The drop in used equipment prices and the slowdown in freight are causing fleet managers to rethink the wisdom of truck and trailer ownership. A full-service lease can mean a better balance sheet and ...
The drop in used equipment prices and the slowdown in freight are causing fleet managers to rethink the wisdom of truck and trailer ownership. A full-service lease can mean a better balance sheet and significantly less risk. But while the lessor is looking to attract business to full-service leasing with as comprehensive a package as possible, the onus is on fleet managers to have a handle on what they need out of the lease agreement to serve their current and future needs. Getting the most flexible deal for your money means going into the lease armed with a few good pointers.
1. Leasing vs. Owning – Find out what will work best for you
The most obvious benefit of full-service leasing is the ability to concentrate on core operations outside of running the fleet. Leasing can provide fixed, predictable payments rather than variable rate financing as occurs on some purchasing. Under a lease, your statement can show operating lease payments as a monthly expense rather than long-term debt on the balance sheet.
“Some customers don’t twig to the financial benefits of full-service leasing. They may be of the mindset that owning equipment (is an asset). Leasing really does free up your capital within the company so you can reinvest within the facility, or wherever. In a great sense, it also eliminates the obsolescence of the equipment,” says Steve Nash, general manager of Provincial Trailer Rentals.
Also, the fleet manager has to determine whether fuel tax, licensing, and washing can be done at a reasonable financial cost if they’re in ownership.
“Leasing is an ‘unbundling’ of the product. The fuelling cost factor, and washing costs can vary considerably,” says Bill Ford, president and CEO, National Truck Leasing System.
Full service truck leases, unlike most other purchases or straight finance leases have many variables which is why a lease vs. own analysis is critical. Fleet managers should be able to see the cold hard facts in a numbers analysis.
“Other than competitive pricing, a fleet manager should insist on a comprehensive lease vs. own financial analysis which will analyze the fleet manager’s specific situation and make recommendations based on non-biased, proven, business principles. A comprehensive lease vs. own financial analysis, conducted utilizing proven business principles is the only way to make sure that your decision is based on facts,” says George A. Schmidt, lease product manager for Penske Truck Leasing.
2.Take a thorough inventory of your costs before proceeding
When you’re weighing your lease vs. own options, take a thorough inventory of your costs.
“Many fleet managers are not as prepared as they probably should be about costs. Typically, the buying decision is driven more and more by CFOs and they are not necessarily in touch with operational costs,” says Dave Winkelman, vice president, Rollins Canada.
Focus on the extra costs that may not be as transparent. For example, certain maintenance costs may not even be considered. Factoring in maintenance costs can make the overall cost scenario that much clearer.
“Very few customers understand their maintenance costs, and there are many reasons why. Often tires are not included in the cost of maintenance. When they do their calculations, managers may not factor in a tire cost of about 1.5 cents per mile. And with a new engine, you can put it in the books as an operational liability so it’s not on the books in the same way,” explains Lance Bertram, vice president of marketing with Idealease.
If you are not sure how all your costs will be factored in, don’t be afraid to ask questions. And be wary if the lessor doesn’t do the same.
3. What kind of maintenance set-up will be provided?
Make sure you are also well-informed about service schedules. “The fleet manager should be looking for a maintenance program that covers his operation completely,” advises Nash. A full-service lease should also respond to concerns for both preventive and reactive maintenance.
In terms of emergency road service, look for 24-7 availability. The average response time for service (across the choice of vendors), outside of the remotest lanes and the worst weather conditions, is at or under two hours.
Also look for a leasing company that has set up a computerized network of vendors that can respond to your service needs, and make sure that it will vouch for that vendor. “Your lessor should have (a road service) track record that can be documented in print, not just verbally,” says Schmidt. Clem Morrison, president of Xtra Lease Canada, also advises inquiring about the uniformity in costs and procedures for repairs across the leasing company’s network. He says Xtra Lease has standardized repair costs across North America so that if repairs have to be done in another province or state, there are no nasty surprises.
Another issue is substitute vehicles. Make sure your leasing company will arrange substitutes for you as quickly as possible.
Simple logistics should also come into play. If your trucks have to travel a long way to the leasing company, you may not be saving. “Most important is the proximity of our maintenance facility to their facilities. It translates into fewer costs,” says Ford.
4. What kind of spec’ing knowledge and flexibility does the leasing company offer?
When it comes to spec’ing, fleet managers should come to the table with as much knowledge as possible. But a lessor should be able to offer a properly spec’d vehicle for the life of the lease and beyond. Watch out for underspec’ing.
“When you have four or five leasing companies competing against each other, you can get the price lower by underspec’ing. We try to avoid that. I’d advise customers to understand their equipment. Don’t leave that up to the lessor,” says Bertram.
But remember, a good leasing company will also have an interest in spec’ing right to cover its costs.
“As we go through a needs analysis, it enables us to properly engineer a vehicle. The concept might be simpler if you thought of us as a co-op passing reduced operations costs back to the end user. We have a pretty good idea of what components should go into what vehicle for an optimized level of service for the end user. Typically, we compete with a dealership mentality. A dealer typically spec’s a truck to sell, not to operate, so companies may end up with underspec’d parts that shorten the life cycle of that vehicle,” says Winkelman.
5. Can you get the right flexibility with the payment structure?
A leasing company should be willing to build flexibility into its payment structure, and to work with you on any specific needs. For example, can the payment schedule be tailored to fit a seasonal business? Have a plan about what kinds of flexibility you may want built into your lease in future, and bring up these needs at the initial discussion with the lessor.
“We’ve done accelerated payments with some customers, We’ll take their total annual payments over the period of time they’re actually doing most of their business, and spread the payments out over those months,” says Bertram.
Locking into a longer lease on equipment you may need to change can be another risk. So look for some flexibility on upgrading or swapping within the lease.
6. Do the value-added items provided make sense for your operation?
If you are deciding between different leasing companies as a first time lessee, or looking to move from one company to another, consider what sorts of value-added services offered by the leasing company can enhance your operation. Value-addeds such as Rollins’ fuel and unlimited truck washing program, and Xtra Lease’s agreement with Terion Inc. to install tracking systems on trailers, are some of the initiatives and advantages that may make bottom line sense for a carrier’s leasing arrangement.
“We’ve installed the Terion tracking system on some of our day-to-day rentals so that the customer can test them out free of charge. Finding empty trailers is a big problem in the industry, especially if a guy has to drive 45 miles to see which trailer is empty in the yard,” says Morrison.
f paperwork on permits and licensing is tying up your valuable time, will your leasing company take on this onerous task for you?
“A full service lease supplier should offer you relief from administrative burdens associated with transportation services, such as permitting and legalization services, and licensing. Some of the administrative items you should consider include state or provincial and federal licensing and registrations, vehicle safety inspections, local tax payments, heavy vehicle use payments, fuel tax permitting, fuel tax reporting, emergency permitting, service records, hazardous waste issues, and audit simulations,” says Schmidt.
7. What kind of quality assurance are you getting ?
A typical lease is a long-term relationship and a major financial transaction. So receiving good customer service is of paramount importance. If a typical lease term lasts about five years, and a good percentage of leases get renewed, you’re looking at a good fifteen years of building a solid business relationship with your lessor..
“We always assign an account manager to the client. The person always has one person they can talk to. On average we’re looking at three cycles. So it’s very important for that leasing company to have strong relationships with that fleet manager,” says Ford.
Beyond personal relationships, asks Winkelman, what kind of guarantees do you have on paper?
“Ask what kind of quality assurance the lessor provides. Does the company have a customer audit and customer service program? We have a requirement that we have to see the customer every 30 days. We also have a rating system for all our programs. Does the company have a customer orientation meeting? We think the first 100 days are the most important. That will be their lasting impression,” he says.
Lastly, does the leasing company have a measurement system in place?
“The supplier should measure every aspect of its performance to the fleet and provide a fully documentable report card showing how it is performing. The best people, properly trained, coupled with continuous measurement of services provided, assures that the leasing company can offer customers the transportation tools required to compete in today’s marketplace,” says Schmidt.
8. What will outsourcing mean for your current employees?
Be prepared to deal with employee issues if you are outsourcing maintenance and other fleet functions to a third party. Shop personnel will naturally feel threatened by company plans to outsource maintenance and may attempt to sabotage the process with prejudiced information when comparing costs. You will need to keep that in mind as well as figure out how to handle possible layoffs. Some leasing companies may be willing to take on employees from your maintenance department. Start those discussions before you sign the lease agreement.
On the positive side, when carriers go with a leased fleet, the opportunity to run with newer spec’s can be a benefit on the driver retention side, which is one of most pressing issues facing motor carriers.