Grinding to a halt: vehicle leasing industry braced for tough times ahead
25 May 2021
When global car rental giant Hertz filed for Chapter 11 protection in the US back in May last year – at the height of the first lockdown – many in the car leasing industry saw this as a foretaste of things to come as the pandemic cut a swathe through businesses around the world.
With its headquarters in Florida, the car rental giant had crippling debts brought on by the worldwide ban on travel – for tourists and business customers – as a result of Covid-19. Up to that point, it was the largest victim of the pandemic.
By April 2020, the company was £15bn in debt with only £820m of cash available. Some 4,000 jobs were furloughed from among its global workforce, while 12,000 staff worldwide had been made redundant.
Fortunately, despite initial concerns, the Chapter 11 filing in the US did not affect Hertz operations in the UK and Ireland, much to the relief of management and staff at more than 400 outlets. Nevertheless, for many in the UK vehicle leasing industry, it was a warning of things to come.
The switch to remote working
The demand for vehicle rentals – either for travel, business or courtesy car hire – ground to a halt during the first lockdown. Most firms in the UK had to quickly switch to remote working practices, using video streaming services such as Zoom and Teams as the new modus operandi rather than traditional face-to-face meetings. Overnight vehicle leasing for businesses and hire cars for events and business travel simply stopped – and many are now expecting things to get a lot worse before they get better.
In June last year, Gary Smith, managing director of Europcar Mobility Group UK, admitted that the unprecedented scale of disruption to the travel sector brought on by the pandemic was having a potentially terminal impact on the car leasing sector. Overnight, depots had shut their doors and thousands of vehicles were sitting idle on forecourts.
During the first wave of the pandemic some 70% of those surveyed by Fleet News admitted that only 10% of their company cars were on the road. Meanwhile, van fleets had similar problems and most vehicles became idle overnight. Most staff had been furloughed as company bosses tried to scramble for solutions to the problem. This included de-hiring vehicles not in use, payment deferrals for customers and arranging rental holidays for vehicles already leased out.
Furthermore, HMRC was unwilling to compromise over taxation of leased or company cars whether they were sitting idle on a driveway or being driven every day.
And so the enforced hibernation continued for much of 2020 and into 2021.
Crunch time ahead
With the gradual winding down of lockdown measures from May this year many insolvency professionals have been predicting a crunch time for the industry, as with many other sectors. The ending of company furlough schemes for staff is expected to signal a vast swathe of redundancies in the leasing sector, with insolvencies increasing significantly among the smaller vehicle fleets.
With many small to medium-size enterprises across the UK suddenly under pressure to improve their bottom line post-Covid-19, thousands of businesses have been returning their company cars, particularly as the trend for home working continues.
Berkley Executive closes
High-end chauffeuring firm Berkley Executive is a typical example of one of these small niche businesses that have had to close its doors. The firm launched in February 2020 pitching its services to wealthy people in the entertainment and corporate markets – the company was even backed by pop singer John Newman who invested £1m into the business. However, after 18 months with no customers, in early May 2021 Berkley handed back its fleet of six bespoke long-wheel based Range Rovers and Mercedes-Benz vehicles. Managing director Mark Butterfield admitted he would now look for work outside the chauffeur sector.
Butterfield told Professional Driver magazine: ‘This extended third lockdown was the final straw. It was always going to be a brave project but who could have foreseen the events of the past 12 months? Having hard-launched our business in March 2020 – to incredible fanfare at a fabulous party at The Yard, Shoreditch – the first lockdown came at a bad time for such a young company.’
He added: ‘With all live events cancelled, plus very little in the way of hospitality, entertainment and luxury travel for the best part of a year, survival as a start-up business was clearly going to be tough.’
And the news continues to look grim for the sector – at the time of writing there were still concerns about further variant waves of Covid-19 occurring in pockets around the UK.
Moreover, the long-term trend for continuing remote working is predicted to have a long-lasting impact on the vehicle leasing sector and even the more robust rental businesses may well be struggling to ever recover to their previous levels of business in 2019.
Those leasing agencies focused on the travel sector are forecast to remain in the doldrums or worse for several years to come.
Crash repair industry
Another related business area suffering from the Covid-19 effect was that of courtesy cars leased by crash repair workshops and garages. One owner of a medium-sized crash repair business, with more than 30 depots across the UK, told me that before the pandemic he was leasing 1,000 cars across all depots on a 12-month lease with a 10% turnover of new leasing cars each month.
With the sudden closure of the repair workshops – combined with the Brexit effect and less accidents on the roads due to the sharp reduction of the number of vehicles on the road – the company was left with a fleet of courtesy cars standing unused on forecourts while leasing companies continued to demand full rental costs for vehicles. While the source admitted times were very difficult, his company was big enough to come through the pandemic relatively unscathed. He added that many smaller businesses, particularly family-owned workshops, would not be so fortunate.
Linked to this were the car and component manufacturers, all of which were closed for much of the initial lockdown phase. This in turn created a shortage of parts for cars and increased costs on car manufacturers and the reduction of new car discounts; a further cost burden when rental companies lease new cars to replace their existing fleets – creating more cost pressure on an already struggling industry.
Adapting with the times
Out of all this doom and gloom there was one bright spot, however, with the rise of ecommerce. Companies that were able to diversify were able to increase their van hire leasing to supply a boom in home deliveries. If car leasing companies have been the losers as a result of pandemic, then the clear winners have undoubtedly been the van leasing companies.
In June 2020, the ONS estimated that spending online increased by 62% compared with three months earlier, resulting in an increase of £943.5m in average weekly sales from £1.5bn in February to a staggering £2.5bn by July 2020.
Demand has picked up so much that companies such as delivery firm DPD had to recruit more than 3,000 drivers to meet the demand for online shopping. The volume of online sales has picked up so much that companies such as delivery firm DPD had to recruit more than 3,000 drivers. DPD was said to be spending £200m in 2020/21 to expand its delivery service to cope with the demand.
Elsewhere, the pandemic has clearly affected consumer habits and some leasing businesses have been looking at more flexible alternatives such as the subscription model. It’s a business idea borne out of the trend for online streaming services. The idea is that vehicles – like any other service – can be ordered online and delivered direct to the consumer for up to two years’ leasing. The British Vehicle Rental and Leasing Association recently reported a 250% increase in vehicle subscribers since September 2020, with adoption showing no signs of tailing off by May 2021. And more mainstream dealer groups were starting to jump on the subscription bandwagon by early 2021.
As with all business sectors, insolvency professionals are saying it’s only a matter of ‘when’, not ‘if’, companies in the vehicle leasing sector start to fall victim to the pandemic – similar to businesses in other sectors. By the start of May the number of UK businesses in financial distress had increased to its fastest level since 2014 with warnings by industry analysts that the sheer volume of zombie businesses could become overwhelming when support from the government finally ends in September.
An extra 100,000 companies were in significant distress from January-April 2021 when compared with the final quarter of 2020. Overall, the UK has 720,000 distressed businesses, in spite of the ban on winding-up petitions as a result of debt related to the pandemic, according to recent industry statistics. This is an increase of 15% on the previous quarter and the biggest rise since research began seven years ago.
This stark news will come as no surprise to many in the vehicle leasing industry, and related businesses across the supply chain; all waiting to see what will happen from September this year. While many will weather the storm ahead and others will continue to diversify their services, a huge number predict a very difficult final quarter to 2021. The astonishingly swift unravelling of Hertz continues to prey on the minds of many SME business owners in the sector and most agree Hertz will just be one of many casualties of Covid-19.
Andrew Chilvers is head of GDPR and data protection at MAPS Solutions Europe Ltd.