To lease or not to lease?

by Adam Ledlow

TORONTO, Ont. – Several years ago, many fleets believed owning their own trucks made the most sense financially. But with recent advances in technology and strict government regulations, leasing may soon become a more desirable option.

According to the National Private Truck Council, about 50% of private fleets use some form of truck leasing. An annual survey conducted by the council shows an increase in the number of trucks being leased each year, though the profile of the leasing customer is evolving beyond manufacturers and distributors, says Bob Southern, president of PacLease.

“In the past, customers were typically small- to medium-sized private fleets,” he says. “But today, all types of fleets are discovering the benefits of full-service leasing.

There are two main categories for leasing: operating (full-service) and financial leases. With a full-service lease, the leasing company adopts all costs associated with ownership, including maintenance costs.

With full-service leasing, beyond paying the actual leasing bills each month, the only thing companies really need to do is to put the driver behind the wheel, put the fuel in the tank, and insure and paint the vehicle. With a financial lease, the residual value of the contract is set and the lessee must purchase the vehicle at the end of the term.

Southern says the trend to full-service leasing is expected to accelerate even faster in the next few years as the complexity of trucks continues to evolve.

“If you’re running fewer than 50 trucks, it’s going to be increasingly difficult to justify your own shop,” he says.

“Bottom line, with new technology in trucks, full-service leasing allows you to off-load maintenance to a trusted partner. It’s the leasing company’s job to make sure equipment is well-maintained and running properly. You insulate yourself from unpredictable or erratic maintenance costs. That burden is shouldered by the leasing company.”

Leasing companies operate in a variety of ways. Nationalease is an affiliation of more than 100 entrepreneurs who own leasing companies across North America. Working under the Nationalease umbrella, companies operate as a team in an effort to benefit the group as a whole. For instance, if a truck leased from Montreal breaks down in Los Angeles, the customer can bring it to a local Nationalease affiliate where the truck will be “treated like it’s their own equipment,” says Doug Davis, president of Pollock Nationalease. “They make it a priority, as opposed to a truck dealership scenario where you get behind everyone else and wait in line.”

Penske, on the other hand, operates as one corporation, rather than a governing body overseeing a network of affiliates. Penske is one of the largest full-service truck leasing and rental companies, with 41 locations across Canada and 750 locations in North America. Each location is part of one corporation which oversees the whole operation.

“We’re one company, one corporation, with one chain of command,” says Alan Stewart, vice-president, Penske Canada.

“If you pull into any Penske location and you’re not happy with the service, it goes all the way to the top, whereas a lot of leasing companies are independently operated or independent dealerships.”

One of the key reasons leasing has been thrust to the forefront is the recent changes to engine emission regulations. With 2007 truck engines now meeting the EPA’s standards, the technology has become much more complex, and with complexity comes outsourcing.

“These engine technology changes add another level of complexity with respect to the maintenance of the vehicle, the residual risk, the running costs and knowing when you have to take it in for certain types of procedures,” Davis says.

He says private fleets that keep the focus on their core business will likely find a better return in the long run.

Trucking companies are another matter altogether. Because the cost element associated with purchase and maintenance in a larger fleet is so much higher, Davis says the 2006 pre-buy may temporarily cause leasing companies to see less business in 2007.

“We expect to see more rentals in ’06 because we expect people will try to delay purchasing the technology just to see if they can work out a few of the bugs. I do think there will be folks that will consider changing from ownership to full-service leasing because of that additional complexity there,” he says. “However, any sort of decline we find in the number of leases in the upcoming year will in no way mirror the decline in production the OEMs are expecting.”

With OEM’s estimating an increased cost of $7,500 to $10,000 on a new truck, cost is certainly a key factor when deciding whether to lease or buy. As well, the new trucks are currently unproven in terms of fuel economy, mechanical fitness and resale – the main types of things people look at when approaching full-service leasing.

Because leasing companies are in charge of the up-front purchase price and maintenance associated with the truck, full-service leasing may prove a very desirable option post-2007.

But leaving the push of new technology aside, in the world of just-in-time deliveries, few fleets can afford to have a truck sitting on the side of the road for an extended period of time, particularly if it is loaded. Leasing helps eliminate this risk by increasing uptime.

“At PacLease, for example, if there is a down vehicle, we determine the nature of the problem and prescribe the best course of action to maximize uptime,” Southern says. “Typically, the quickest solution is having the truck repaired at the roadside or taken to one of our more than 50,000 service points.”

Owning trucks is a bit like timing the stock market, Southern says.

“Hit it right when it comes time to sell, and you’ll reap high residual values. If your timing is wrong, the value of your equipment may be too low to make a much-needed move to new trucks,” he said. “From our perspective, there has never been a better time to lease vehicles,” Southern says. “We take the risk out of operating a fleet of trucks and that’s a comforting notion for our customers.”

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