Article

Leasing Lessons

June 2009, TruckingInfo.com - Feature

by Tom Berg, Senior Equipment Editor, Senior Editor - Also by this author

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CARB is a four-letter word to most truckers, who cringe every time the people who run California's Air Resources Board dictate another set of rules.
For example, CARB's rules on older transportation refrigeration units (what it calls TRUs) require equipment to clean up exhaust from the reefer's diesel engine. Affected are model years 2000 and older, whose exhaust systems must be fitted with approved diesel particulate filters or their engines replaced with new ones by July 17.

The rules affect anyone who operates TRUs in California, even if vehicles are domiciled out of state. Owners should be planning now to retrofit their reefers, or be sure they are taken elsewhere and replaced with newer equipment by the July deadline.(The previous deadline was Dec. 31, 2008, but a legal challenge delayed it.) Retrofitting or engine replacement costs $7,000 to $10,000 per unit, and buying an entirely new reefer (and probably a trailer) costs many thousands more. Some owners are handling it, but others might be in a bind. Leasing may offer an answer.

"If I want to ship into California, I have to have equipment to do that," says Kathleen O'Leary, a vice president at Xtra Lease in St. Louis. "We don't retrofit, because our strategy is to have a young fleet; about six or seven years is the limit. We have some older reefers out there and will

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get rid of them. We'll buy new for CARB."

The company can lease them to truckers for very little money up front and a variety of payment schedules, so they can continue to do business in California and still meet the law.

It's not the only reason to consider leasing trailers.

Fast and Flexible

Quickly switching equipment to gain new loads is a common reason for fleets to lease trailers, O'Leary says. Like most other leasing companies, Xtra Lease's revenue is down during this recession, "but the good news in this business is that a lot of companies want to grow and are looking to get into a different market niche than what they're now in, and they're looking at financing," she says. "And leasing companies can be a bank and supply that financing. So trucking companies that are healthy and are looking to expand, they come knocking on our door."

Conversely, equipment no longer needed can be quickly turned in, within limits, and the fleet is not saddled with many idle units. When more freight begins moving, it can expand again. Xtra Lease has 100,000 trailers, including vans, reefers, flatbeds, extendables, single- and double-dropdecks, and 80 branches to lease and service them.

On-time Delivery

Reliability is another reason to lease, according to Don Clair, transportation manager at Rakhra Mushroom Farm Corp. in Alamosa, Colo. How to grow mushrooms under-roof at high altitude is a story in itself, but once picked, the tasty fungi must travel fast. Fresh mushrooms are very perishable and there's little leeway for late deliveries. Food distributor and supermarket customers demand on-time deliveries. A missed delivery can very well result in a ruined load, and upset the scheduled loading of commodities to be back-hauled to Colorado.

Rakhra leases 13 Kenworth W900L sleeper-cab tractors, three Utility 53-foot trailers with refrigeration units, and three drop-deck trailers through MHC Truck Leasing, the local PacLease franchise in Colorado Springs and Pueblo, Colo. The drop-decks haul pallets of processed compost that was used to grow mushrooms to garden stores. The company also owns and operates 15 other refrigerated vans and two flatbed trailers. PacLease handles the maintenance on the trucks and reefer units. If there's ever a problem on the road, servicemen are quickly there with repairs or a substitute vehicle.

The Debt Equation

Leasing also frees up money for other uses, particularly if a company's primary business is not trucking. Food and beverage producers and manufacturers of many types are typical customers who'd rather use funds to sustain and improve their own operations. Leasing also frees up a company's access to credit.

Coover Trucking of Erie, Kan., delivers powdered cement in bulk tankers to concrete producers in Kansas and several surrounding states. Although he buys his trailers, President Don Coover believes leasing his tractors not only allows him to acquire new, efficient power units he otherwise couldn't afford, but also helps him get financing to buy the high-capacity trailers that are important to the operation. If he were financing the five tractors, local banks would be uneasy about lending him the money for the trailers, he figures.

"As a result of leasing our trucks, I was able to approach our company's bank about borrowing money to buy bulk cement trailers, which we needed in order to haul more product and meet demand," Coover says. "If we had to buy those tractors instead of leasing them, it would have meant borrowing another $800,000 to $900,000. That's a helluva lot of debt load to be carrying. There's no question that the bank would have been reluctant to lend us money for the trailers carrying that kind of debt."

Ownership Options

To be sure, there are strong arguments for buying trailers and tractors. Many private and for-hire carriers have the resources and infrastructure to purchase and maintain their own equipment, and the know-how or contacts to take care of selling it all.

Owning provides greater control over the equipment's design, from choice of components to color, lettering and lighting. (You want purple vans with Christmas tree lights and spread tandems with rear steerable axles? Chances are the leasers won't want to supply that, because no other trucker is likely to want such contraptions and resale would be highly questionable.)

For the many thousands of truckers who prefer to own, leasing companies also offer an avenue to buy used. For instance, Xtra Lease recently announced that it's buying 2,000 new trailers, selling its older equipment to a variety of users. "Our type of equipment tends to be generic and resalable - easily maintainable, driver friendly, the Xtra Lease spec that we purchase from many vendors - a consistent fleet," O'Leary says.

There might be some good deals there.

From the May 2009 issue of Heavy Duty Trucking.

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