Evolution of Short-term Leasing in Europe

Table of Contents

DATAMONITOR VIEW

• CATALYST
• SUMMARY

ANALYSIS

• "Business, more than any other occupation, is acontinual dealing with the future; it is a continual calculation, aninstinctive exercise in foresight. " - Henry R. Luce
• In times of fragile economic recovery, cost-effectivefleet management remains a top priority on corporate agendas. Instead ofkeeping their fleet constant throughout the year, regardless offluctuations in business volume and labour force, companies show agrowing tendency towards keeping at least part of their fleet adjustedto their changing needs.
• Short-term leasing is an instrument that helps corporatefleet users maintain lean fleet sizes at a minimal possible cost. Ifstandard operational leasing contracts presume a two- to four-year longfinancial commitment, whereby early termination inflicts penaltycharges, it is no surprise that prudent spending policies should in manycases favour short-term leasing. Due to a number of reasons, demand forshort-term leasing in Europes largest company car markets has been onthe rise over the past few years, with buoyant growth rates expected for2006.

Introduction: What is Short-term Leasing?

• A "grey area" between car rental andoperational leasing, short-term leasing is a funding method, wherebycontracts for financing and maintenance are arranged for periods of lessthan than two years, and starting from as short as three months.
• This financial product has emerged and developed inWestern Europes largest operational leasing markets of the UK, France,Germany and the Netherlands. It is a flexible alternative to theexisting standard operational leasing contracts ranging from two to fouryears on the one hand, and a cheaper alternative to extended dailyrental on the other. Originally supplied by car rental companies, thisservice is currently still predominantly catered for by the daily rentalindustry. But, as the demand among corporate buyers is witnessingsignificant growth, some leasing and fleet management companies are alsoventuring into the market with their short-term lease operations. Thisbrief looks into the development of that trend across Europes largestfleet markets and the implications it is likely to have on leasingcompanies, as well as the daily rental sector, car manufacturers,used-car dealers and the aftermarket industry.

Market Drivers Stimulating Growth of European Short-termand Flexible Leasing Market

• 1. Prudent Spending Policies Drive Growth of Short-termLeasing
• The main factor influencing the rising demand forshort-term leasing in Western Europe is the same that drives the growthof conventional operational leasing - the aspiration among companies tominimize their fleet expenditure by outsourcing funding and managementof their vehicle fleets. However, there are more specific factors thathave driven and continue to drive a more dynamic growth in theshort-term leasing, compared to the long-term operational leasingmarket, particularly in Europes most advanced markets.
• In particular, the adoption of more prudent spendingpolicies by companies which prefer to adjust their fleet in line with the volumes of their business, in order to avoid having to carryfinancial commitments into quieter periods. Therefore, the demand forshort-term leasing is particularly notable in industry sectors withvariable business requirements, such as construction for example.
• 2. Flexible Labour Market Drives Flexible Fleet Leasing
• Another factor boosting the popularity of short-termleasing is the ongoing liberalisation of labour markets in WesternEurope. The increase in the number of temporary employees is evident.Whilst companies are responding to gradually increasing demand by hiringadditional labour, they are extremely cautious to avoid expensivecontributions related to social insurance, as well as rigidity imposedby permanent contracts.
• The rising number of temporary staff, some of whichwould benefit from the use of a company car, is driving the growth oftemporary car usage and hence - short-term leasing. It is estimated thatacross the European Union, temporary work agencies employ more thanseven million workers, which is 1.9 percent of the European unionworking population. In some markets, such as the UK, the trend is morepronounced. Similarly, it is estimated that short-term leasing contractsaccount for nearly one percent of all operational leasing contracts in the UK, for example.

Operational Challenges Impacting the Growth ofShort-term Leasing

Impact of Short-term Leasing in European Vehicle RentalMarket

Impact on Vehicle Manufacturers

Impact on Used-car Dealers and Garages

Business Case Analysis

Conclusion: Short-term Leasing is a Valuable Supplementto Long-term Rental

• Short-term lease is not a subsitute for long-termleasing , but a supplement. Because short-term is more expensive thanlong-term leasing, a large proportion of corporate fleets will remain tobe funded on long-term contracts.
• Datamonitor estimates that in 2010 - Belgium, France,Germany, the Netherlands and the UK will have a combined operationalleasing fleet of 4,830,806 passenger cars. If the proportion ofshort-term contracts reaches 3 percent of the total operational leasingfleet, 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 byshort-term leasing will continue to sustain this market in future. Inconditions of fragile economic growth it is hardly surprising thatshort-term leasing has emerged a successful proposition, because ithelps companies to rationalize fleet expenditure and avoid funding anunnecessary number of vehicles, thereby releasing funds for otheractivities.

Industry Recommendations: Overcoming the Challenges ofShort-term Lease

List of Tables

• Table 1: Proportion of Temporary Employees out of allEmployed 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 asProportion of Total Operational Leasing Fleet in 2010 for Five EuropeanFleet Markets

List of Figures

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