Full service leasing has gained a great deal of popularity in recent years, with contract maintenance also becoming a fairly large part of the business.
Fleet managers have become more aware of advanced technologies and services on offer, and as such are increasingly more willing to unburden themselves of some aspects of running the fleet.
“I think some of the things that have helped that growth is that companies are focusing on their core competencies. You hear that a lot but it certainly is the case,” says Jim Feenstra, senior vice president, marketing, Penske Truck Leasing.
“It used to be when you walked in as a full-service lease provider, the customer was very well-informed of specifications and how they wanted it done. More so now what you’re seeing, especially in private fleets, is that the traffic manager or warehouse manager is more focused on their business, and says to the full service lease provider, you’re the expert, you put the spec together that’s going to work, and put the maintenance programs around it that work. There’s way more information out there than there ever used to be,” adds Kirk Tilley, vice president, The Tandet Group.
Over the past several years, this glut of information and advances in technology have been the driving trends in full-service leasing.
“Five years ago, for example, we were putting on-board computers in very few of our customers’ trucks. In the lease business our customers drive the componentry and technology we put into the vehicle. In the last few years, they want the latest on-board electronic equipment. They want to be able to monitor the movements of their freight and their trailers, in a real-time manner, which normally requires GPS technology. All these technological efficiencies have become apparent to our customer base. This forces us to become experts in that type of business,” says Lance Bertram, vice president of marketing, Idealease.
Full-service lessors then have to get their arms around the new technologies and recognize what parts will best benefit the customer.
The challenge, however, is educating the leasing representatives to stay on top of market needs, and to have a better consultative approach.
“We’re talking to a greater number of people within the organization, (for example IT specialists), and this drives the need for our workforce to get better educated,” says Louis Gagnon, vice president, Canada, GE Trailer Fleet Services.
GE launched an asset tracking and trailer fleet management product, GE VeriWise, in the fall of 2003, and has established research and development programs on technology and analytics at the GE Global Research Centre in upstate New York.
“We also have the ability to do a sell-lease-back. We buy their equity and basically lease back the equipment to the customer allowing them cash flow to help them grow in other areas of their business.
Why tie up your cash into something that depreciates when you can take that cash and use it in other areas?” says Gagnon.
Idealease, meanwhile, has teamed with XATA and Qualcomm on this to put together service offerings, says Bertram.
“We’ve insourced our fuel tax reporting system to provide it electronically through GPS. Also, electronic engines require certain diagnostic equipment that often only the leasing companies or dealership-based leasing companies have access to. We see more and more of our customers who have maintained their own trucks for years say, you know what, it’s getting more and more complicated, I have to bring my truck into the dealership half the time anyway, because I can’t discern what’s wrong. So as technology gets more advanced, leasing gets more attractive,” says Bertram.
But it can still be a challenge to have some fleet managers understand the value of technology, says Feenstra. They are so frequently bombarded with tons of direct mail or salespeople at the door.
Having certain technologies bundled into the full-service lease package can take away some of the headache of weeding through what’s on offer.
Penske’s Precision Plus Web-based product, launched in mid-April, 2004, offers fleet management capabilities, truck starts and stops, automated driver trip reports, fuel and tax reporting, via a private online connection for customers.
“We believe with our new product we can provide a smarter truck with accurate real-time data on how fleets and drivers are performing. We put that with our own fleet profile all on one invoice. All early indications are that this is resonating really strongly,” says Feenstra.
An investment in technology means that while other costs are going up (for insurance, fuel, drivers, etc.), the maintenance component of a lease is not, says Tilley.
“If you look at full-service leasing, there’s a lease payment and a variable quotient. The asset itself is fixed in that monthly payment. If three years ago you were at six cents a kilometer, you’re still paying that or slightly less, because today, a full service leasing company should have a huge investment in a computerized maintenance system. What used to be a bit of an art is now a science. We’re a lot better at predicting what components are going to fail and replacing them before they fail,” he says.
On the service side, he says, it’s actually better, because everybody seems to be linked.
“I can get real-time data and customers can get real-time data on truck breakdowns. It’s easier to get a truck serviced, if it’s broken down on the road today, if you’re part of a system,” says Tilley.
Another phenomenon, notes Bertram, is that more and more OEMs and dealerships are getting involved in leasing as well, and strengthening their own networks.
“There was a time when most of your leasing came from a Ryder or Penske. More dealerships realize there’s an opportunity for a customer base that used to go to those third-party leasing companies. That’s a big change in the marketplace, and the third parties have responded by growing their business through acquisition,” he says.
Some suggest the lines are blurring somewhat between leasing and purchasing, but Bertram blames this on some misconceptions that still abound, namely on warranty clauses.
“Sometimes warranty is a little overrated in the marketplace. A lot of folks say, with extended warranties, you don’t need a leasing company, but warranty actually impacts about 10-15% of our entire running/maintenance cost. You could have a warranty program that’s just the greatest ever, but there’s no warranty program for tires, brakes, the brunt of your maintenance. It’s sold as a complete maintenance alternative but in reality it doesn’t take care of all your problems.”
And there will always be some basic differences between leasing and owning in the US and Canada, with regard to taxation and financial accounting, he says.
Tilley says another big misconception is ‘I can borrow money at the same rate or cheaper than the full-service leasing companies, so it’s going to cost me more to lease’.
“In actual fact, it should cost them either the same or less than what they can do it for. You can look at full-service leasing a bit like an insurance policy. I’m covered top to bottom and have the use of it 365 days a year. For a lot of companies that need to move product no matter what, that’s what they’re willing to go after. And you can reduce your fleet size,” he says.
According to Tilley, the Tandet Group, which has dealerships as well, can see where the blurring of the lines comes in.
“There is a blurring because, I believe, the OEM is trying to recapture some of the market the full service leasing company has had the benefit of. In the old days, the happiest time in the truck dealership was when you saw the taillights leave the yard. The full service leasing industry looked at that, and embraced the headlights. Now the OEMs are starting to say, we need to start offering some of the same services, looking after the customer bumper to bumper,” he says.
“Today a dealership looks at what parts can I sell for this truck. A full-service leasing company says, what’s going to wear out, what do I need to replace, before it wears out? The customer doesn’t pay for that in a transaction-based full service lease. You have to foresee everything that’s going to happen to it. The dealerships aren’t there yet. Because typically the customer that brings the truck into the dealership says, fix what I tell you, because I have to pay for it,” he says.
Unbundling a truck lease package has also become a more popular option, says Bertram, for those looking for the flexibility this offers.
Over the last five years, just under 5% of Idealease business was unbundled business. Today it’s just over 15%. Some customers like the idea of full-service leasing but want the opportunity to own the equipment at the end of the term. “Therefore they might say, let’s break apart that full service lease and I still want the maintenance coverage but as far as the truck goes, I want the opportunity to purchase at the end, therefore I want to write a track lease (a terminal rental adjustment clause that gives them the first opportunity to buy that truck at the end). Likewise, some want to own the tax depreciation for the vehicle. If we write a finance lease, the customer can take advantage of this, coupled with contract maintenance,” he says.
If you decide to opt for a full-service lease, says Tilley, it is important that you take your time and understand who the lessor is and what they’re providing.
“You need to be aware of how much flexibility the lessor has. Can they move and adapt as you grow as a business, or are you stuck with whatever it is you’ve signed on to for the long term. You need to know the other services that the lessor has available to you. Do they have driver training, accident investigation? Can they compile information for you on your fleet, and is it customizable? And how easily can you move from a full-service lease to a dedicated program? One of the key things, when somebody is looking to go to full- service leasing, they need to be very clear with their lessor why. They’re better off to say, here’s the problem I’m having, how can you create a solution around it?” he says.
What’s ahead for 2007?
Another factor that has sweetened the option of full-service leasing over the past few years is the uncertainty over the residual value of trucks during the last round of engine emissions.
The 2002 engines produced some problems when it came to obtaining real-world operating data on the modifications. With the lack of information, predicting the running costs of trucks for the length of a contract was a challenge.
Many of this year’s trucks will hit the used market just as the next round of emissions regulations takes effect in 2007, and there’s a lot of concern as to what trucks are going to be worth at that time.
Bertram is confident that these trucks will hold some significant value.
“Prior to the latest round of emissions, everyone was concerned about today’s trucks, would it cost more to maintain them, would there be fuel degradation issues? It’s funny how it works because everything is relative, and in 2007 new emissions standards have to be met, and suddenly the trucks that are running today are going to be “diamonds in the rough.”
“In the last year, we have seen Class A residuals start to come back, and start to increase in value, which over the last 30 years they have not. So as 2007 gets nearer, I think we’ll continue to see an increase in residual value in today’s equipment, because once again, these trucks that are running today are all of a sudden going to look like gold compared to the 2007 and 2010 equipment. At some point, depending on who you talk to, somewhere between 10% and 25% of the fuel efficiency of an engine could go away after 2007,” he says.
Feenstra says he is seeing a pre-buy phenomenon with managers upgrading their fleets now rather than having to wait until 2007.
“Certainly, starting a few years ago with the EGR engines, and what we’re going to be seeing in 2007 with the new engines and even stricter restrictions in 2010, there is a more predictable cash flow and budget on a full service lease. From a cost management side, we see benefits. With everything that goes in this marketplace, it’s a challenge keeping up. What is the right decision to make with the new engine emissions? Do I sit and wait, do I take the risk now? Or do I hold off and take a hit on the costs in 07, 08? It helps companies to work with a lessor to reduce the risk,” he says.