Get the Most from Your Lease
Decisions about the best vehicle leases involve more than payment schedules
Private fleets have been known to choose vehicle leases over outright purchases for several reasons. Financial teams might focus on the promise of predictable monthly payments that can be written off in their entirety, without straining debt-to-equity ratios. Operations teams may be attracted by the low-risk way to expand or reduce equipment counts based on seasonal demands.
Mario Marin, major account sales executive at Brossard Leasing, thinks the promise of predictable maintenance costs may be the most enticing factor of all.
Maintenance needs will vary over the life of any truck. Costs tend to be relatively low in the first two years of a vehicle’s service, rise in the third year, drop in the fourth and then spike in the fifth year as individual components need to be replaced. This can be difficult to explain to a company’s senior financial officer who has limited experience with mobile equipment. And experienced fleet managers who oversee a limited number of assets face their own challenges when trying to predict future maintenance expenses.
“With a full-service lease, if you can tell me how much mileage you’re doing on an annual basis, I can pretty much print a budget for the next five years on what your costs will be,” Marin says.
The option can be a particularly welcome fit for a private fleet. “When you look at a private fleet, their core competency may be brewing beer or distributing steel. It’s not trucking and truck maintenance and the procurement of rolling assets,” says Chris Fairey, Ryder Canada’s vice-president of business development. “When you look at the costs of trucks with the new [emissions] technology, and when you look at what it takes from an operational perspective, the new technology is complex. It requires more tooling, more expertise, more road service support.”
“Even the large fleets can’t keep up,” agrees Tim Derrough, vice-president and general manager at Altruck International.
The perfect lease
As valuable as predictable payments can be, fleet managers need to consider several factors when looking to structure a perfect lease. Something as fundamental as monthly payments will vary depending on the leasing company’s own purchasing power, Marin says. Equipment choices also differ, since some providers are married to specific nameplates. Still other operations may offer better deals to fleets that are able to accept pre-defined equipment spec’s.
The leases don’t even need to rely on new equipment.
Fleets which limit their trips within the Greater Toronto Area do not need a brand new trailer, explains Jason Ciciretto, vice-president of GTA Trailer Rentals. “They’re looking for a cartage-type trailer which is typically in the vintage of ’99 to 2002. There’s also a storage cartage need, where trailers typically get loaded for peaks in demand. [Fleets] store them, and they don’t do a lot of miles over the road.” Best of all, an older van trailer can be secured at a lower price than its newer counterpart.
Meanwhile, fleets which traditionally buy their trailers may turn to a lease when trying to address a short-term surge in freight. “In the short term, it makes no sense to buy,” Ciciretto says. “It comes down to the customer. Is the demand something we’re going to continue to see? Is it short-lived?” A fleet that decides to lease the trailer in this scenario may want to maintain the option of returning the equipment with relatively short notice, extending the agreement for a longer term or even converting the deal to a lease-to-own model, essentially capitalizing the asset. (He calls the latter option a providing-your-cake-and-eating-it-too lease.)
Some private fleets address seasonal business cycles by leasing their trucks for only part of the year and then turning the equipment over to another user, adds Bob Hotton, national sales manager for Maxim Truck and Trailer’s leasing division. “I have clients that lease trucks 10 months of the year, and the other two months of the year they don’t need them.” Equipment which sits unused in the summertime might meet a moving company’s seasonal needs. In other cases, the units could simply be fed into a broader rental fleet, supporting other fleets that are trying to address their own peaks in seasonal demands.
“Ultimately, the general consensus is that fleets are still fairly conservative in terms of making a large capital expenditure. Leasing allows them to address their fleet requirements and still insulate them from risk,” Ciciretto says.
A healthier economy is having its own influence on the deals. “We’re seeing some players that are willing to serve longer-term leases, where two to three years ago you would not see that. No one would consider signing a 12-month or longer lease,” he says. “Now we’re seeing that come back.”
Of course, finding the equipment is merely the beginning.
Under a full-service lease, something as basic as the maintenance network’s hours and locations will determine whether technicians are available when and where they are needed. While one fleet will require support around the clock, another may be able to accept limited hours. Even a fleet with its own maintenance facilities can require added support along specific routes or closer to shipping destinations.
The infrastructure behind the promised level of service will make a difference of its own. Two leasing providers may offer onsite repairs, but one of them may have 10 times as many service trucks, Marin explains. Even the type of service vehicle can make a difference. “We have 12 of them working on three shifts, and they’re not pickups,” he says. “They’re real service trucks worth $50,000 apiece plus all the equipment that goes in them.” It can be the difference between a roadside repair and towing back something back to the shop.
The after-hours support varies widely, too. While one company answers calls with a live person, another requires stranded drivers to leave a message. For its part, Idealnet requires phones to be answered in three rings, maintenance teams to be dispatched in 30 minutes, preliminary diagnostics to be completed in 30 minutes, and repairs to start within 30 minutes after a repair is authorized.
Equipment delivery demands can make a difference as well. Some leasing companies require customers to arrange moves to a shop. Others offer the service at an added cost for every pickup and delivery. Depending on schedules and travel distances, a day in the shop could suddenly extend into three days without a truck, requiring a replacement unit.
And a quick replacement for a reefer will be particularly important to a fleet that ships temperature-controlled freight, Ciciretto observes.
The power of information
The level of support does not end there.
Fleets which lease their equipment also have the chance to maximize the data collected through telematics, which can monitor everything from vehicle locations to measures such as idle time, fuel economy and hard-braking events, Fairey says. But compiling the data is just the beginning. A fleet with its own trucks could still do that internally. The real value emerges when a leasing company can compare a customer’s experience to the benchmarks established by similar operations. Think of it as a shift from an internal report card to one which grades performance against the industry at large.
It is not the only way that information can be a powerful thing. The maintenance teams which support a full-service lease will certainly need ongoing training to keep up with changing equipment such as emission controls or a shift from drum brakes to disc designs.
Derrough adds that some leasing companies can provide support for operations teams in the form of regular driver meetings to discuss safety and compliance, or answer questions about regulations such as those which govern border crossings. This extra help will be particularly important to private fleets overseen by controllers or general managers who have limited exposure to the business of trucking, he says. “We build relationships with people and try to be a business partner.”
“Make sure all the services you were promised are written in there clearly,” Marin adds. “Sometimes there’s a lot of pushing: ‘Oh, yeah, yeah, yeah, we’ll do it,’”
Above all, one of the best indications of future service will come in the form of references from existing customers. It’s why Hotton is surprised that many fleets seldom ask for the names.
As important as acquiring the equipment will be, there may be a time when it has to be returned, and some leases are easier to cancel than others. A wide open-ended lease, typically designed for a short term, allows for the equipment to be returned at any time. Term leases, running for one to 10 years, will include different terms and conditions. GTA Trailers, for example, will typically charge three months of interest to carry the returned asset, but will waive the fee if it can find another customer to lease the equipment.
“Say something isn’t working out or they have a unit too many,” Hotton says. “There are cancellation clauses. There are circumstances where maybe they are heavy one unit. How do we take it back? What do we do? What does that look like if there’s a slowdown in their business or a loss of drivers?”
Agreements can typically be concluded on an anniversary date with 30 or 60 days of prior written notice. “What would you do in the case I had to bring back a unit?” Hotton says, referring to important factors to discuss. “A lot of sales guys don’t like to answer that question.” A highly specialized unit with a crane may also face different rules than equipment that can be easily absorbed in a broad rental fleet.
As varied as the options are, there may be another important change to come. Today, full-service lease agreements are treated like operating leases on a company’s balance sheet. There is a move to change the way international accounting rules look at the deals. “They want them to become capital leases instead of a footnote on your balance sheet, where an operating lease is today,” Hotton says. “If the term happened to be over five years, the tax and accounting people are looking to change that law so it would virtually become a capital lease. That changes the game a little bit because now you’ll have to use the depreciation rule instead of 100% tax write-off.”
Even if that happens, Fairey stresses that several other leasing advantages remain. The value of ongoing maintenance support and expertise cannot be denied. “Our business is to understand [a fleet’s] application, understand their business, and then look at the best way to add value and create something that works for them.”