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To buy or not to buy? That is the question for truck operators. Future developments in contract hire might change the options, but will they suit the needs of medium-sized fleets? John Kendall asks if you ought to own.
Truck operators used to have a straight choice between buying new and buying used. While those choices remain, contract hire has opened up other options to the large capital outlays involved in vehicle purchasing. At least two manufacturers have signalled that future changes might see the end of vehicle purchasing.
Steps towards that are already being made at Mercedes' Charterway contract hire division. Charterway managing director sales and marketing Michael Nuttall says: "We are in discussions at the
moment in structuring a fleetstyle contract for a mix of new and used vehicles." This offers flexibility for the operator who can include a used vehicle at the beginning of the contract and switch to new later.
But, as .Nuttall points out, a mixed new/used contract does not necessarily mean it's cheaper. The reduced capital value of a used vehicle can be offset by higher maintenance costs.
Charterway can also offer used vehicles on short contracts, where the vehicle has finished one contract before being reallocated to another. This facility is offered to existing customers and could be attractive to medium-sized fleets needing extra vehicles to cope with short-term demand peaks.
"By 2000, one in two vehicle acquisitions will be on contract hire," says Chris Christianson, director of marketing
operations at Nee() Ford. With the physia usage of the vehicle as low as 25% in mm cases, Christiansen foresees whe manufacturers will offer "shared" contra( hire packages. When one haulier is not usin the vehicle, it will be available to another.
Iveco Ford is not directly involved i contract hire at present but the company i evaluating the possibility. Christians° believes that in medium-sized fleets, whic include many local authority operation; there is still a trend towards vehicl ownership, rather than contract hire.
But change is on the way as thes operators are forced to explore other option: "The issue revolves around who are th shareholders and what else they can do wit their cash," he says. "The biggest are gettin bigger because they have great( expectations of return on investment. In th middle, they may not have the sam aspirations. In an upswing, it's the bet industry to be in but in a downturn, the can't find business.
"What may be overheads to a larg company could be the reward to a famil) owned middle-sized company—for exampl if the company is not making money but th family is drawing its salaries. Or a famil) owned company can score because of it flexibility and local ties. Some customet prefer doing business with a family own( rather than the depot manager of a nationa A local business understands local need and will always have a place," say Christianson.
Contract hire certainly has a future •i Shrewsbury-based Burway Transport.' don't care if I never buy another vehicle says proprietor Meirion Jones. Burwa operates 25 tractors and about 26 reefer trailers, with frequent runs to southern Europe.
The mixed fleet includes Mercedes-Benz, Renault and Leyland Daf. Burway owns seven of the vehicles, the others are on contract hire. Similarly, it has some nine trailers on its books and contracts in the rest. At busy times the company will top up with spot hire to meet its customers needs.
"Contract lure for tractors and trailers is the way to go," says Jones. "It's a bit like house buying, you never get good at it. I've never had a good deal buying and selling, they'd have your trousers off you if they could."
More clout
"Maintenance too, for us to have workshops would ruin us. As for breakdowns, manufacturers have so much inure clout. If I have a trailer problem in France, the local agent might sort it out more quickly if it's a CTR trailer than if I ring up and tell them I'm Burway Transport and my trailer's bust.
"Any future acquisitions will be contract hire. I don't want a totally contract hire fleet because there's no flexibility. If you write off vehicles over 10 years, it might be worth owning them, but keeping the fleet age down gives a better image for the customer and you can attract better drivers," says Jones.
He concedes that contract hire could pose problems for companies that experience lean periods, "Cash flow is vulnerable. Contract hire companies will structure costs to allow for lean and better times, but I try and avoid that because you cannot see ahead."
Great Bear Distribution is a relative newcomer to the market, having just celebrated its first birthday, although its directors have many years haulage experience between them. All 40 tractors and trailers have been operated on contract hire since the company was formed. It runs an all-Mercedes-Benz fleet, the 40 1834LS models are on operating leases from Mercedes' Charterway subsidiary. Both tractors and trailers are on maintenance contracts too.
"We are good at distribution not maintenance and anyway, good fleet engineers are hard to come by," says Managing Director David Williams. Great Bear has distribution contracts with Nestle, Bridgewater Paper, Premier Beverages and Hero Carter drinks.
The benefits of contract hire are crystal clear as far as Williams is concerned: "We need cash, a scarce resource and we need to use it effectively. As far as I am concerned, we could shift to kilometre-based contracts now. It doesn't make any difference as long as the cost is the same."
Not all medium-sized hauliers are convinced that contract hire, let alone distance-based leasing, is for them. Redruth based R & R Transport runs 13 Volvo tractive units, all purchased. "If distance based contract hire was cheaper, it might be interesting to us," director Rodney Rowe says. "Some operators may only use vehicles three days a week and it could be more appealing to them. Our vehicles are in constant use."
Fixed costs
Robert Walker, managing director of Westfield Transport in Truro has other concerns. "There's something to be said for fixed costs, particularly if you have a regular contract, but it makes it too easy for anyone to bang something on the road."
Westfield has a mixed fleet of artics and rigids, mostly Mercedes and Scania. "It's horses for courses. It wouldn't suit me, everything is mine and I run premium vehicles, also there's no residual benefit with leasing."
Some of Walker's fears are countered by Mike MacDougall, general manager Contract Hire Sales at Via Truck Rental. "We try to avoid owner-drivers, they are a high risk, but we like small business users." These account for around 75% of Via's contract hire business. MacDougall is scathing about distance-based contracts: "Add up the production volumes of a big manufacturer, take an average value of £30,000 per vehicle over five years and it is not a realistic proposition, even for Mercedes-Benz or Iveco. You can do that with some market sectors but they could not raise the cash to do it across the board."
Vehicle records
MacDougall thinks that manufacturers entering the contract hire business have other problems too. "They need to set up a rental company, they need a fleet manager and they do not have access to vehicle records, mileages and so on."
"They cannot offer what we offer. A company running five vehicles has no transport manager. If they talk to us, we can give them a complete package. If a vehicle breaks down, we give them another."
"If a customer decides two years into a contract that he needs a bigger vehicle, we will write a new five-year contract and terminate the old one with no penalties, except the increased rental."
'What manufacturers usually offer is an operating lease, usually financed externally. If a customer terminates, there are penalties, it is very difficult to unlock a lease. They don't run rental vehicles either. These are a couple of the things they haven't addressed."
MacDougall sees little resistance to contract hire from medium-sized hauliers: "They need to control their overhead cost and their profits are often expanding at a greater rate than big companies. They are always looking for more cash and releasing vehicle capital can give them more."
Scania agrees: "Some mid-size fleets are resistant to contract hire but if it works for a supermarket running 300 vehicles it can work for 10 vehicles", says Gordon Waldron, general manager Scania Contracts. "We can offer a global package for the whole vehicle, tractor, trailer, tyres, fridge, crane. You can't hoodwink the customer, you must be honest and reasonable. If we look after them, and they're profitable, they'll come back."
Waldron does not share MacDougall's views on manufacturer contract hire. Although Scania does not shout about it, there are around 4,000 vehicles currently on direct contract hire with the company.
"We can offer the buying power of a manufacturer. Most of our customers don't want hard packages, they want minimum risk, minimum cost and maximum usage."
Waldron sees big changes ahead for manufacturers and existing contract hire companies. "I don't believe we will offer drivers, but insurance and secondary insurance will be offered. I reckon we'll have 20 huge logistics companies in a few years time. The likes of Ryder and Transfleet will move into distribution, while big manufacturers will be the suppliers of trucks and financial packages."
One thing is clear. We are unlikely to see radical change in the next few years. But the seeds of change were sown when contract hire was introduced. Once it became possible to run a haulage company without owning vehicles, the mould was broken. From there it is a relatively small change to distancebased contracts and vehicle sharing.
The manufacturers have much to gain. There is little or no profit in building and selling trucks. To make it worth their while, there is an increasing need to tie customers to more profitable parts and servicing agreements. Just the same, it will be a brave manufacturer who refuses to sell a vehicle to an operator who chooses to buy.
Any change in ownership patterns is more likely to be driven by financing conditions imposed by the banks, rather than moves for change from the manufacturers themselves.