Doug Siefkes, for PACCAR
When it comes to trucks and product distribution, there are three choices: use a carrier (for-hire or dedicated), own your fleet or lease your fleet.
Each has its pluses, but what’s right for your operation? According to Chuck Davis, PACCAR Leasing’s director of sales, much of the decision comes down to the regularity and volume of your shipments, coupled with how much control you want with your fleet.
“The first step is to determine if you really need a private fleet by asking yourself the following questions,” said Davis. “How important is it that my product arrive on time? Can I trust my reputation with someone who doesn’t know my customers? And, can I trust someone else to carry a hazardous material (if required)?”
“While most trucking firms are reputable,” Davis said, “in some cases, your product moves on their schedule rather than yours. And their drivers are not likely to know your products, routes or customers. If on-time delivery and putting a face with your company isn’t critical, the trucking company option may be right for you. If control of shipping is paramount to your operation and you transport often, your best option is to have direct control of your transportation and that means either owning or leasing equipment.”
According to a National Private Truck Council 2019 Survey, the top reasons companies operate a private fleet are customer service (by an almost 3-to-1 margin), followed by cost, capacity and control. The survey also showed that those companies measure customer satisfaction through on-time deliveries with performance windows from just 10 minutes up to 60 minutes.
Should I Purchase or Lease My Fleet?
Today, according to Davis, a good percentage of companies hauling petroleum products include some level of leasing in their fleet strategy.
“Many of our customers will tell you that they were staunch advocates of owning and maintaining their own fleet, but they’ve changed their stance over the years,” he said. “Fuel hauling, for example, tends to be a very personal industry where safety is extremely important, and the thought of losing any control is troubling for them. However, once they see all the possibilities of leasing, they recognize it can be a competitive advantage.”
According to Davis, there are three primary considerations to keep in mind when making a lease-versus-buy decision: your financial resources, the size and complexity of your fleet, and the geographic range of your operation.
“As a rule of thumb, if the purchase cost of your vehicles will hinder the growth of your primary business, it’s probably a good idea to consider leasing to protect your capital,” said Davis. “A primary goal of all companies is to obtain the best financial return on its money, which includes acquiring a single vehicle or a fleet of trucks. With leasing, you’re paying for the use of the vehicle, and since you don’t own the vehicle, the residual value is backed out. The monthly cost is less than if you financed in ownership. The most recent development in the U.S. Financial Accounting Standards Board’s ASC 842 that requires all leases be on-balance sheet, which has been in effect for public companies starting 2019, has a proposal to extend the effective date for private companies from 2020 to 2021. While there is some related administration burden in the beginning, it will become business as usual ,and leasing remains attractive since the amounts capitalized will be significantly lower than in ownership. The asset investment decision is one of the most important decisions a company can make, so financial officers really should be involved.
“The second consideration—size and complexity of the fleet—centers around customized specifications and anticipated maintenance costs, including the significant expense of technicians, service facilities and tooling if you operate your own shop. Generally, if you run a small- to medium-sized fleet, leasing is often the most cost-effective alternative since you’ll bypass these expenses. However, if your fleet is large enough to justify the expenses of your own maintenance facility, other considerations may or may not make full-service leasing the most economical solution. Your decision will require a thorough financial analysis, ideally performed by an outside consultant familiar with all the costs—tangible and intangible—of running a truck fleet. Keep in mind that while today’s modern, high-tech trucks are very efficient on the road, they require a modernized maintenance facility with specialized diagnostic equipment as well as thoroughly trained and certified technicians.”
While the shortened development cycle of new technology is delivering significant improvement in truck performance and fuel efficiency, it comes at a cost of tooling, training and hiring technicians with new skill sets. “Environmental strategies are also a growing element of responsibility. The management of fluids and other regulated components must be monitored to avoid spills or leaks as well as maintain compliance,” adds Davis.
“Once you have a full understanding of your maintenance shop, we recommend doing a pro forma, which identifies all the costs of operating a maintenance facility—it’s something PacLease and other leasing companies do on a regular basis. The numbers will help you decide the best way to go.”
According to Davis, the range of a fleet’s operation can also have a major impact on the lease-versus-buy decision. “For instance, many of our customers lease more than 30 vehicles. For them, leasing is more economical because they distribute in a multi-state or regional operation. A service bay 300 miles away won’t help a stranded truck. Many leasing companies have emergency roadside service programs to provide repairs anywhere in the country, 24 hours a day. Owning and operating trucks can be a very expensive proposition when you factor in the frequency of breakdowns and subsequent repairs. Leasing eliminates this worry by taking lease customers off the hook for these expenses, giving them the advantage of a reliable, high performing fleet as well as accurate cost accounting. And, unlike ownership, the lease customer can accurately budget for transportation expenses over the term of the lease.”
What Does a Full-Service Lease Provide?
For people accustomed to automotive leasing, full-service truck leasing is something altogether different. Whereas automotive leasing generally stops with the financial arrangements, full-service truck leasing typically includes a myriad of services, such as access to product engineers, full preventive maintenance support, emergency roadside service, electronic logging device (ELD) solutions, driver safety and fuel programs, as well as financing. In addition, a full-service leasing company can handle all the paper work that can monopolize a manager’s time—fuel tax reporting, toll-management, licensing and permitting.
Choosing the Right Lessor
Choosing the right leasing company to work with is an important decision. You are, in effect, entering into a long-term relationship (typically three to six years) that should be beneficial to both parties.
“Leasing a truck is a bit like buying a suit,” said Davis. “You can either buy it off the rack or have it custom tailored. While the suit off the rack may appear to be less expensive, you’ll probably be happier with the custom-tailored suit down the road. You’ll also enjoy a more professional image with a suit designed specifically with you in mind.
“Look for lease companies that are willing to ‘tailor’ a lease to meet your specific transportation needs. Do you have specific load or route requirements that can be best met with a custom-spec’d vehicle? For a fuel hauler, spec’ing is critical since there is a balance between durability and lightweight components to maximize payload. Would premium vehicles, like a Kenworth or Peterbilt, enhance your company’s image and be appreciated by your drivers—who typically are some of the most qualified and highly paid drivers in the industry? Will your leasing company provide maintenance services around your schedule and provide extra or substitute vehicles to ensure you won’t miss deliveries and be on the hook for a product shortage?
“It’s important for your lease sales representative to clearly understand your transportation requirements and business needs. Only then can they become a transportation partner.”
Finally, Davis said a good leasing company will provide objective lease-versus-ownership comparisons, including an operating and a financial analysis that includes a net present value of cash flows. “This comparison should include your company’s own numbers for the ownership option (labor, facilities, maintenance costs, cost of borrowing, etc.). It will give you the means to weigh the tangible financial benefits and the intangible operating benefits that full-service truck leasing offers versus ownership.”
A company’s emphasis, both strategically and operationally, should be focused on its core business. The answer to the transportation dilemma is never the same for any two companies. By carefully examining your needs and reviewing the benefits of using trucking firms, purchasing trucks or leasing them, you’ll reach the most cost-efficient solution for your business.
Hidden Costs of Vehicle Ownership Can Make Leasing More Appealing
Consider and quantify the following questions when making your lease-versus-buy decision:
- What is the cost of your time to manage truck and maintenance operations? (Some companies find that re-allocating time toward their core business in revenue-generating capacity provides a greater return.)
- Does your company have the buying power to purchase high-quality truck parts and supplies at a low cost? (Many leasing companies have access to volume parts programs that can reduce your cost.)
- What is the cost of your working capital tied up in parts inventory? (Old parts that become obsolete are a common problem in shop operations.)
- Would an additional credit facility through a full-service lease help your financial picture and line-of-credit with your bank?
- Is your workflow steady enough to optimize shop labor? (New fleets require less maintenance than old fleets and the units have to be available when technicians are present.)
- Are your technicians in a consistent, formalized training program? (This is a requirement to keep up with annual improvements in technology.)
- Is your shop tooling and equipment keeping pace with the advanced technology found on today’s trucks?
- With federal, state, provincial and local regulations, are you prepared to upgrade your facilities and processes to meet current and future environmental standards? (Similar to trucks, regulators require facility improvements resulting in costly upgrades and on-going risk management.)
- Would premium trucks on a full-service lease reduce your driver turnover? (Well-spec’d top truck brands can make an impact on driver satisfaction. The loss, replacement and training of a single driver can exceed $7,000 in cost.)
- Are you in a position to risk the resale value of trucks in ownership, or would it help your business to have the guaranteed residual value that full-service leasing affords?