To lease or not to lease

by Julia Kuzeljevich

TORONTO, Ont. –Traditional truck ownership has long brought with it the perception of better control in terms of running company assets.

But in many situations, there can be some inherent risks associated with owning trucks.

Some of these risks include the value of the equipment at trade-in time, unpredictable maintenance costs over the equipment life, obsolete or stranded assets due to improper replacement cycles and increased costs caused by hiring, training and tooling technicians to keep up with ever-changing truck technology, said Olen Hunter, director of sales for PacLease.

Full-service truck leasing can provide the consistency of a set monthly payment based on a combination of lease truck services.

“Truck leasing can be a crucial strategy in accomplishing your company’s transportation needs, particularly if you want to take advantage of emerging technology, which is rapidly advancing in trucks in shorter and shorter cycles,” said Hunter.

But there are a few questions you should ask yourself before making the decision on whether to buy or lease.

If you’re considering a move from ownership to full-service leasing, first, determine the best use of your company’s capital, and whether transportation is your core competency.

Next, consider whether off-balance- sheet accounting through full-service commercial truck leasing would help your financial picture and line of credit with your bank.

Could you risk the resale value of trucks by owning, or would the guaranteed residual value of fleet leasing offer a better deal?

What is the cost of your time for managing fleet maintenance operations? Can you purchase high-quality truck parts and supplies at a low cost? Is driver turnover something that might improve through a full-service lease?

To determine whether a lease is your better option, look at the lease rate, the variable cost (mileage rate), if it’s a full-service lease, the length of the lease, the net present value calculation of the lease payments over the equipment’s lifetime, and the residual responsibility -is it yours or does it belong to the lessor?

Once you have gathered the data, said Hunter, you can perform a net present value calculation on the lease payment, the finance cost and the maintenance cost over the equipment’s lifetime. It’s also important to look at the net after-tax cash flows under ownership and leasing. This will give you the true picture of how depreciation impacts ownership and leasing cash flows.

Alan Stewart, area vice-president, eastern Canada region for Penske Truck Leasing, said the recent economic downturn in the transportation industry saw fleet owners and managers “bear down and look at every aspect of their business, look at every cost, such as ownership vs. leasing,” he said.

“The time that management spends on fleet maintenance, record- keeping, and administrative functions is important to consider about truck ownership. Leasing is more and more popular because it’s an alternative form of financing, with capital being limited. Full-service leasing allows them to free up some capital from that standpoint,” he said.

During economic downturns, market share for leasing companies traditionally improves, often as a result of some insecurity clients may be feeling about long-term ownership.

“Many companies turn to leasing during uncertain times such as these to help them mitigate risk. Truck prices are not going down, and even with these increasing costs, leasing helps companies reduce overall transportation costs with the newest, fuel-efficient technology. Customers also have the ability to utilize rental vehicles as needed on a short-term basis. As the market returns, we find most customers turning in the rental equipment for full-service leases,” said Chris Maccio, director of sales for PacLease, eastern US, Canada and Europe.

Full-service leasing allows companies to focus on their core businesses by outsourcing the maintenance and much of the administrative work associated with managing a fleet.

Quebec-based Transport Jacques Auger runs 80 units in the petroleum- hauling business.

They own their own trucks in Quebec City, since they have a maintenance facility, and lease some 30 tractors from PacLease in several locations.

President Jacques Auger said that the company opted for full-service leasing “to find a cost-effective way to control our operating/ maintenance fees outside our Levis office headquarters. We needed to find the package that would give us the right terms of payments versus the number of kilometres needed yearly along with the costs for maintenance on each tractor,” he said.

They like a full-service lease so they don’t have to worry about maintenance, downtime, or substitute vehicles. They run Kenworth T800s and they’ve been working well. The company is very safety-oriented and has a roll stability option on its leased trucks.

“The main advantage is the maintenance cost, which is a fixed price and therefore gives us a more stable way to budget. Another advantage with the full-service leasing package is the replacement option. When one of the tractors is being serviced or repaired (at the garage), there are no interruptions in our deliveries,” said Auger.

“We do have plans to continue leasing if the costs stay within our projected budget and if the quality of service is maintained.”

Another thing that has changed people’s mindsets, noted Stewart, is the new emissions requirements coming into force on the new engines, which will increase the cost of a tractor by some $8,000-$10,000 per unit.

This led, he said, to an uptick in long-term leases ahead of the new engine requirements.

“A lot of people are worried about the residual worth and cost of maintaining the trucks. We’d take the guesswork out in terms of their maintenance costs, etc. Our maintenance department has run prototypes a year ahead to test longevity and we’ve rated our costs to anticipate this. We’ve been forced to re-rate our cost model going forward in anticipation of those changes,” Stewart said of the new engines.

The sheer complexity and variety of new technologies, changing regulations and reporting requirements in the transportation industry is a major factor in the popularity of full-service leasing options, noted Maccio.

“Full-service truck leasing has become more popular as companies seek to simplify their operations and manage growth. Many customers today are taking advantage of additional services to help better manage their fleets including paperless fuel tax reporting, insurance, and on-board telematics. Especially in a down economy, leasing provides an off-balance-sheet source of financing that helps companies keep bank credit lines open. With full-service leasing, customers should expect a transportation solution focused on improving their business operation. It’s not just a financial transaction, but a consultative relationship where the leasing company can customize the vehicle and services to the customer,” said Maccio.

The average leasing customer has also become more educated.

“Companies want trucks and services customized for their business. Instead of a one-size-fits-all approach, new vehicles need to help improve their efficiencies. They want more of a partnership to help them understand new technology, government regulations and ideas to improve operations. For example, recently we were able to work with a customer to spec’ trucks that will reduce fuel consumption and meet environmental regulations. As a result of this process, they were also able to deliver the same amount of product with fewer trucks,” said Maccio.

Since PacLease is directly affiliated with Kenworth and Peterbilt trucks, customers can consult with engineers on the spec’ing process.

“If a customer wants better fuel efficiency we may look at truck components from a drag perspective. If they want greater payload capacity, we may look at reducing weight. More and more companies are concerned abou
t clean air legislation and want help developing strategies for green operations and sustainability. As new technology comes available, leasing is a great way to meet compliance and take advantage of new fuel-saving technology without the necessary investments to maintain it. This trend requires that we become experts in the technology as well as new rules and regulations surrounding environmental legislation,” he said.

While Stewart has not seen a real change in long-term leasing requirements, more flexible leases are available to certain customers.

“Our standard full-service lease with maintenance has been available for over 40 years. From a due diligence standpoint our credit requirements have changed in terms of being a bit more stringent. The one thing that has changed a bit is that used truck values have plummeted, so we’ve done a lot more used equipment leasing, because we can’t dispose of the vehicles as well. These can go a little bit shorter term because they’ve been partially amortized already. It’s become a little more prevalent and there are some customers preferring two-or three-vs. five-or six-year terms,” he said.

Used equipment leasing seems to be on the increase, as evidenced by the recent creation of the Web site

Nationalease, a North American full-service truck leasing organization, created the site in April, offering detailed information on hundreds of trucks, tractors and trailers available for sale.

Visitors can enter a product category and see the full list of available equipment, plus have it filtered according to year, make, model, stock number, and other details, to create a comparison chart to show similarities and differences among vehicles under consideration.

“Every customer we go to today is certainly looking at more of their costs. They’re getting more in tune with where their money is going and a more educated buyer for us is generally an advantage,” said Stewart.

“What customers are really looking for now is price competitiveness. In today’s economy generally people are getting the best price. It’s a fairly competitive environment, it’s come to me with your best value added proposition, your best price,” he added.

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