IN PRINT — Financial Planning: Structure a lease that’s right for you
Posted: October 4, 2017 by Jim Park
What is it that you do best: fix trucks, manage toll payments and fuel taxes, change tires, sell used trucks, or move freight? If you’re even a modestly successful fleet in today’s market, you’re probably pretty good at most of the above, but you probably wish you could devote more time and resources to your core competency – moving freight.
About 10 years ago, André Boisvert, vice president and co-owner of Lachine, Quebec-based Trans-West Group, concluded that he was better at transportation and logistics than he was at maintenance and fleet management. Coming out of the last recession, the company decided to ditch its wheeled assets and rent equipment. That worked well enough, but a few years later Trans-West Group decided to go all-in on a custom-designed full-service lease plan with PacLease Canada. He says it was the best move he ever made.
“It fixes your cost per mile precisely,” Boisvert says. “I know to the penny what I will be paying for that truck right up until the day they come to pick it up when the term is done. And they look after almost everything in between.”
Trans-West runs a fleet of about 300 trucks, each averaging 450,000 kilometers per year in team operations to California, Florida, and Western Canada. Uptime is critical, so the full-service lease assures the trucks are in top condition when they go out, and through a guaranteed residual program, the trucks are disposed of at the end of the term by the leasing company.
“In the past we had to sell those trucks ourselves,” says Boisvert. “Let’s just say getting rid of those trucks consumed a lot of time and energy, and we didn’t always do well on the price. When you put 100 trucks on the market all at once with close to a million miles on them, you’re not in a good bargaining position. Now, I don’t have to worry about that. I hand Paccar the old keys and I get a new set of keys.”
On top of that, Trans-West gets the benefit of the latest fuel-saving technology each time a portion of the fleet is renewed.
That may sound like an expensive proposition, but it’s really not.
While a lot of fleets understand the benefits of leasing equipment, many feel that the cost of such a program, particularly a full-service lease, is just too high, but Peter Hampton, director – business development for Ryder Canada, says customers are often surprised to find the cost associated with leasing is often less than ownership – if they have truly captured all of their own costs.
“Customers tend to believe that there are certain benefits to leasing, but their initial reaction is that it’s more expensive than owning,” Hampton says. “While some fleets do a better job than others of understanding what it costs to maintain a fleet, I have yet to go through an engagement with a customer where they have fully captured and understood the complete maintenance-cost picture.”
The costs Hampton refers to include those associated with maintaining a staff of technicians, their training and upgrading costs, the cost of diagnostic tools, shop supplies, heating and electricity costs, amortization of the building housing the shop, and any associated environmental costs.
Hampton says a number of companies that have historically maintained their own equipment have given it up and handed that responsibility to Ryder.
“The desire to explore the switch to full-service is driven in many cases by the pain associated with the new technology,” Hampton says. “Many fleets pre-bought ahead of the 2007 emissions changeover and they had to make do with equipment that was running 1-1.2 million miles (1.6-1.9 million kilometers). When it came time to refresh their fleets, the question arose about whether they should invest millions of dollars in diagnostic equipment and training for the technicians, or should they explore a full-service lease option. The interest from fleets across North America in (full-service leasing) over the past five years has picked up significantly.”
Trans-West is good example of how the transition can improve not only the bottom line, but operational efficiency. In what is becoming a fairly common arrangement, Paccar has “taken over” the fleet’s maintenance facility and staffs it with Paccar-employed technicians. They work on the fleet’s equipment, and also other lease customers’ equipment. Trans-West divested itself of the shop overhead, while Paccar picked up a maintenance facility. Boisvert says this solution eliminated a significant pinch-point in his operation.
“Before [Paccar] came into my shop, I was shunting trucks to their shop,” he says. “I had several people each day tied up just moving trucks, or sometimes I had to wait for a truck because there was nobody around to move it.”
No one size fits all
There are many reasons to consider a lease that goes beyond equipment and operations. There are financial benefits in some cases, but these decisions require some professional financial advice. “I always ask the customer what their accountant recommends,” says Philippe Camp, national account sales executive, Paccar Leasing Company, Canada. “Is it a taxation question? Is it a cash flow question? Is it an accounting question? If you’re a cash-rich company, you might need depreciating assets. Or is it better for the company to have a pure operating expense item? It may all come down to what your accountant recommends.”
And, of course, there are different types of lease arrangements to suit different needs. Common operating leases are off the balance sheet; there are pure finance leases that do not incorporate any maintenance whatsoever. These are just another way of financing equipment over time.
The kind of lease arrangement you choose also depends on what kind of risk you want to take on. Do you want to take on the back-end residual risk and ownership at the end of the lease? Do you want to walk away at the end, or own it and take the risk.
“It depends on the business and what the fair market play on that truck might be at the end,” Camp says. “If the truck has a 10-year life span and you lease it to own over five years, you may have some value there. If you’re a local or low-mileage operator that keeps a truck for 10 years or more, then ownership is probably the better way to go.”
Either way, ownership or lease, capital or operating lease, if you don’t know the trucking business cold, or if you get caught in a situation where the business plan changes dramatically in mid-stream you could get burned. Leases often do not offer the “flexibility” ownership does. Go in expecting a pleasant surprise from a cost perspective, but go in with eyes wide open.
Benefits of Full-service Leasing
Sometimes known as outsourcing, a full-service lease arrangement brings to the fleet the benefits of scale and the expertise of a much larger organization, while minimizing risk and controlling costs. It can also provide flexible maintenance schedules, while improving uptime and the ability to capture data related to operating costs. Here are a few ways fleets of any size can benefit from a full-service lease plan:
Straight-line cost control: Negotiated rates for maintenance and related services, and pre-determined schedules bring predictability to the maintenance operation. “It gives fleets the confidence of knowing what their maintenance spend will be, making it easier to manage costs,” notes Peter Hampton, director of business development, Ryder Canada.
Uptime: This is probably the greatest value any leasing program has to offer. In a full-service lease, the cost of maintaining the truck falls to the lease provider or the lessor. “It’s in the lessor’s best interest to make sure that vehicle is operating out on the road because that’s where we make our money,” says Hampton. “If it’s in the shop being repaired, we are losing money.” On top of that, many full-service leasing plans offer or include replacement vehicles while maintenance or repairs are being performed.
Economies of Scale: Leasing companies operate tens of thousands of vehicles and can maintain a vehicle more cost effectively than a private business owner running a smaller fleet. “Leasing companies can effectively stay on top of all the changes in technology, the government mandates, and the cost of the tooling and training needed to repair and maintain a modern vehicle,” says Philippe Camp, national account sales executive, Paccar Leasing Company, Canada.
Bundled Service Packages: Full-service leasing is not an all-or-nothing proposition. Fleets can negotiate suites of services. A fleet could, for example, keep its tire program or negotiate to do minor repairs to vehicles if the staff and the facilities are already in place, rather than paying the lessor to manage those tasks.
Administrative Services: Leasing companies are experts at capturing and sorting data for maintenance and monitoring performance. That data can also help manage the fleet by providing key performance indicators, and it can all be managed by one provider. There’s also the option of consolidated billing for everything from fuel and consumables to toll roads, International Fuel Tax Agreement (IFTA), and vehicle licensing.