Jake Civitts, PacLease director of franchise operations
 - Photo: PacLease

Jake Civitts, PacLease director of franchise operations

Photo: PacLease

2018 saw PacLease grow its market share in the lease/rental market, adding 30% more medium- and heavy-duty units. Seventeen new main and branch locations were added, bring the total to more than 460 locations – up from 319 just 10 years ago.

We talked to Jake Civitts, director of franchise operations, about changes in the leasing and rental market and about the growth of PacLease. (This interview has been lightly edited for length and clarity.)

HDT: I see from your LinkedIn profile that you’ve been at Paccar for a while now.

Civitts: Coming up on 15 years this May, I started out at [Paccar subsidiary] Dynacraft as plant manager at one of our smaller plants. I’ve been through a couple emissions cycles; I did EPA 07 and EPA10 on the operating side. We spent lots of time worrying about emissions systems.

HDT: A lot of the industry worried about those emissions systems. And in fact fleets still tell me that maintenance of aftertreatment systems is one of their biggest headaches.

Civitts: We see it all the time in our franchise network. One of my responsibilities is our maintenance team, and over the last 15 years, the number of hours of maintenance required just to maintain our trucks, with all the technology that has been added, it’s an average extra 24 or 25 hours a year. In our network we’re constantly trying to figure out things like the ideal technician to truck ratio, what does a PM take, we’re trying to continue to advance the agenda when it comes to maintenance – which ties to why more people are looking to full-service leasing. It’s not as easy to maintain and fix these trucks.

HDT: I understand that PacLease had a strong 2018, adding 30% more medium and heavy-duty units and adding 17 new main and branch locations.  Can you share some highlights and factors in that success?

Civitts: We had a great year throughout our franchise network. We delivered more trucks than we have in the last five years or so. Not that that’s necessarily the most important thing, but it’s a measure that the investments that our franchisees and Paclease made in our network are really starting to pay off. We improved customer retention by several points as well, and rental utilization has been the highest in the past five years, kind of signaling demand across the network.

We’re pretty successful anyplace the truck is not commoditized. We’ve got the ability to offer a customized premium truck, which helps in driver retention and other things our customers are asking us for. We also do some things our competitors don’t do a lot of; our franchises are in the vocational space. They have dump trucks for rent, roll offs, there are heavy haul trucks available in our network, things to help customers do their business.

Quite frankly we’ve reserved build capacity with our sister divisions, Kenworth and Peterbilt, so I won’t say we’re not constrained by lead times, because that’s not true, but our lead times are not the same as over the road retail buyers. We still have limited build slots available in the first half. We’ve insulated customers from that whole 'wait 19 months to get your truck.’ There’s obviously some limitations in configurations and engine operations because the entire industry’s constrained. But for the most part we’ve got the ability to meet their needs.

HDT: What’s your outlook for 2019?

Civitts: Cautiously optimistic. As I said, we’ve reserved that build capacity to remove the ‘acquisition anxiety,’ if you will. Last year we added 17 locations, and I think we’ll be pretty comparable this year. Rental utilization has been strong the first month of the year. We kind of had some carryover from the fourth quarter with large national accounts that has bled over into January, which is a positive. In the rental market there are a lot of interim units out there while retail customers wait get their trucks. We’re watching that; as long as the rental market stays strong for the first half of the year I think ‘19 will be set up strong.

HDT: Interesting the carryover from the fourth quarter. I noticed a FedEx delivery in late January in my neighborhood in a rental truck, which I normally only see during the holiday crunch. Is that because of people returning gifts?

Civitts: There’s definitely return logistics, but there’s also a whole shift rippling through the supply chain. I go back to hours of service, which was the first shock to the supply chain, and you overlay last year’s ELD mandate, and now you’re looking at changing customer expectations and that last-mile delivery piece and the e-commerce stuff that goes through.

Surprisingly, there’s also a little commodity pricing that can weigh into that as well. For instance if you have a hanger factory, when commodity prices go up they tend to buy steel in smaller amounts, and as commodity prices go down they buy full truckloads. So there are constant waves of ups and downs as far as capacity matching demand. And housing starts; all those thing factor into it.

Right now were’ on the rising side of a wave or near the peak of a wave, and we want to be cautious we’re not repeating what happened in 2015, when we overshot our capacity on the rental side. Trucks were basically renting themselves, and we put too many out there, and all of sudden we had this excess capacity in the rental market, which drove rates down and used truck values down. We’re a little smarter this time, hopefully, and trying to make sure that growth is sustainable.

HDT: Industry information such as Polk data show that full-service leasing’s share of the overall Class 6-8 market has been growing. What are the larger industry trends that are contributing to that growth?

Civitts: It’s a great option for several reasons. Traditionally we say at least one of very four to five trucks in Class 8 is a leased truck. And a lot of that has to do with that it allows private fleet customers and people whose revenues aren’t necessarily generated on a per mile basis have someone whose business is focused around the truck, and let them focus on their core businesses. And we’re the subject matter expert when it comes to things like reducing mpg or getting another 1,000 pounds of payload or giving you driver recruitment tools. We’ll handle your tolls, washes, all the other things that would be a distraction for those private fleet customers.

As the technology in the truck has increased and business have become more sophisticated and customers more demanding, customers are looking to full-service leasing because that’s what we do every day.

HDT: What about the types of customers? Truck leasing has always been a strategy used largely by private fleets; are you seeing the types of customers changing?

Civitts: Because we're only the third or fourth largest leasing company and because we are affiliated with Kenworth and Peterbilt, we have a lot of opportunity to grow. We only represent around 7 to 9% of the full service leasing market. Yes, we see transitions from ownership to leasing. There’s a little bit of noise with the latest accounting treatment, and some new entrant folks … who are trying to give a full service lease experience without making that investment.

But in the end, we’re seeing more and more folks move toward full service leasing model because of the things I talked about: ‘I can’t make an investment in my shop, I can’t make the investment in training technicians, I’ve got mechanics aging out, real estate prices getting higher for facilities, and the cost of compliance for all of this reporting and training, it’s just more than I’ve got, so what are my solutions and options?’ So that’s where we step in and help. We don’t solicit business from over-the-road carriers, because private fleets are our target, but we are seeing folks whose business models are shifting.

HDT: Examples?

Civitts: Right now, construction, companies that sell building supplies, along those lines. For instance, DTS here in the Northwest, which does construction site waste removal with the big dumpsters and the roll on/roll offs, traditionally would have their own shop, but that’s not something they can do anymore. And traditionally vocational buyers tend to be terrible planners; they go try to find a truck once they win the business, we try to fill in that gap to help them do that.

HDT: Are you seeing changes in the way customers are using leasing?

Civitts: I think they’re relying on full-service leasing to help them with more and more complicated business problems. We’re seeing as business partnerships get more complicated, we’ve got things like, ‘Help me understand the accounting balance sheet treatment,’ or, ‘Let’s integrate telematics data into my business solution,’ or preventive and predictive maintenance strategies. We’re much more sophisticated today with our ability to provide data, to use cloud-based computing.

HDT: I understand the National Private Truck Council’s annual survey seems to show more fleets using a combination of owning and leasing.

Civitts: It think that’s the right blend given the tax structures we have today. There are some benefits of ownership that from a business perspective make sense, to offset income or defer taxes, or even just some specialized equipment. There are some private fleets that work with Paccar Financial who do a walk-away finance lase and bundle maintenance services through Paccar leasing because it gives them some flexibility as far as geographically where that asset is, so they see a blend of ownership, full service leasing and finance-based lease. But given recent changes in tax law and accounting treatments, I don’t know if that’s settled itself out yet.

HDT: I remember reporting on those proposed changes to standard accounting practices several years ago. I know they’re complex, but give us a sense of how they affect these decisions.

Civitts: Fundamentally the economics of leasing don’t change, but structurally what’s happening is, you’re bringing on to the balance sheet the obligation of your payment plus the right to use the truck. Hopefully those two things balance out, and all the information you need to do that is in the exiting contracts today. You can do all the math.

Where we can add value is understanding the business piece of what you’re trying to do. It’s when you want to manipulate one of those levers, it gets a little gray. For instance, the portion that comes onto your balance sheet is the fixed payment. The variable piece, the per-mile charge, doesn’t come onto the balance sheet, because it’s variable. So if you’re concerned about the amount coming onto your balance sheet, you can shift more of the payment from that fixed piece into the variable piece. … It gets really in the weeds very quickly, but ultimately the economics don’t change, but how you get there and some of the subtleties can change, and we’ve got some ability to try to help with that. I think we’re just starting to see [the impact of the changes], as public companies and larger private companies do their adoption now. Over the next 18 to 24 months we’ll see that become more of a factor. I don’t know that it changes the acquisition decision, but it’s something we need to help understand.

HDT: We keep hearing how transportation models are changing – that fewer people in the future will own vehicles, whether personal cars or commercial vehicles, as we move to a more subscription-based model and the use of technology to basically let people “share” vehicles. Where do you see rental and leasing in this?

Civitts: Full-service truck leasing for sure is a pay-for-what-you-use arrangement. Some of our competitors have some of [capacity sharing], but it’s relatively limited. Quite frankly there’s a lot of “transactional friction” about making sure liability lines up and whose asset it is, all that cost of compliance, whose ELD is plugged into that thing, how do you mitigate that risk? Right now, with high truck capacity demand, everyone’s kind of got their own trucks working. I’m not going to completely discount it, but it’s not something we’re focusing on.

HDT: How has the ELD mandate affected the rental and leasing business? I know there were some concerns early on, about short-term rentals especially.

Civitts: It’s actually turned out to be very minimal impact to our businesses overall. Our customers listened; everyone is bringing their own ELD device when they come rent a truck. We have some available if needed, but they’re showing up with their device, we provide access to the J1939 as needed.

HDT: Are you seeing interest from customers in alternative fuels and drivetrains?

Civitts: We’ve got a full suite of those products available. We’ve been a leader in natural gas largely through our refuse division, with thousands upon thousands of natural gas vehicles out there. [Kenworth and Peterbilt also have been working on electric and hydrogen fuel cell trucks.] However, on the private fleets side, we’ve not seen a lot of demand. When customers ask, we will have that available.

We’ve seen a little more interest in the autonomous space, but that’s not for the right reasons. They want to lease or rent a truck because they don’t have any money to invest in capital. ‘Can you lease me a couple trucks that I’m going to autonomously drive?’

HDT: Any other leasing issues our readers should know about?

Civitts: We have three core business lines: contract maintenance, rental, and full service leasing. And PacLease has a solution that matches up with each of those three and can really appeal to private fleets and to anybody anywhere. I know we’ve talked mostly about private carriers, but with those rental and contract maintenance pieces, you see some overlap with over the road carriers because of that incremental capacity they need. As carriers are consolidating or they are winning new lanes, sometimes they need a rental or lease truck where they don’t have existing infrastructure.

It’s a much deeper partnership with a full-service lease customer than a retail customer – it’s understanding those deeper business problems.

0 Comments