Loving that lease
Several factors can influence a carrier’s decision to purchase a new or used truck to add to its fleet. And with an ever-changing marketplace that demands flexibility, leasing has become a more viable option for those looking for adaptability, peace of mind, and fixed costs.
Michael Cinquino is the president of Energy Transportation Group based in LaSalle, Que., and he said there are two key reasons his company chose to lease the majority of its trucks.
“With volatility in the marketplace, we wanted something where we would understand what our fixed costs would be per mile and be able to calculate revenue minus that fixed cost per mile,” Cinquino explained. “It made those calculations a lot better for us and we were able to forecast better and understand our costs better.”
Energy Transportation Group is made up of four divisions – two are asset-based and two third-party logistics, or 3PL, divisions. The 3PL side mainly covers the company’s domestic and U.S. operations, while the others represent local cartage for specific shorter runs within a 100- to 200-mile radius. All of Energy Transportation’s mid- and longhaul trucks are leased, and make up approximately 90% of its fleet.
The second major benefit to leasing, as Cinquino pointed out to Truck News, is that all its trucks are on full-service leases, so any repairs or required maintenance is covered, both mechanically and financially, by the lease provider.
“Should we incur any downtime because of those mechanical breakdowns or repairs, our partners would have to supply us with interim vehicles while the repairs were being done,” said Cinquino.
This peace-of-mind means Energy Transportation continues optimizing its entire fleet and avoids downtime when a vehicle needs to be taken off the road. It also means the company does not have to worry about investing into its own maintenance facility.
“We didn’t have much expertise in that area,” said Cinquino. “We’re operators, and we really didn’t need to invest in our own garage with our own equipment and hiring of mechanics.”
Brian Holland, president and CFO for Fleet Advantage, a leasing solutions consultant out of Fort Lauderdale, Fla., said fleets are realizing that the old system of purchasing a new truck and squeezing as much life out of it as they can is not as cost effective as operating at a shorter lifecycle.
“They’re realizing they can achieve more savings on maintenance and repairs by moving to a shorter lifecycle, the highest variable and volatile cost of a fleet operation,” said Holland.
Pointing to his company’s Advanced Truck Lifecycle Administrative Analytics software, Holland said fleet operators can see a first year, per truck savings of US$16,928 by upgrading from a 2015 model truck to a 2020 model. For a fleet of 100 trucks, that equates to a possible savings of US$1.7 million, with fuel being the primary reason behind the reduction in costs.
“Fleets can save US$6,048 in the first year of fuel expenditures when replacing a 2015 sleeper, representing a 12% increase in fuel economy and reduction of CO2 emissions,” said Holland. “Maintenance and repairs also offer significant savings.”
Allen Kenore is a lease account manager for IRL Idealease based out of Kelowna, B.C., and he outlined several benefits of a full-service lease option over ownership: new fuel-efficient technology, reducing liabilities and debt load, access to specialized service, and as he explained, making the right financial decision.
“You benefit from the use of equipment that would otherwise be unaffordable or would require a significant cash outlay,” said Kenore. “You immediately eliminate repair facilities, expensive specialized shop equipment, and the training and employment of shop technicians.”
Another advantage to leasing over purchasing is flexibility.
Cinquino said fleets that lease have more control over the number of units they put on the road, which is important in an economic climate that has its ups and downs.
“When your leases come due, you’re a little bit nimbler in terms of understanding where the market is or forecasting where the market is going to be,” he said. “So perhaps rather than renewing some of those leases in some softer markets, you don’t have to renew them. You can downsize your fleet and reduce capacity in the marketplace if that’s what the market is asking for.”
There are of course some factors carriers must take into consideration when choosing whether to lease or purchase trucks. One of the negatives to leasing, according to Cinquino, is the initial cost, with payments, per-mile usage fees, and maintenance programs all adding up.
“Initial costings on a monthly basis are more expensive to lease than to buy,” Cinquino said, “however, these are operating leases so you’re not carrying that hefty asset on your financials as well.”
Holland said an analysis by Fleet Advantage does show there is a higher investment level with leasing over a seven-year period compared to purchasing. He added, however, that “investment is overshadowed by much larger financial losses on the four-year and seven-year ownership in areas such as fuel expenditures, maintenance and repair, tires, and financial losses resulting from disposal of the financed trucks.”
For fleet managers looking to gain assets, purchasing would be a clear advantage over leasing. Holland said equipment resale is a critical component for any fleet owning its trucks. He said a 5% gain in used equipment sales can significantly reduce finance costs throughout the lifecycle of a vehicle.
As Doug Oliver, senior vice-president of pricing and appraisals for Ritchie Bros. Auctioneers, explained, there has been a 32% increase in the number of used trucks coming into the market that are five years old, a 23% increase in six-year-old trucks, and a 12% decline in those seven years old.
And for those looking to sell older model trucks, how much they garner can vary compared to newer trucks.
“As can be expected, pricing isn’t as strong on these units compared to 2018 and 2019 units,” said Oliver. “In general, leasing and rental has become more popular over the last five to six years.”
In addition to options like Idealease and well-established providers like Penske Truck Leasing, which recently celebrated its 50th anniversary, OEMs are offering customers with the ability to lease their equipment. Energy Transportation is the process of transitioning all of its units over to Kenworth trucks as part of its leasing partnership with PacLease.
Daimler Trucks North America recently announced its Dynamic Lease Program during the North American Commercial Vehicle Show (NACV) in Atlanta, Ga., this past October.
Supporting a pay-as-you-drive model that matches lease payments with billable miles, the program draws on telematics data and is supported by the Detroit Connect platform in Cascadia trucks spec’d with Detroit engines. Base-level payments will reflect the truck’s depreciation, while the remainder will be based on mileage.
“The Dynamic Lease offers our customers an incredible amount of flexibility to manage their business and is a great complement to our other products,” said Tobias Waldeck, head of Daimler Trucks Financial, during the launch.
The program is initially only available in the U.S., to be introduced in the first quarter of 2020, and will not be limited to large fleets.
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