TORONTO (Aug. 12, 2002) — Like anyone who will buy trucks this year, Don Decaire is staring into a haze of uncertainty. Starting on Oct. 1, most heavy-duty diesel engines will use exhaust gas recirculation or other means to cut nitrous oxide (NOx) emissions in order to comply with tougher pollution standards. The new hardware is expected to make the engines more expensive to buy, operate, and maintain, although no one knows for sure how much more.

That puts Decaire, who oversees about 9,000 vehicles as director of asset management at Ryder Canada, one of Canada’s largest truck rental and leasing firms, in a tough spot. One of the key selling points of full-service leasing is a predictable maintenance cost. Decaire ordered trucks for pre-October production where he could, but a leasing company usually buys equipment according to its customers’ wishes and on their timetables, so it’s not as able to alter equipment specs and acquisitions as a small for-hire carrier or private fleet might be.

“Internally, we’re struggling a bit to figure out how to set our prices,” Decaire says. “What none of us fully understands yet is what the cost of maintaining them will be, or how reliable they’ll be. We don’t have any more information than the next guy.”

That means truck fleet managers who view contract maintenance or full-service leasing as relief from EGR will find themselves right alongside Decaire and other leasing executives, crystal-balling their lease rates and running costs.

Complicating matters, many customers — particularly those whose primary business is not transportation — are not well informed about the new rules and are jittery when they hear about the added complexity of the engines.

“We’re trying to work with them so any change in the lease rate or the on-road performance of the vehicle doesn’t come out of left field,” says Doug Davis, president of Pollock NationaLease in London, Ont. Buying new is not an option. “Build slots are full; I wouldn’t know where to go for a pre-October truck today,” he says.

Instead, customers are asking about extending their vehicle replacement cycle, sticking with the trucks they have. That would seem to be a sensible solution, but few leasing companies are eager to break well-established trade cycles and crimp their supply of used equipment, a key source of revenue.

Lease rates are going to be “a bit of a crapshoot as we go into the fall,” says Peter Roy, national sales manager at Paclease Canada. “There are many costs the customer never sees that we’re going to have to absorb or factor into the price.”

For example, most leasing companies include vehicle substitution in their pricing scheme. “The customer is traditionally free and clear of those subbing fees,” Roy says. “The leasing company is supposed to have vehicles on hand in case there are problems. If we keep lots of spares around but there are few problems with the new engines, we’re out of balance. If there are many problems with the engines, the cost of subbing becomes huge. Either way, it’s a big expense. How do we recover it?”

A more basic concern about pricing, however, involves residual values.

“The depreciable cost of a vehicle is directly reflected in the lease rate,” explains Oliver Silver, director of marketing and pricing at Ryder Canada. “We’re not sure where those residual values will end up. We might find, five years from now, that pre-October 2002 vehicles are worth some multiple more than post-October vehicles that are younger. We don’t know. I don’t think we’ll know the true costs for another two, maybe three years.”

Nor can Silver predict the cost of training technicians and carrying parts and equipment the new engines will require.

Doug Davis tries to look on the bright side. “If there’s a positive for us, it’s that the emissions deadline has acted as a catalyst for people to make a conscious choice” about full-service leasing, he says. “In the past, people could say they want to think it over, and delay and delay and simply choose to continue to repair their trucks instead of converting to a full-service lease. Now, I’m sensing that people are feeling more motivated.”