To own or to lease?

April 1, 2003
TO LEASE or to buy that is the question for tank truck carriers today. Is it better to own a fleet of tractors and trucks with the ensuing demands of

TO LEASE or to buy — that is the question for tank truck carriers today. Is it better to own a fleet of tractors and trucks with the ensuing demands of management? Or, should the fleet be composed of vehicles provided by another party that offers many services along with them?

According to information compiled by Modern Bulk Transporter, truck and tractor leasing has established a strong position in the trucking industry. Even in the tank truck sector, which has historically preferred to own equipment, more and more managers are turning to leasing, says Terry Dubowick, Mack Leasing System leasing director.

“Tank truck leasing is a growth area,” says Dubowick. “We've always supplied a big part of that industry, and the dealer leasing service lends itself to tank truck carriers that require more customization.”

With a full-lease program that includes maintenance services, carriers forego the costs of maintaining repair shops, including the environmental considerations that often plague a facility, Dubowick says.

Although Peter Vroom, president of the Truck Renting and Leasing Association (TRALA), can't say for sure that demand for tractor leasing is trending upward, he notes: “We are holding our own — our market share is certainly there. There are some areas that we are doing quite well in.”

“Considering the downturn in the economy, we have been able to weather the storm,” says Gene Scoggins, vice-president, sales, NationaLease, Oakbrook Terrace, Illinois.

He reports the first quarter of 2003 as steady, and predicts an upswing by the end of the year for the company's business and its affiliated 112 owners and 570 locations in the United States.

Terry Young, TRALA chairman and president of Advantage Truck Leasing, Charlotte, North Carolina, said the next few years will offer more business opportunities for full-service lease providers, especially where truck maintenance is concerned.

“We've been below typical truck replacement demand for several years now and the upcoming 2007 emission regulations may convince many fleets to starting leasing equipment,” he said in a recent interview.

Young said leasing firms will also benefit as more fleets decide to outsource maintenance in the face of the increasing technical complexity of trucks.

Peter Toja, Economic Planning Associates Inc, Smithtown, New York, says leasing activities should expand along with overall demand for trucks and trailers. “With interest rates extremely low, I would look for lessors to be extremely aggressive in the marketplace this year and next,” he said.

“There is an increase in the leasing industry as a very competitive environment,” says Mark Murfin, Ruan senior vice-president, sales and marketing. “The current state of the industry drives companies to find a more efficient way to do business.”

Big players

For the most part, the big players in the tractor and truck leasing industry are Ruan, Ryder System Inc, and Penske Corp, says Vroom. There are various types of leasing businesses such as NationaLease with its members, independent businesses, and some that operate in a franchise arrangement. Added to that lineup are leasing programs offered by truck manufacturers.

Fifty percent of all trucks used by private carriers take advantage of full-service leasing, according to information by Bob Southern, PACCAR Leasing Company president.

“Think of the leasing industry as risk managers,” says Vroom. “Carriers can't put off purchases because they must have those trucks to operate.”

So, who are the companies using leased vehicles? Smaller companies are more likely to lease tractors — with the average fleet size composed of about five trucks, Vroom says.

Scoggins agrees with a small number, but adds, “We enjoy some large fleets. We just signed one with 100 trucks.”

Contract length

As for lease duration, NationaLease is seeing from five to seven years on a contract for power units, Scoggins says.

Jeff Sass, Kenworth's on-highway market segment manager, says most of the company's full-service leases are for extended terms, anywhere from 48 months to 72 months. He estimates that full-service leasing has a 16-17 percent market share.

Companies rotate leased tractors about every five years, and are keeping them on the road for longer periods of time. With the increase in road time, maintenance requirements are stepped up to keep the vehicles rolling. With the situation occurring across the industry, leasing companies are offering contract maintenance services commercially, as well as for the equipment they are providing.

As for full-service leasing playing a role in a carrier's future, Southern says it depends on the leasing companies. “As providers of equipment and services, we must remain flexible to evolve with the fast-changing business climate of our customers. Private fleet managers today are faced with mandates to become more efficient with every dollar allocated to transportation. And after every penny is trimmed, upper management will demand more reductions the following year.

“It's not surprising, therefore, that some large fleet customers are unbundling services from their leasing companies. These customers are shopping for the most economical combination for their operation a la carte. And it frequently means negotiating with company A for truck purchasing, company B for financing, company C for maintenance, and companies D, E, and F for other services, such as emergency roadside service, fuel programs, and insurance. They are justifiably eliminating any service they do not absolutely require.”

However, Southern added that the evolution of leasing and private carriage will be quite the opposite from unbundling. Customers will expect more and more of their leasing companies. “Flexibility is the touchstone by which leasing companies today are measured,” Southern said.

“The ongoing shortage of qualified technicians, combined with the high degree of ongoing technical training and sophisticated shop equipment to service today's and tomorrow's trucks will continue to make fleet-run maintenance shops a thing of the past,” said Southern.

The number of private fleets qualified to do warranty work has declined in recent years, he added, noting that 37 percent of all truck fleets currently outsource maintenance. That figure is expected to grow to 46 percent in 2002.

“The trends today indicate that our leasing companies are looking at leasing as more of a commodity,” says Scoggins. “They want to do over-and-above service. They can provide services for maintenance, collecting data, handling national accounts, selecting electronic billing.”

“The trend is to go beyond the full-service lease package and look to a company to provide a turn-key operation — one that not only provides the vehicle and the maintenance, but also the drivers and management at a guaranteed price,” says Murfin.

There are services that address administrative issues, taxes, regulations, and fueling programs. “If there's a service to be provided, they find it,” says Vroom.

Strong factor

Offering an abundance of services can be a strong factor in persuading a carrier to choose leased vehicles, as can a meeting with a leasing representative to evaluate the company's current ownership costs in relation to leasing costs. The main thing is not to look for the answer in the heavens, but to have a down-to-earth review of operations and search for ways to cut costs.

Dubowick points out that carriers thinking about leasing trucks can start with their local dealer. “They can help guide that transaction and help a customer evaluate whether there is an advantage to lease or to own,” he says. “Typically, customers will consult their internal advisor, and the advisor will make a recommendation about whether it fits the company.

“They should bring in several leasing companies to visit and talk about lease versus owning,” says Scoggins. “A lot of times they don't know what their true cost are. Even if they currently have new equipment, they should consider contract maintenance — and start looking at leasing at about year three on their trade cycle. I caution everybody today that they need to make their decision on what they are going to do for 2007 when the next EPA engine requirements kick in.”

The year 2007 is the next deadline for engine makers to meet the Environmental Protection Agency (EPA) standards. The regulations mandate that PM levels drop to 0.01 g/bhp-hr (grams per brake-horsepower-hour), NOx to 0.20 g/bhp-hr, and NMHC to 0.14 g/bhp-hr.

Carriers already have had to deal with EPA standards that were required in 2002. Many beat the deadline and purchased new tractors that do not meet the standards, which allowed them to delay the purchase of the new untried engines.

Vroom noted that concerns about meeting environmental regulations may be driving some carriers toward leasing programs.

“Some of the carriers like the new engines, but the fuel mileage has dropped,” says Scroggins. “We knew that when going in. Many are concerned about long-time costs (for maintenance), and the amount of downtown. The next concern is 2007. That has everybody worried.”

Environmental standards aside, tractor leasing programs allow carriers to avoid putting money up front, as they would in purchasing equipment, said Vroom. “It all depends on how you are set up, or how you want to be set up.”

And so it seem that this is the above-all advice: A company must evaluate the leasing needs that will be true for its operation — and it will follow that the final financial decision is likely to pay off in the future.

At Kenworth, Sass says: “If a company can increase its bottom line by reinvesting capital into the core business instead of purchasing and maintaining their fleet, then they will choose leasing.”