The world of fleet management has witnessed a period of rapid industry consolidation that has cut the number of fleet management companies almost in half. Against this backdrop has been a concern voiced by some fleet managers that consolidation may potentially cause a decrease in the level of client service. Where industry competition might once have been based on price-cutting or tax benefits, today it revolves around providing superior service. The importance of client services will continue to grow and will play a key role in determining the successful fleet management companies of the 1990s. To get a pulse on what's happening in the world of fleet management and client services, Automotive Fleet recently spent some time with PHH FleetAmerica. Interviewed by AF's Mike Antich were PHH FleetAmerica President Phil Tuff, Executive Vice-President of Sales & Marketing John Maslanka, and Bob Ward, president of Avis-Leasing, a PHH Group company.
AF: Do you believe the assessment that only those lessors that are competitive in the back room will be successful in the future? Also, what actions has PHH taken to become more competitive in its back room operations?
Taff: First of all, let me say that one of the words I really disdain is "back room." These people are service providers for our clients. Everybody in our company has a client. Some are external clients and some are internal clients. The whole perspective of our company is to serve clients. So we never use the word "back room." Because those people are so important to our overall success and the service level that we provide.
AF: I understand the importance of client services, but in what ways are you making it more competitive and more efficient. What sort of specific actions are you taking? Or, are things fine as they are?
Taff: No, things are never fine the way they are. We are investing a tremendous amount into employee training which is key and critical to people's ability to be successful on a day-in day-out basis. There's no single set of services provided in a certain way that meets every client's needs. Every client has unique needs. So you have to have a lot of services on the shelf, so to speak, that you can bring together in such a way that is very tailored to the needs of that client. You are onto a really key issue since we will be adding 100 new positions at PHH FleetAmerica. Number one is you've got to hire the best possible people you can. Then you've got to give them a job that lets them be fulfilled so they understand how they relate to this total service that is being delivered to a company. Nobody likes delivering a service they are not proud of.
We're investing a lot of money on systems at the highest levels in the history of the company. This is because more and more fleet managers want to be strategic decision-makers and not have to put out fires all the time. So we have to give them information that is meaningful and analyzed in a way that lets them arrive at the right decisions for their company. This year we have seven areas we are working on in terms of quality. We are spending a lot of effort in our ordering, our title area, and in employee sales. We are investing tremendous amounts into the used car area, all the way from wholesaling to auctions, to now, our own retail stores around the country. We think this is one of the more exciting and innovative things that has happened in the industry for a long time. When you talk about the so-called back room, there isn't a back room. It's an everybody's room and that philosophy leads to efficiency. If you think that makes us more competitive - you bet. A part of quality delivery is doing things right the first time. Quality breeds efficiency.
AF: From a fleet manager's point of view, a key consideration towards client services is its cost. Do you agree that it's necessary to have economies of scale in order for a lessor to be competitive and efficient in client services?
Ward: I think you also need efficient processes. Just adding people is never the only answer. If the system isn't working as efficiently as it could, all the people in the world are not going to fix it. We are continually looking at some of these processes. These are the seven areas that Phil was referring to. There are two ways of being competitive in the operation of a business: One is to ensure the quality of service by eliminating inefficiencies in the system. The other way is through innovation. Phil mentioned our used-car retail stores which are a real hot button with our clients. We're expanding it judiciously and as promptly as we possibly can, because we believe it will bring a tremendous amount of added value to our client base. In the technology area we can provide on-line access for our clients. We are spending a fair amount of money on market research by talking to our clients and prospects determining what's important to them. That is an effective way of letting us know our customers' needs and priorities. We could use a shotgun approach but we are very selectively targeting those areas that are of the greatest importance. They will create a competitive advantage for us and the efficiencies follow.
AF: Can you provide us with further details on your used-car retail program?
Taff: Right now, we have 15 retail stores around the country with the largest number in California and Florida. We are using Avis Leasing, Inc. as the brand name, so to speak. It's not easy opening up retail stores around the country. You run into a myriad of problems with local city councils, signage, what you can put on signs and what you cannot, and licensing. The Avis philosophy is a low pressure, no hassle way for a person to come in and buy a car of value. We have been fortunate to have clients that have been willing to help us prove out this concept. We are convinced that a successful program can be a winner for everyone - our clients, retail customers, and PHH FleetAmerica.
Ward: In a sense, we are getting back to the basics and providing a more value-added service as opposed to a commodity situation. In the forefront of most of our clients' minds is return on their used vehicle. It always has been the largest cost associated with a vehicle in terms of its depreciation over the years. PHH and Avis have developed a strategy to maximize that return to our clients through the concept of the retail stores and are passing that advantage back to our customers. There is a tremendous consumer appetite out there for clean used vehicles and we can be a provider of those vehicles through our own distribution system.
AF: Do you have any projections on the volume of units you anticipate moving through the retail used car lots?
Ward: I would estimate that our typical store would retail 400 to 500 vehicles a month during the fall and spring. We also provide the financing for the vehicles, extended warranties, and insurance avenues for the customer. We try to make it a one-slop shopping service for our retail customers.
Taff: We are going to sell over 60,000 cars this year and probably half of those cars are retailable cars. Someday, and I'm not going to say when, it could be five years from now or it could be seven years from now, we could be looking at 30 to 50 of these stores, maybe more.
AF: At the recent Automotive Fleet and Leasing Association's annual convention, one of the keynoter's said there will be faster growth in leasing as a result of the corporate restructuring of America which will cause more companies to opt for leasing. Do you agree with that statement?
Maslanka: I don't disagree with it. When companies go through the process of consolidation they identify those areas where they can improve their cost effectiveness. We do things for companies that they cannot do for themselves for the same kinds of dollars. We can bring economies of scale. We can bring expertise that is very expensive to replicate. So as consolidations occur and focus is sharpened on cost effectiveness, that is where we look the best. Also, technology will play a heavier role in fleet management. Many of our clients are using on-line services and are finding it far more cost effective. This also extends to a whole range of supplemental products such as accident management, maintenance control, fuel service cards, national accounts, and so forth. Those services become more important to a consolidated organization.
Taff: I don't think we are going to sec a lot of increased growth. I really don't. Let's say growth is even in the two to four percent range, while that represents a large absolute number that's still not something that you get all excited about. The excitement comes from the new services we can bring to our existing marketplace plus the ability to serve clients that aren't professionally served today by either us or our competitors. Therein lies the growth in this marketplace. I think maturity is a state of mind. I would never say that this is a mature market. As a matter of fact, I go the other way, I strongly believe this a growth market. We are a growth company. But that is where the growth has to come from, we can't sit here and wait for corporate America to be adding to their fleets by factors of 10 percent growth and get excited about this marketplace because that is not going to happen.
AF: Has the Tax Reform Act led to the anticipated net increase in leased vehicles?
Taff: It has in our case. Last year about 65 percent of the vehicles in our client base were leased and 35 percent were company-owned. These percentages are up dramatically this year. I think more and more companies have taken a look at their tax position and look at the various types of alternatives that are out there. That has given us an opportunity to talk about leasing and talk about the overall cost savings and productivity that professional fleet management offers. So I think it has had a positive effect on our business.
Ward: We find in the mid-market segment that today we are doing more lease versus ownership analysis for our prospects and clients than we ever have in the past. Whether this is a direct result of tax reform is unclear, but the fact is we see a much greater interest in leasing as opposed to ownership.
AF: At what percent do you anticipate the market will grow? Are we still looking at one to two percent growth?
Taff: For the total market that is probably not a bad number. But that doesn't bother us. It has been that way for a long time. So it's not a new phenomena. For us the opportunity is that huge, untapped market that is out there.
AF: In the past several years there has been much consolidation and ownership changes occurring within the vehicle leasing industry. Has this affected client services?
Taff: I think the answer to that is probably yes. But you would have to ask our competition or clients of our competition to get an answer to that question. Certainly I can tell you that our clients have never had any more attention than what we are giving them today. For us that is a continuing process. One of the things that we talk a lot about is being the best to serve the best, everyday. When it comes to providing quality, you are never finished. So everyday we have to go to work and earn our relationships and stripes and that's what we've been doing for 40 years and that's what we will be doing 40 years from now.
Ward: We also believe that the consolidation that is taking place is giving us all much greater opportunities in the marketplace. With the consolidation, the opportunities grow along with the marketplace. So we are very optimistic about the future of the business and industry.
AF: Where do you see these opportunities arising? Will they be found among larger or smaller fleets?
Ward: I would like to talk just from the Avis perspective. We think the small fleet market is an untapped marketplace. When we look at smaller fleets we are talking about 75 vehicles or less. I think statistically it is almost impossible to get your hands around a marketplace that large. From the Avis point of view there is a tremendous amount of opportunity.
Taff: But I don't think it is just limited to fleets of 75 or less. I wish we could find a better way to term that market than "small fleets" because they have big needs. It is even more service intensive in some cases than larger fleets because they don't have professional fleet managers on staff. They have a CEO, a president, or marketing head trying to make these day-to-day decisions.
AF: In many cases you are acting as that company's fleet manager.
Taff: That's right. Nobody knows for sure how big that market is. But there is a large segment of that market that is not being served by us or any of our competitors. The complexity of fleet management has never been greater than they are today. We have seen tremendous interest. Last year was the biggest new client signing year we had in the history of the company. About half of that is coming from the unserved part of the market and about half is coming from our competitors. We would like to keep that kind of balance going forward.
AF: Do you see continuing consolidation in this industry?
Ward: I think we are going to go through another year or two of consolidation. Not on the grand scale that we have witnessed in the last couple of years but then I see out in the future other competitors coming into the marketplace. I believe others will view this industry as one that has many opportunities. I think the competitive situation will expand in the future. I think if you look at the number of competitors today in a marketplace as large as this, it will lead others to get interested in it.
AF: Is PHH in an acquisition mode?
Taff: For the right company, you bet. We have been for a long time. We are not in an acquisition mode just to go out and acquire just for acquisition sake. Avis was a very strategic acquisition for us because it puts us in a part of the market that, quite frankly, we did not serve before. So they bring a tremendous wealth of knowledge and abilities in serving that high need part of the market.
Maslanka: We are in a growth mode. We are committed to that. We know that to be successful in a growth mode we've got to be the best. This is what this company is doing in many specific ways. We're investing in our people, our processes, and our products. You don't see many companies in our industry investing in the future in a tangible way. We've charted our course and set full sail.
AF: To change the subject back to Avis, what do you see as the future for closed-end leases?
Ward: We find a tremendous need in the mid-market segment as opposed to the small fleet segment. There are companies out there that don't want to be subjected to the whims of the used-car marketplace. Closed-end leasing in that regard fills a tremendous void. As a result it is a very viable and growing product at Avis. That coupled with our capabilities of utilizing the services that PHH has developed over the years, lets us provide just about all the services the mid-market customer can use at this point.
AF: Is closed-end leasing a growth area or does it simply balance out the type of programs that PHH offers to its existing or potential clients?
Ward: I personally feel the closed-end lease itself is going through a renaissance, in that more and more companies are looking at the closed-end lease again because of the used-car market which over the past several years has been virtually a disaster brought about by manufacturers' subsidies and interest rates. This in turn has negatively impacted the customer's bottom line. So again, we see a lot of interest in closed-end leases and I expect that we will continue to see a lot of interest in the closed-end leases at least over the next several years.