Evolution of Short-Term Leasing in Europe

• Analysis of market factors driving and restraining the growth of short term and flexible leasing in Western Europe.
• Impact analysis of short term leasing on vehicle manufactuers, leasing and rental companies, used car dealers and aftermarket companies.

• The brief evaluates the market potential offered and suggests strategic options for companies to enter this emerging sector
• Business case analysis provides best practices adopted in the industry and suggests recommendations based on key research findings

DATAMONITOR VIEW

CATALYST

SUMMARY

ANALYSIS

"Business, more than any other occupation, is a continual dealing with the future; it is a continual calculation, an instinctive exercise in foresight. " - Henry R. Luce

In times of fragile economic recovery, cost-effective fleet management remains a top priority on corporate agendas. Instead of keeping their fleet constant throughout the year, regardless of fluctuations in business volume and labour force, companies show a growing tendency towards keeping at least part of their fleet adjusted to their changing needs.

Short-term leasing is an instrument that helps corporate fleet users maintain lean fleet sizes at a minimal possible cost. If standard operational leasing contracts presume a two- to four-year long financial commitment, whereby early termination inflicts penalty charges, it is no surprise that prudent spending policies should in many cases favour short-term leasing. Due to a number of reasons, demand for short-term leasing in Europe's largest company car markets has been on the rise over the past few years, with buoyant growth rates expected for 2006.

Introduction: What is Short-term Leasing?

A "grey area" between car rental and operational leasing, short-term leasing is a funding method, whereby contracts for financing and maintenance are arranged for periods of less than than two years, and starting from as short as three months.

This financial product has emerged and developed in Western Europe's largest operational leasing markets of the UK, France, Germany and the Netherlands. It is a flexible alternative to the existing standard operational leasing contracts ranging from two to four years on the one hand, and a cheaper alternative to extended daily rental on the other. Originally supplied by car rental companies, this service is currently still predominantly catered for by the daily rental industry. But, as the demand among corporate buyers is witnessing significant growth, some leasing and fleet management companies are also venturing into the market with their short-term lease operations. This brief looks into the development of that trend across Europe's largest fleet markets and the implications it is likely to have on leasing companies, as well as the daily rental sector, car manufacturers, used-car dealers and the aftermarket industry.

Market Drivers Stimulating Growth of European Short-term and Flexible Leasing Market

1. Prudent Spending Policies Drive Growth of Short-term Leasing

The main factor influencing the rising demand for short-term leasing in Western Europe is the same that drives the growth of conventional operational leasing - the aspiration among companies to minimize their fleet expenditure by outsourcing funding and management of their vehicle fleets. However, there are more specific factors that have driven and continue to drive a more dynamic growth in the short-term leasing, compared to the long-term operational leasing market, particularly in Europe's most advanced markets.

In particular, the adoption of more prudent spending policies by companies which prefer to adjust their fleet in line with the volumes of their business, in order to avoid having to carry financial commitments into quieter periods. Therefore, the demand for short-term leasing is particularly notable in industry sectors with variable business requirements, such as construction for example.

2. Flexible Labour Market Drives Flexible Fleet Leasing

Another factor boosting the popularity of short-term leasing is the ongoing liberalisation of labour markets in Western Europe. The increase in the number of temporary employees is evident. Whilst companies are responding to gradually increasing demand by hiring additional labour, they are extremely cautious to avoid expensive contributions related to social insurance, as well as rigidity imposed by permanent contracts.

The rising number of temporary staff, some of which would benefit from the use of a company car, is driving the growth of temporary car usage and hence - short-term leasing. It is estimated that across the European Union, temporary work agencies employ more than seven million workers, which is 1.9 percent of the European union working population. In some markets, such as the UK, the trend is more pronounced. Similarly, it is estimated that short-term leasing contracts account for nearly one percent of all operational leasing contracts in the UK, for example.

Operational Challenges Impacting the Growth of Short-term Leasing

Impact of Short-term Leasing in European Vehicle Rental Market

Impact on Vehicle Manufacturers

Impact on Used-car Dealers and Garages

Business Case Analysis

Conclusion: Short-term Leasing is a Valuable Supplement to Long-term Rental

Short-term lease is not a subsitute for long-term leasing , but a supplement. Because short-term is more expensive than long-term leasing, a large proportion of corporate fleets will remain to be funded on long-term contracts.

Datamonitor estimates that in 2010 - Belgium, France, Germany, the Netherlands and the UK will have a combined operational leasing fleet of 4,830,806 passenger cars. If the proportion of short-term contracts reaches 3 percent of the total operational leasing fleet, 144,924 passenger cars could be financed by that funding method. If short-term leasing penetrates the operational leasing market further - 5 percent, the short-term fleet would be 241,540 passenger cars.

However, the flexibility and customer focus offered by short-term leasing will continue to sustain this market in future. In conditions of fragile economic growth it is hardly surprising that short-term leasing has emerged a successful proposition, because it helps companies to rationalize fleet expenditure and avoid funding an unnecessary number of vehicles, thereby releasing funds for other activities.

Industry Recommendations: Overcoming the Challenges of Short-term Lease

List of Tables

Table 1: Proportion of Temporary Employees out of all Employed People in Selected European Countries, 2004

Table 2: Leasing Companies and Short-term Leasing: In-house Fleet vs Co-operation with Car Rental

Table 3: Utilisation of Short-term Leasing as Proportion of Total Operational Leasing Fleet in 2010 for Five European Fleet Markets

List of Figures

Figure 1: SWOT Analysis of Operational Leasing Companies in the Short-term Leasing Market