Article

Industry Trends Prompting More Fleets to Look at Leasing Equipment

May 2011, TruckingInfo.com - Feature

by Deborah Lockridge, Editor in Chief, Editor in Chief - Also by this author

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As trucking companies cautiously poke their heads out of their shells after struggling to survive the recession, they're finding higher prices for new equipment,
concerns about the availability of credit and use of capital, uncertainties about new emissions technology, rising fuel costs, pressure to be "green," a volatile used-truck market, and the need to replace aging fleets in an era of a coming driver shortage and more regulatory focus on maintenance via the Federal Motor Carrier Safety Administration's CSA enforcement program.

Leasing equipment is one strategy to consider.

"We can't forget we've just come out of two very, very challenging years," says John Deris, senior vice president of national sales for fleet management solutions, Ryder System. "A lot of companies have put off fleet investment. Equipment has gotten much older. They have to make adjustments in their maintenance operations. People are finally seeing the demands of putting off decisions. Aging fleets and more stringent emissions regulations are forcing people to invest in new equipment.

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"All these issues have come after them all at once," he says. "The excuses to delay are slowly running out."

Some companies are exploring leasing as a way to cope.

"I know first-hand from talking with customers, where we've traditionally always done a retail deal for them, [many] want to evaluate and look at a couple of different options," says Geoff Robinson, vice president for sales, marketing and remarketing for Daimler Truck Financial.
Gene Scoggins, president of NationaLease, cites a customer that owns about 80 trucks. "They had come through the tough economy very well. But they had sold off trucks, had not replaced trucks, had not maintained their trucks properly."

This customer decided to go with full-service leasing, where the lessor handles all the maintenance, repair and administrative duties in addition to simply leasing the piece of equipment - everything but the driver and the insurance.

"That gives him a way to get new equipment," Scoggins says. "It will cut his maintenance costs dramatically, and it gives him peace of mind knowing what it's going to cost him to run that truck two, three, four years down the road."

Capital and cash

One of the biggest trends affecting the lease-vs.-buy decision is changes in the capital market. For many companies, it's harder to get access to capital and financing these days. Leasing is more likely to be available, and is less impacted by changes in the banking market.

"Capital availability over the last three years has shifted pretty dramatically," says Brad Hoffelt, senior vice president of analytics at GE Capital Fleet Services. "There's more liquidity today in the market, but it's available to fewer companies." Leasing, he says, provides a good alternative in that environment.

It's not just the availability and cost of financing at work. There's also the question of how your company prioritizes use of its existing capital.

"If you're going to own equipment, even if [you have the money in] the bank, you have to make a decision on whether to tie up your capital in owning equipment or use it for something else," explains Mike Dreller, CFO of Xtra Lease, which specializes in leasing over-the-road trailers. "The difficulty in financing is shining a brighter light on the financial flexibility of leasing."

Financial flexibility isn't the only way leasing offers fleets flexibility. For instance, if a fleet needs more trailers to serve a new customer, he may be able to lease trailers for the length of the contract with the customer. This is especially valuable if the new customer needs a different type of trailer spec than those in a trucking operation's existing fleet.

Some fleets may find it's beneficial to own some trailers but lease others. "They can forecast demand and equipment for some portion of their business, but for an incremental part of their business they can't do that as well," Dreller says. "So they've mitigated their risk on that incremental part of their business."

Beyond capital concerns, there's the cash flow consideration.

"Generally leases provide the lowest monthly cash flow from a customer's perspective," says Tom Guse, vice president of truck financial services for Volvo Financial Services. "That's critically important." And there's typically less up-front money involved.

Cash flow is one reason Jim Mickey, co-owner and president (administration) of Coastal Pacific Express in British Columbia, and an HDT 2010 Truck Fleet Innovator, leases all of his trucks.

"Our approach to leasing our rolling stock is driven primarily by the desire to match our monthly income to our monthly expenses as close as we are able, to manage our income taxes, and to keep our internal cash as free as possible," he explains. "It appeals to us to have a monthly payment that approximates the actual monthly value of the asset. The net effect is a nice clean monthly picture on our P&L with no considerations for 'equity build' in the fleet." Mickey also points out that the leasing strategy frees up cash to fund other targets, such as accounts receivable.

Some fleets also may find leasing offers tax advantages, depending on the company's operation and how the lease is structured. "As you head into an environment where there are new tax incentives for things like alternative fuel technologies or the up-front depreciation credit, utilizing all those tax benefits can be a challenge for companies that want to own the asset," says GE's Hoffelt. "For companies that may be dealing with an AMT tax situation and they can't use all those credits, leasing offers an alternative."

The recent extension of the 2010 Tax Relief Act, which allows lessors to write off 100 percent of equipment costs in 2011, also will affect leasing.

"If somebody needs depreciation, buying can often be a better solution than leasing," explains Volvo Financial Services' Guse. "For customers that aren't making as much money or don't need the depreciation, companies like mine that act as a lessor might be able to make them really competitive offers, because we ourselves can depreciate the equipment over one year. Their monthly payment will be reduced. But it really depends on the customers' tax strategy and their tax position."

Maintenance and more

Many leasing companies can provide maintenance along with the equipment lease. Options range from entirely maintaining the equipment in your own shops to a completely outsourced, full-service program where the customer doesn't need any mechanics or shops. Emergency roadside assistance is another option.

"The equipment is getting so highly technical to work on, more and more customers are looking for a turnkey solution to their transportation needs," Guse says.

These issues only get more difficult as new EPA 2010 engines come into the mix. Equipment prices have gone up dramatically due to EPA-mandated emissions, but that's only part of it. There's also the ability to adjust from a maintenance standpoint, and to make sure diesel exhaust fluid will be available for selective catalytic reduction, the technology being used by most manufacturers to meet EPA 2010. Ryder, for instance, recently announced it will be offering DEF at every full-service location in North America; it's already available at more than 550.

"The complexity of the new emissions, whether it be EGR or SCR, I think that's another bonus" of leasing," says Jack Saum Jr., dealer principle of Beltway Inter­national in Balti­more, who started the company's leasing business, Idea­lease of Balti­more. "Small operators are going to be less and less inter

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