Fleets face a complex challenge today: How do they add capacity to meet burgeoning freight demand, yet keep capital outlays low? For many fleets, leasing could be the answer.
“The demand for freight [capacity] is increasing the need among carriers to get drivers, forcing many to raise wages and benefits,” says Jim Feenstra, vp-marketing for Penske Truck Leasing. “That translates into a lot more cost for their operations — cost many can't afford to tie up in equipment anymore.”
At the same time, mandated technology, such as low-emissions engines, and the rising cost of raw materials are making trucks and trailers more expensive.
The expiration of “bonus depreciation” this year adds to the fiscal burden of ownership. According to Ken Simonson, chief economist for the Associated General Contractors of America, “This tax provision let buyers of trucks and other equipment deduct 50% of the cost in the first year and then claim regular depreciation on the remaining cost. With that tax break gone,” he points out, “modernizing or expanding a fleet will cost more in 2005.”
In addition, some of the changes in the Heavy Vehicle Use Tax (HVUT) are more burdensome to fleets. Although the tax is now pro-rated, which means owners get a refund if they sell equipment before the end of the tax period, owners no longer have the option of making quarterly payments, says Simonson, and must pay the tax in one lump sum.
He also points out that since interest rates are rising, the cost of borrowing money to fund traditional methods of equipment acquisition is up as well.
All of that is fueling a boom in leasing services. “I've never seen the market so active,” says Richard Carson, sr. vp-fleet management solutions for Ryder System. “The leasing industry is booming any way you look at it. At Ryder, new accounts are up 47% and gross sales are up over 50%.”
In addition to capacity issues and a reluctance to commit capital to new equipment purchases, Carson sees long wait times for new trucks as an incentive for fleets to explore renting and leasing options.
“If you want a truck in a hurry, leasing is the way to go,” he says. “One-hundred-day delivery windows for new equipment is getting more common; many fleets can't wait that long. We've gone to our suppliers and requested more slots to help our customers get the equipment they need.”
Capacity and new-equipment costs are not the only reasons fleets are turning to leasing. It can also help fleets solve some of their maintenance issues, not the least of which is finding people to actually work on trucks in the first place.
“We have a poor supply of technicians — they are becoming scarce and relatively expensive,” says John Grainger, president of the National Truck Leasing Systems (NationaLease). “That's going to become more critical in 2007 and 2010, as new emission systems will require a high degree of skill to maintain properly.”
Reed Murphy, president of MHC Leasing, agrees. “Trucks continue to get more sophisticated. “That increases the difficulty in both recruiting and training mechanics.”
In general, fast-changing truck and trailer technology is making maintenance a more expensive proposition for in-house operations.
“We were buying and maintaining our own trucks, but it was getting more difficult to keep up with changes in engines, government regulations, and so on,” says Larry Gribble, distribution director for Clinton, NC-based Premium Standard Farms, who contracts with a local PacLease franchise for 44 Kenworth T800s and 80 trailers. “Yet we didn't want to contract our trucking operations to an outside company,” he says. “We wanted to retain a fleet of trucks with our name and signage that our customers would recognize.”
Michael Winburn, vp-operations for food distributor Shetakis Wholesalers, Las Vegas, says that his fleet switched to leasing to reduce the paperwork burden and stabilize costs so it could expand in a more cost-effective manner. “They can do a better job of taking care of federal and state fuel and mileage reporting and other regulations,” he explains.
“Plus, leasing stabilizes our fixed costs…and minimizes our variable costs,” he says. “For example, we don't have to pay a driver overtime to shuttle a truck to a distant repair facility; they handle it for us.”
“Truck equipment in particular is getting much too sophisticated for the average fleet; it's requiring more time and money, something only the really large carrier can afford,” says Peter Vroom, executive director of the Truck Renting & Leasing Assn. (TRALA). “Contract maintenance allows you to get access to technicians and diagnostic equipment at a lower direct cost to the fleet operator.”
Another benefit to leasing is all the headaches it can save fleets when they have equipment breakdowns on the road. “It's not just about getting your truck fixed,” says NationaLease's Grainger. “It's about getting a spare truck or finding another driver to take the load to make your delivery on time,” he explains.
But this is only part of a bigger leasing picture. “It's really about a fleet transferring a lot of the equipment ownership risks,” says Grainger. “Truck equipment is getting more complicated to maintain, more expensive to buy and harder to obtain — and residual values can be uncertain. Leasing is what fleets are using to mitigate all of that.”
Penske's Feenstra concurs. “The question is: How can you best abate risk? Doing it on your own or sharing it with a leasing provider? Take the emissions changes ahead in 2007, for example. We'll all have trucks equipped with that technology at some point, whether you buy it or lease it,” he says.
“With leasing, though, that risk is shared. A fleet doesn't have to handle maintenance and operational issues on its own,” Feenstra points out.
While the need to expand capacity at a time when equipment costs are rising is reason enough to consider leasing as an option, it's clear that the list of benefits is a lot longer than that.