Fuel issues

Diesel: From fleet favourite to stock liability?

As the shadow of pollution ban looms on Europe, will diesel fall out of favour with fleet users – and jeopardise lessors’ business?

Dieselgate may have come to light three years ago already, but 2017 was arguably the year when the auto retail industry began feeling the hit from diesel’s tarnished reputation.

Both consumers and fleet users across Europe are increasingly shifting to petrol and alternatively-fuelled vehicles (AFVs), which in markets like the UK has already marked the end of diesel’s historical dominance.

The latest, and arguably loudest, funeral toll came from Germany’s Federal Administrative Court, which in February allowed the country’s city authorities to impose local diesel bans – a ruling that campaign group Transport & Environment said could have the same signalling effect as Fukushima did for nuclear power.

Diesel has historically been a favourite of commercial fleet because of its lower price and higher efficiency, and newer Euro 5 and Euro 6 certifications had lent it the right environmental credentials too. But reputational damage and regulatory pressure seem to have now put it on an early way to retirement.

In March, analysts at rating agency Moody’s warned that Germany’s ruling could lead to a “pronounced falloff” in residual value of diesel vehicles, subsequently jeopardising much of lessors’ stock.

[Pullquote: “This will require close monitoring by the large captive finance firms of German automakers, which are particularly exposed to the residual values of younger-generation Euro 5 and Euro 6-compliant diesel cars, which also form the backbone of corporate car leasing fleets,”] Moody’s said.

The firm also drew parallels with the UK, another lease- and diesel-dependent country where a Germany-style ban could spell dangerous consequences. Diesel fleet users in Britain already tasted a bitter rise in costs when Chancellor Philip Hammond announced an increase to 4% for the diesel supplement on company car tax.

Not all forecasts are as apocalyptic as Moody’s. A number of industry figures have pointed out that the shift away from diesel, through inevitable, will be much slower in a mileage-intensive segment like fleet, where despite everything, diesel still makes economic sense.

But some providers are not taking chances, and are already taking measures to hedge against bans. Sixt Leasing, the fleet and retail leasing arm of rental giant Sixt, said in March it would substantially reduce the number of diesel vehicles in its stock fleet over the coming years. The company has already begun a similar operation in its retail stock, where it plans to halve the number of vehicles that are not covered by buyback agreements with dealers.

In the UK, meanwhile, medium-term lease provider Meridian set out plans to offer both diesel and petrol options on all its stock, as customers grow vary of diesel. “We are moving away from a one-fuel-fits-all situation to one where fleets are gaining knowledge about the suitability of different fuels for different applications,” managing director Phil Jerome said in December.

Regardless of whether other countries will go down Germany’s route, fleet providers across Europe have seen the writings on the wall, and are preparing for a future where diesel will probably retire earlier than petrol will. The industry has long known the future is low-emission: it just might not get there in the most straightforward way.