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What Keeps Leasing Company Execs Up at Night?

April 21, 2011

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Technology is always a double-edged sword. Do we control technology or does it control us? The goal is for technology to make our lives easier-and safer-but it can often have the exact opposite effect. 

In a panel discussion at NAFA's fleet conference in Charlotte last week, the heads of the major leasing companies weighed in on the issues affecting fleet management from a lessor perspective. Managing technology is just one of the things that keep these executives up at night. The answers to that question and others are woven into the topics below. 

Technology - the Cure and the Problem

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As Mike Pitcher of LeasePlan pointed out, technologists believe the rate of change will be five times faster in the next five years than it has been in the last 25 years. "We have this rush of technology and we're not sure how to use it," he said.  

This is especially true-and dangerous-when applied to vehicles.  

Greg Tepas of Emkay put the distracted driving issue in perspective: Only 10 years ago, the penetration rate of cell phones was 36 percent. Today it stands at 96 percent. America has gone from sending 81 billion text messages in 2006 to 1.2 trillion today. While drunk driving causes 13 percent of accidents, 28 percent are a result of mobile phone use. 

Pitcher recounted speaking to a group of college students at the University of Georgia. Out of 325 students, only seven were wearing watches. Pitcher brought up a study that connected a cell phone ring with a release of dopamine. The message: kids use cell phones to tell time, and to do just about everything else. This generation is constantly connected and dependent on technology, and they are entering, or already in, the workforce. 

"We have a responsibility to educate our clients on technologies they can use to prevent accidents," said Tepas. Some technologies to help are now OEM installed, such as lane departure warnings and blind spot awareness systems, while new wireless technology will disable mobile devices while driving. Fleet management companies have captured data that can better educate fleets on their own accident patterns, he said. 

Pitcher said some fleets operate on the dangerous premise that "We don't have a cell phone policy so no one can break it." Pitcher sees an ever-increasing challenge in our ability to manage the need to stay connected in a vehicle going 65 mph. "The marriage of technology and mobility scares the heck out of me," he said. 

Technology has facilitated a less centralized work environment, though this makes influencing driving behavior even harder on fleet managers, said George Kilroy of PHH Arval. 

In general, technology is forcing quicker fleet management decisions. "Fleets must react quicker to changes in interest rates and fuel prices," said Kilroy. "This discussion should happen at least once a quarter." 

"A year is an artificial number," said Jim Frank of Wheels. "Setting fleet policy used to be an annualized thing, but with technology we all can change on a dime as needed." 

Telematics systems are becoming integrated on an OEM level. While today's systems are aftermarket, the ability to track your drivers and measure their performance will be integrated direct from the factory in three to four years, Kilroy and others predict. 

Gary Rappeport of Donlen likened the uptake in telematics to how fleets were initially hesitant to implement fuel card programs in the early 1990s. After some early pushback, fuel cards are now ubiquitous. 

Social media will become a bigger part of fleet management. The OEM's may not be ready to have fleet managers order vehicles through Facebook yet, but social media will be part of the equation, Kilroy said. 

Lease Accounting Changes?

Jim Frank of Wheels provided an update on FASB's (Financial Accounting Standards Board) efforts to develop a new model for the recognition of assets and liabilities arising under lease contracts. Whereas this group of lessors "thought we'd be done talking about lease accounting standards by now," the discussions continue. The original dates for implementing any rules changes had been set for 2012 at the earliest. Any rules changes would now take effect Jan. 1, 2015.

In the wake of accounting scandals such as Enron, proposed changes had called for the lessee's balance sheet to reflect assets (such as all types of vehicle leases) and liabilities under leases. The FASB working group released an exposure draft that caused a "180-degree reversal on how vehicles are accounted for." In essence, this represents "no changes or material impact to open-end leases" in North America, according to Frank. 

Today, the amount to be capitalized will be the non-cancellable lease term. With a closed end lease, that's the present value of 36 months. On an open-end lease, it's the 12-month minimum term. Per the exposure draft, this will not change. 

Look for final rules in July or August. However,  Pitcher warned that the exposure draft could come back for changes. "FASB rules are not written just yet," he said. 

Fuel Prices

It's only a question of "how high." 

Clarence Nunn of GE Capital pointed out that "gas prices become emotional at $4 per gallon." There is pressure from the company for fleet managers to "do something about it." Upper management may bring up reimbursement, but it's up to fleet managers to show that fuel prices must be looked at as one component of total cost of ownership. 

Rappeport believes stabilization of the Middle East will moderate fuel prices in the next year, though the long-term trend is a continued rise, due in no small part to demand in developing nations. He said to expect oil at $100 a barrel and a gallon of gas to cost $4.00. 

Jim Frank warned not to overreact when it comes to fuel prices. "We have a business purpose and must address the reason we use these vehicles," he said. 

When interest rates rise again, the dollar will strengthen and fuel prices will fall. Frank acknowledged that it isn't in Opec's benefit to drive up fuel prices to affect economies. Frank clarified that while he might be "a bear on fuel prices," he does not expect to see pump prices drop dramatically; rather, he does not believe they'll go up to $5 - $7 a gallon. 

The convergence of the best used car market in years and high fuel prices are creating opportunities to short cycle, said Pitcher. On a vehicle-to-vehicle basis, fleets can take advantage of great returns on de-fleeted vehicles while cycling into a more fuel efficient model.  

Alt Fuels

Carl Ortell of ARI said he believes the speed of development of electric vehicles very much depends on government assistance, and that "the federal government wants to spend money it doesn't have," he said. 

Nunn questioned whether Obama's $7,500 tax credit could be sustainable when the government is essentially out of money. Clarence Nunn believes the answer depends on how OEMs plan to meet CAFÉ standards. More diesels (with higher fuel economy) and smaller cars will alleviate some of the need for electric to meet those standards. 

Rappeport believes the conversion to alternative fuels and power will be slower than anticipated. (Indeed, when Ortell asked the audience how many fleet managers had pure electric vehicles in their fleet, only two-of about 80-raised their hands.) 

However, while sustainability was on the backburner during recession, fleets were beginning to measure their carbon footprints in greater numbers. From Rappeport's numbers, fewer than 3 percent of fleets were measuring their carbon footprint three years ago, while 50 percent are doing so today. 

George Kilroy pointed out that the environmental well-to-wheels analyses out there today are sponsored by organizations with an agenda. He called for an independent, non-sponsored study. "It's hard to get a straight answer in today's political environment," he said. Amen to that. 

Surviving the Downturn

In a bad economy, extended cycling and the specter of reimbursement show their ugly heads. Nunn commented on how fleets were parking vehicles on TRAC leases rather than take a loss in a down market. But these analyses are often not done by the fleet manager. Therefore it's incumbent upon fleet management companies to get data to thier fleets on how longer cycling can affect costs such as increased maintenance. Fleet managers can push back on these policy changes with data. 

Public fleets are still in a rough patch, said Pitcher. "Commercial fleet budget cuts pale in comparison to what's going on with government fleet cuts," he said. Pitcher has seen municipalities cutting fleet managers from six to one, while combining fleet pools and moving from buying to leasing to conserve capital. Recovery in the government sector will take longer, as increases in tax receipts take effect. 

One of the silver linings of a bad economy is that it facilitates change that may not have happened in good times. As a matter of necessity, there is less resistance to downsizing and economizing. However, as the economy improves and competition for new hires increases, Jim Frank warned that drivers may call for more power, luxury, amenities and choice in fleet vehicles. 

In general the ongoing problem of federal and state budget deficits are a prime concern to these leasing execs, especially as the consequences of underfunding will lead to more government intervention into business.

When asked directly what kept him up at night, Ortel responded, "Everything that kept us up has already happened, and we're still here. Our fundamentals are sound."

 

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Author Bio

Chris Brown

Executive Editor

Chris Brown is the executive editor of Business Fleet Magazine and Auto Rental News. Through these publications, online newsletters, trade events and associations, Chris covers all aspects of the fleet world, including fleet management, manufacturer fleet activities, the fleet leasing industry, vehicle remarketing, rental industry news, car rental taxation and legislation.

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