mean that these vehicles would not represent a good financial outcome, it just is not good public policy to have these marques, that while no different in Europe to the locally manufactured makes in Australia, which are seen as luxury makes. Operational Fit for Purpose Selecting fit for purpose vehicles is an important driver in overall fleet management. For example selecting vehicles that do not have the correct towing capacity can add to fuel cost and maintenance costs. Page 3 of 8

4 Smaller cars should be selected for pools and in metropolitan areas where the larger vehicle are not needed. Also today s 4 cylinder vehicles now provide as much comfort on long trips as the large passenger vehicles. Vehicles need to be selected for the task required not on driver preference. Engine Size (cylinders) Engine size is an important factor as in some ways it determines whether the vehicle will be classified as small or large. But it also has an impact on the financial and environmental cornerstones and to a lesser extent on the safety cornerstone. This is because small cars generally cost less in fuel and maintenance costs. Environmentally, if less fuel is consumed then there is by definition, less emissions. From a safety aspect there has been a belief that larger cars are safer. This is dependent upon the type of accident an accident at 100kms into a tree will generally have the same level of injury whether in a large or small car. However there will be those that disagree with this scenario. The level of safety protection in a vehicle can only do so much to protect the occupant yet many families drive small cars. Ultimately it is how the vehicle is driven to the prevailing conditions. Locally Made or Import Over the last years the Australian vehicle manufacturers have, with the exception of Toyota, abandoned the 4 cylinder models. As fleets, both private and public, through policy or financial necessity, have moved to 4 cylinder vehicles this has meant a greater proportion of the vehicles purchased by fleets are imported. Fleet managers struggle with the need to balance the financial and environmental cornerstones of their fleet against competing Government policy to retain the manufacturing of motor vehicles and ultimately jobs. Fuel Types The selection of LPG fuelled vehicles can provide substantial cost savings. The availability of LPG is now more prevalent across the state (and Australia) so the selection of these vehicles and the technology changes mean cold starting which was an issue previously, are now less a hindrance. But the payback on LPG is only where a large number of kilometres will be travelled over the life of the vehicle. It is this reason that they are popular with the taxi, salesperson and courier fleets. European diesels are also now more developed and the rough idling and performance issues of the past are well gone. It is the fuel condition that has not seen a greater importation of cleaner diesel engines into but this is changing as the federal government issues cleaner diesel standards. Hybrid vehicles are also proving to be more user friendly and fleets are now purchasing / leasing these vehicles for the cost savings in fuel and the environmental benefits. Page 4 of 8

5 Transmission It is becoming obvious that the Automatic is the preferred option for the majority of fleets. The use of vehicles by multiple drivers, the use of vehicles within peak hours in metropolitan cities and the general ease of driving which the automatic provides are all factors that are seeing a fleet becoming predominately automatic. Generally it is the single vehicle, single driver who may select a manual variant. Financial General The interaction of purchase price, interest rate and residual loss based on term are what determine the lease rate. It is the pure cost of money exercise conducted by the financial sector for all types of commodities. In effect fleet managers are borrowing money to buy the commodity, being the motor vehicle, and selling it at the end of its lease term at a loss. This loss has to be paid by someone, generally the lessee but depending upon the type of lease arrangement operating or financial, the risk on that loss may be carried by the fleet manager for the operating lease or by the client for the financial lease. Purchase price The purchase price whilst important, it is not necessarily the biggest cost consideration in selection of a vehicle. Fleet buyers can expect significant discounts off the RRP on locally manufactured vehicles. On imported vehicles the discount is much less due to competitive pressures and lower margins. As mentioned above, all 4 cylinders (except for the Camry) and light commercials are imported so the level of discount on the purchase price is smaller. Interest Rates Lender interest rates in the last 10 years have been low but in the last year there has been volatility. As the general cash rate increases, so will the cost of money borrowed. Warranty Warranties on vehicles are offered for either 3 or 5 years. If a manufacturer offers 5 years, there is more scope to offer a 4 year lease allowing the write-off of the residual loss over a longer period and so bring down the lease cost. It also means there is less risk of a major failure that will have to be paid for by the fleet client. It is preferable to offer vehicles for sale with at least 1 year warranty remaining as it offers the buyer a level of comfort and generally results in higher prices. The major manufacturers (Ford, Holden and Toyota) have persisted with the 3 year warranty whilst Mitsubishi, Hyundai and Kia have gone to 5 years. Lease terms Lease terms generally are from 9 months to 48 months and for 15,000 kms to 100,000 kms. The policy of the client will generally override the fleet managers preferred lease term for a variant. The lessor can artificially manage the risk by adjustment of the residual loss. Page 5 of 8

6 From a fleet manager s perspective it is favourable to have a balanced mix of 1, 2, 3, and 4 years leases across the fleet and through each variant. Again it is merely a risk management strategy. Residual & Sale Price A whole range of influences determine what the future sale price of a vehicle may be. Determining what the future sale price is probably one of the hardest parts of the fleet leasing organisations role. The future sale price impacts the lease rate through the setting of the residual. The lessor becomes a combination of a vehicle sales data analyst, actuary, international economic forecaster and.sage. The longer the lease term, the harder the task and the more grey hair. Tax Liabilities FBT; RFB & GST The impact of Fringe Benefits Tax (FBT) and Reportable Fringe Benefits (RFB) on an Organisation and individual is significant. To a lesser extent, GST for the government Fleet Manager is not as significant as it is claimable and it comes back to the State Government, in course, through the GST agreement with the Federal Government. Organisations should embark on a project to change the composition of the fleet within Australian Tax Office guidelines and to ensure that its FBT obligations are met but minimised. This by definition means that the Agency also limits the RFB to an officer who used the vehicles and so negated Industrial and Financial issues associated with RFB. Fleet Management - Whole of Life Costs Effective Fleet Management is understanding the Whole of Life cost of a vehicle and is in the main related to the residual value estimated for the vehicle, fuel consumption, the level of maintenance required and insurance on that vehicle. Some makes and models incur higher lease costs predominately as their residual value is lower than similar makes and models. High fuel consumption vehicles add further to this cost. It is therefore important to ensure that vehicles selected, have high residuals and low consumption to minimise the financial cost. Safety & OHS Vehicle Safety One of the basic charters of Governments is to improve road safety. This community outcome can be reflected in the type of vehicle returned to the used car market. By selecting vehicles that have as many of the safety features recognised as improving driver safety (Air bags, ABS, ESC, air conditioning for comfort, crash rating etc) a Government can assist in placing safer vehicles into the used car market. Page 6 of 8

7 As well the Government is able to continue its commitment to the OH&S of its staff particularly those who are regular drivers of motor vehicles. Vehicle Safety options Safety features in vehicles can be categorised as occupant protection, pedestrian protection and vehicle control. Occupant protection includes air bags and seatbelt reminders; pedestrian protection includes reversing sensors, pedestrian friendly bumper bars and daytime running lights and vehicle control includes Anti-lock brakes and electronic stability control. Most small, medium and large passenger vehicles provide driver and passenger airbags. Side airbags are either standard or optioned one most makes and models of small, medium and large passenger vehicles. Curtain air bags are available on an increasing number of vehicles purchased by Government Agencies. Most utilities, commercial and large 4WDs still do not come with side or curtain airbags. Pedestrian protection in the design of the vehicle is to protect the pedestrian in the event of being hit by a vehicle. Reversing sensors are available after market on nearly all passenger vehicles even though some models have them fitted as standard or as an option. Pedestrian friendly bumper-bars is one way the pedestrian can be protected and ANCAP now tests and scores pedestrian safety. Daytime running lights are similar to reversing sensors in providing pedestrians with early identification of an oncoming vehicle. Vehicle control is Anti-Lock Braking Systems (ABS), Electronic Brake Assist (EBA) Electronic Stability Control (ESC) and these are now standard or optioned on most small, medium or large passenger vehicles. ABS works in the longitudinal direction whilst ESC assists drivers to cope with lateral or sideways movements of the vehicle. Driving Practices Encouraging good driving practices including adequate rest breaks, remaining calm, reduced braking by smooth driving, keeping to the speed limit etc are all driving practices that can assist in the safety of both drivers and the public. A side effect of these practices is that fuel usage is also lessened and maintenance costs are reduced. Environmental The Climate Change issue affecting the world has driven fleet decisions and led to the development by the United Nations of Euro Standards for emissions management. Australian vehicle emission standards largely reflect these international standards. Environmental Performance Score (EPS) An EPS score is by vehicle and is determined by Department of Transport and Regional Services (Federal Govt DOTARS) and published in Green Vehicle Guide (GVG. Page 7 of 8

8 Before a road vehicle can be registered for the first time in Australia it must comply with the Motor Vehicle Standards Act The Act applies to new and used imported vehicles and locally manufactured vehicles. The Act requires vehicles to meet national standards covering safety and environmental requirements. The national standards are known as the Australian Design Rules (ADRs). The vehicle ratings are based on the results of testing conducted in accordance with the ADRs for emissions and fuel consumption labelling. Fleet decisions can be made on the actual EPS of a car, its star rating (1-5) or other policies like % of 4 cylinders etc. Emissions The main greenhouse gas emitted by motor vehicles is carbon dioxide (CO 2 ). The level of CO 2 emissions is linked to the amount of fuel consumed by the vehicle, and the type of fuel used. All new vehicle models up to 3.5 tonnes gross vehicle mass sold in Australia are tested to determine both the fuel consumption and the level of CO 2 emissions. While diesel vehicles tend to perform comparatively well on fuel efficiency and produce lower levels of greenhouse emissions, their contribution to air pollution is generally higher than that of comparative petrol or LPG vehicles. Of most concern are particulate matter and nitrogen oxides (NO x ) emissions which can cause a range of adverse health effects. These emissions are generally higher in diesel vehicles compared to petrol or gas vehicles Therefore whilst on one side of the fleet decision a vehicle may be selected as fit for purpose or and good vehicle fuel efficiency it may not meet the level of emissions required by the organisation. Utilisation (Vehicle per Kilometre Travelled (VKT)) The more kilometres travelled, the higher the cost, as fuel usage, after residual loss, is the next biggest component to the lease cost of a vehicle. There is a need to get a fine balance between the expected usage of the vehicle and need to keep costs low. Effective redistribution of low kilometre use vehicles with those of high kilometre use can mean a reduction in management costs. Fuel Efficiency Fuel efficient engines are continually being developed as the Europeans predominately strive to extend the dwindling oil resources. Fleet Managers use a number rating methods to score the fleet to meet t he targets set by legislation or policy. Conclusion The Fleet Selection Step Guide should be used to make the selection for vehicles. Page 8 of 8

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