Car subscription services: proceed with caution

Article first published in Fleet Leasing 19 December 2019

Should leasing companies move into the car subscription market? Colin Tourick outlines the risks involved.

There has been a growing interest in car subscription services, also known as car-as-a-service, for a whole host of well-understood reasons.

These include:

  • more kids going to university than ever before and leaving with £50,000 of debt
  • more people moving to cities, where public transport is plentiful and parking is a nightmare
  • the rising cost of car ownership 
  • people becoming used to paying for things by monthly subscriptions that they can cancel at short notice
  • the heavy burden of company car tax.

Under a car subscription, clients are offered cars on no-strings-attached contracts, either for a short, fixed duration of, say, three months or cancellable on demand without penalty. The contracts include full maintenance and servicing, insurance, rapid delivery, a small down payment and either a short, fixed duration (perhaps two or three months) or the flexibility to hand the car back at will.

A large YouGov/Zoura study recently showed that 24% of Brits would forego buying a new car and subscribe to a car-as-a-service product within the next year.

Millennials were the group most interested in this option, and, as the researchers said, this is “pushing companies to rethink their business model”.

Those companies, of course, include leasing companies.

Leasing companies’ role in the increase in car subscription services

More and more lessors are offering personal contract hire (PCH) and personal contract purchase (PCP) to meet rising demand from consumers and to ensure that, when an employee decides to opt out of their company car, the opportunity to supply them with a car is not lost forever to a manufacturers’ captive finance company.

And now it is being suggested that subscriptions services will be the next ‘big thing’.

LeasePlan recently entered the market with its monthly car subscription service, Subscribe and Drive.

CEO Tex Gunning said: “Increasingly, our customers – whether they are corporate, SMEs or private individuals – would prefer a ‘car-as-a-service’ with no strings attached in terms of car type or duration. They just want ‘any car, anytime, anywhere’.”

Volvo, Wagonex and Drover also offer car subscription services in the UK, while in America the market is currently dominated by car manufacturers, including BMW, Audi, Cadillac, and Porsche.

Should your leasing company get in on the action?

Many fleet leasing companies are looking at how they can get a piece of the action. But should they?

Traditionally, when a leasing company delivered a new car to a fleet client it stayed on hire for three or four years. They collected it at the end of the contract, ideally when delivering the driver’s next car. There is no ‘down time’ in this arrangement: the client pays for the car throughout the hire period and also pays if they want to terminate the arrangement early.

If fleet clients needed cars for shorter periods – perhaps while the driver was waiting for delivery of their new car or to meet some other short-term requirement – they used the services of daily hire companies, and the deal was often arranged by the leasing company.

There is a very good reason for this division between leasing companies and rental companies.

They cater for the needs of very different customers.

Someone who wants a car for three years will be very specific about their requirements. Colour, engine size, fuel, transmission, make, model, derivative, factory-fitted options, and so on. A tailor-made product.

Someone who wants a car for a few days or weeks generally isn’t bothered about most of these things.

They want to car to be of a certain size and quality and to able to transport a certain number of people and a certain amount of luggage, but beyond that they don’t much mind which car they get. That’s why car rental companies offer cars in groups: mini, economy, compact, full-size and so on.

When they tell the consumer they will be getting a ‘Fiat Panda or similar’ they are managing expectations and giving themselves the flexibility to deliver whatever car in that group happens to be available.

“If I was running a fleet leasing business I’d be talking to colleagues in the daily hire sector to discuss how we can meet demand from my clients for flexible leasing, using the rental company’s resources.” Colin Tourick

Daily hire companies have a very large number of cars available, either from their own fleets or by arrangement with other rental companies.

These cars have been bought at massive discounts, new from the manufacturer, and when they come to be sold nine to 12 months later the rental company will have suffered very little depreciation or maintenance cost.

The driver may have collected the car from the rental company’s local depot, or if the client is big enough and has a sufficient number of rental days per year, the rental company might have delivered it to the driver’s place of work.

Rental companies have massive infrastructure to support this: many cars available at short notice, a good spread of depots across the country and a small army of drivers available to move cars. So the direct cost per hire and vehicle movement is low.

Most fleet lessors have none of these natural advantages. They buy cars at good prices, certainly, but normally nothing like the prices paid by rental companies.

When a driver signs up for a subscription service from a leasing company and wants a car for, say, three months, they are likely to want to choose their own car rather than leaving the choice to the supplier.

But the leasing company is not going to be able to let the driver configure the car they want, because no other driver of that car in future may want that particular spec. How is the lessor to deal with this? Buy more cars than it needs, or try to channel clients into taking cars that don’t meet their specific needs?

Neither option is good.

The driver is likely to want to have the car delivered, which means it will need to be moved – at the lessor’s expense – several times each year.

Giving the client the flexibility to end the contract on demand, at little or no cost, means giving them the opportunity to cause financial pain to the lessor.

The way to avoid all of this pain is for the lessor to charge rentals that are high enough to cover all of the additional costs that are implicit in the delivery of this type of product. But those costs are going to have to be very high indeed to ensure they cover void periods and the need to move cars long distances around the country. It will be hard to make them look competitive against the cost of, say, a conventional three-year lease or indeed a corporate daily hire rental.

One way to reduce some of these costs is for the lessor to show, on their website, the vehicles they currently have available.

If a driver happens to want one of those, great, but if they don’t, will the lessor be willing to let the driver click off that site and onto a competitors’ site or will they try to retain the client by offering them the chance to specify the particular car they want? That way they’ll win the deal, but at what cost?

And will fleet lessors ever really be able to compete with daily rental companies for this type of business, given the massive advantages those companies have – both infrastructure and price?

This is a risky product for the fleet leasing industry as currently configured.

Just because there is demand for something, it shouldn’t automatically follow that lessors should be clamouring to buy new cars (or allocate used cars) and set up departments to meet that demand.

The risks here are high, the revenues uncertain and the opportunity for losses are great.

Also, this product isn’t new. A number of companies have been set up over the years to offer ‘flexible leasing’, and none of them has been particularly successful. One or two have failed spectacularly,

If I was running a fleet leasing business I’d be talking to colleagues in the daily hire sector to discuss how we can meet demand from my clients for flexible leasing, using the rental company’s resources.