Opting to acquire power units through a finance or full-service lease in lieu of ownership has long been seen as a financial decision, typically based on how standard a fleet’s trucks specs are and how quickly it cycles out trucks.
Today, however, fleet managers may have other good reasons to consider leasing over owning, namely as a strategy to deal with the galloping arrival of new equipment technologies (everything from electronic logs to advanced emission systems to alternative power) and the ever-growing shortage of qualified technicians.
While leasing historically has been favored by sizable fleets running fairly standard equipment on shorter trade cycles, full-service and finance lessors say such marketing distinctions are not so cut and dried anymore. More fleets are looking more closely at all their options, from outright ownership to finance leasing to full-service leasing, even opting to own some trucks while leasing others.
“Typically, larger fleets, driven by an interest in tax benefits and the company’s cash flow, choose a leasing model,” says Steve Goodale, vice president of Daimler Truck Financial, which provides services for customers of Freightliner, Western Star, and other Daimler Trucks North America brands.
“For example, a larger fleet may not need the depreciation benefit that comes with financing [by loan] and will decide to take advantage of [finance] leasing’s lower payments, which allows them to simply expense the monthly lease payment. This also offers them shorter equipment life cycles and allows them to adopt the newest technology as it becomes available.” In addition, he notes that a finance lessor can offer “customized deal structures, such as seasonal payments, balloon payments, and extended terms that work for the needs of the specific customer.”
On the other hand, Goodale points out that “smaller fleets tend to gravitate toward retail finance because they are more comfortable with the product, want [to outright own] the asset, or have a longer trade cycle planned.” That last element is often a congruent factor for fleets that run specialized truck equipment.
“Full-service leasing from a third-party provider continues to have an advantage over the ownership model for a variety of reasons,” says Jason Leon, group director, product management for Ryder ChoiceLease. He says chief among those are buying power and an expansive, reliable maintenance network.
“Also with leasing, there’s the residual advantage element. Each organization has unique needs, which is why Ryder, for example, offers a flexible leasing solution, ChoiceLease, that lets customers select from three different levels of maintenance.” He adds that with leasing, “it’s never a one-size-fits-all scenario, which is why we provide our customers with the ability to determine the term, financing arrangements, and the service delivery method of their choosing.”
“Full-service leasing is a growth market and has been for quite some time now,” says Joseph Gallick, senior vice president of National Account Sales for NationaLease, an association of independent full-service lessors and sister operation to finance lessor AmeriQuest. “In our case, we see customers that need to do two things at the same time – heighten the efficiency of their drivers and maximize their fleet investment.”
He says the driver turnover/shortage issue is being exacerbated by hours of service constraints and CSA requirements, “so fleets want productive vehicles to increase driving time and so do drivers. The same thing goes for the rising cost of equipment, mainly due to emissions rules and to new technology that does promise tremendous progress. The truck costs more but the technology’s benefits haven’t accrued yet, although they will. And they may need to be in the shop more as well.
“All that puts a lot of focus on maintenance,” Gallick continues. “Then there’s the need for more technicians and more training as data coming off the trucks has to be interpreted. Trucks are talking to us now, and fleets have to learn to understand what they are saying to act on it.” The upshot, he says, is that “more companies are seeing that trucking is not their core competency and they are becoming more comfortable with turning that over to a specialist in buying, spec’ing and maintaining trucks and recruiting and training technicians.”
The reasons why
“Lease vs. buy is not as simple as it once was,” says Jake Civitts, director of franchise operations for Paccar Leasing Co. (PacLease). “There are different reasons to buy, and there are different scenarios for going with a finance or full-service lease. We have some customers who do all three — buy some trucks, attain others on a finance lease, and have others on a full-service lease. The decision really depends on the organization — how many trucks they need and what resources they can devote to owning and maintaining them.”
Civitts says typically a fleet pays cash or finances ownership if its primary source of revenue comes from trucking. “Those choosing full-service leasing tend to operate trucks to support their business operations, like a company that sells fuel and needs trucks to get it there.”
According to Brian Holland, president and CFO of Fleet Advantage, which provides equipment financing and lifecycle-cost management to fleets, basing the lease vs. buy decision on “functional obsolescence and for how many years trucks can be operated” is outdated.
Instead, he contends fleets should “look at economic obsolescence, which uses data and analytics to determine how many years each individual truck should be operated. We call this the ‘tipping point,’ that point in time where it costs more to maintain and fuel an existing vehicle than it does to replace it with a new, more fuel-efficient model.” Under this approach, a fleet would move to “a shorter asset lifecycle to lower their total costs by utilizing flexible leasing.”
Holland holds that leasing provides the flexibility to run newer equipment more frequently. “That provides many benefits, including lower total cost of ownership, reduced emissions, safety improvements, and better driver retention and recruitment, since drivers prefer to operate newer trucks,” he says.
When deciding whether to lease or own, fleets “need to recognize their true cost of doing business vs. spreading out the overhead costs,” says PacLease’s Civitts. He says lessors are also doing “more and more with technology” for their customers, noting that the cost of compliance now includes “dealing with ELDs, various emission systems, and stopping distances. And we definitely have seen the annual hours it takes to keep new trucks maintained increasing.
“A good full-service lessor can handle all this for a known amount,” he continues, “and other services can be ‘bundled’ in as the customer chooses, from washing trucks and replacement vehicles when needed to fuel-tax reporting and compliance management. A lease can truly become a one-stop transportation solution.”
Ryder’s Leon says there’s a fresh wrinkle that may influence the lease vs. own decision in the coming years. “We have entered a new landscape with the lowered tax rate, now a flat rate of 21% [per the new tax reform bill that became law in January], which favorably leans toward equipment leasing.” Under the new scenario, he explains, the “timing advantage of accelerated depreciation is diminished, and interest expense will no longer automatically be 100% deductible.” In addition, businesses “may no longer use like-kind exchange programs for vehicles, and therefore, no longer defer taxable gains on the sale of vehicles.”
Penske Truck Leasing Senior Vice President Jim Lager expects that in most cases, the tax changes will tip the scale in favor of leasing. “There are, if you will, ‘moving parts’ within this [tax reform]. It’s not just about gaining bonus depreciation, because on the other hand, you can only take so much. That is, the rules on pass-through [earnings] limits the benefit of bonus depreciation. We can conduct a comparative value analysis for customers using their information to calculate all this for them.”
Lager explains further that bonus depreciation will come into play only if assets are carried on the fleet’s books, whether by owning or financing equipment. By contrast, “if the fleet has an operating [full-service] lease, that benefit is baked into our rates.”
On top of the new tax law, there are new accounting rules coming into play that may impact leasing decisions, says Patrick Gaskins, senior vice president of Financial Services for AmeriQuest, a finance lessor and sister operation to NationaLease.
He explains that the Financial Accounting Standards Board has issued a new standard (initial effective date is Jan. 1, 2019). The new FASB 13 will require companies that lease assets “to recognize on the balance sheet the assets and obligations created by those leases,” according to FASB.
“It’s a ‘sunshine rule,’” explains Gaskins, “intended to make these transactions more transparent to investors. In practical terms, it means equipment leased [for more than 12 months] must be reported. It will require ‘unbundling’ the cost of the finance portion from that of the maintenance charges etc. that would be part of a full-service lease — those would then be listed as ‘expense’ items.”
In the past, he explains, the costs of finance leases — whether FMV (Fair Market Value) or TRAC (Terminal Rental Agreement Clause) leases — were always ‘”off the balance sheet.” That is, they were treated like debt, as liabilities secured by the trucks as assets. “Those costs were hidden, in that they were reported in footnotes. Now, everything has to be in black and white, right on the balance sheet.” Gaskins stresses that “the mechanics of a lease are not changing. Only how the details have to be reported, per this light-of-day rule.”
“The lease vs. buy calculation continues to be a very simple process,” says Ryder’s Leon. “The biggest change has been around the increasing cost of equipment and the growing complexity of new vehicle technology, plus the maintenance associated with it all. These changes require that you have qualified, trained technicians to ensure proper diagnosis and repair.”
But, he says, recruiting techs and providing up-to-date training is “not something most fleet owners are equipped to handle, from a financial, time, and expertise standpoint. And in this ever-changing technological and regulatory environment, this challenge has only grown. Relying on an experienced third party provider ensures greater consistency, fleet uptime, and ultimately, peace of mind.”
Penske’s Lager puts it this way: “Today, equipment is becoming more obsolete faster. Start back at the electronic engines of the 90’s and now truck tech has caught up with that of cars. That is pushing more fleets to leasing.” He says there is more recognition by fleets that while “they need trucks for a job, they don’t need to own the trucks. Leasing avoids the highs and lows that come with rising maintenance costs and trading trucks out that comes with ownership. We flat-line those costs for customers. Also tipping the scale is that it’s hard to run a trucking business and stay on top of changing truck technology.”
While full-services leasing is often seen as a business model for large private over-the-road fleets, Lager says the marketplace is more varied than that. “We have private and for-hire customers. We have customers with one, two, or three trucks who do not want to work with a dealer. And we have large fleet customers, including for-hire carriers running thousands of vehicles. Our scale allows for more options than owning trucks or bank-financing them.”
He says in some cases, Penske may provide “all or some of the maintenance work in certain places” for large for-hire fleets. “It is getting harder to hire and retain techs, but we can come in and operate shops on their behalf. And they can go back to focusing on hauling freight.” Langer notes that Penske has been doing more business with for-hire fleets over the last four to seven years. “The fleet has to see it [maintenance] as a core competency. Some can and do it very well [and so keep owning their trucks].”
End of the road
“The ability to get the expected resale value [trading out trucks] is a very important factor in the lease vs. buy decision,” adds Ryder’s Leon. “With technological advances that are moving at a constant and rapid pace, the leasing option is becoming more and more attractive to fleet owners, who are less willing to take on resale requirements in future, uncertain used truck markets.”
Penske’s Lager notes that “lease rates are predicated on [truck residuals]; we have a whole department devoted to that. Fleets find that it’s very hard to dispose of used trucks, except at a rock-bottom price through a dealer. It’s a real crapshoot on valuation today. But we have the history and expertise to handle that risk.”