Opinion: Leasing Offers More Benefits to Fleets

By John Flynn

Founder and CEO

Fleet Advantage

According to recent industry insight from research firm Frost & Sullivan, leasing companies will capture more business in the Class 8 truck market over the next six years. Access to advanced business analytic software, new truck technologies that offer reductions in maintenance costs and fuel consumption, and corporate directives to equip trucks with the latest safety features are motivating factors supporting the move.

Fleet operators are not turning to leasing solely as a form of financing but rather to address the need for a more flexible financing solution conducive with cost-effective asset management. Leasing reduces operating costs by allowing fleets to operate shorter life cycles and upgrade trucks more frequently — enabling them to take advantage of the improved fuel economy of new models.

At the forefront of the leasing resurgence are asset-management lessors providing expertise in new-truck specifications, real-time data analysis and precise management of a vehicle’s “all-in” costs to determine the optimum equipment life cycle and used-equipment disposition timing. By utilizing shorter equipment life cycles, fleet managers are experiencing greater cost savings, better driver retention, an improved corporate image and overall productivity.

For years, fleet operators have attempted to rein in overall costs using the logic that operating a truck until it becomes functionally obsolete will avoid incurring the replacement cost of a new truck. However, as noted in the Frost & Sullivan report, maintenance costs continue to escalate. There is a moment in each truck’s life cycle where it reaches a point of economic obsolescence — a “tipping point” where truck maintenance and fuel expenses are greater than the cost of replacing it with a new, more fuel-efficient model that carries a new-truck warranty and significantly reduces maintenance.

Forward-thinking fleet operators are leveraging technology and data analytics to gain visibility into the total cost of ownership. By aggregating and analyzing real-time information, they can now prepare a cohesive profit-and-loss statement per vehicle and adjust their vehicle life-cycle strategy accordingly. Rather than continually purchasing new equipment and reselling used equipment, a well-planned lease structure will allow fleet operators to seamlessly exchange the older model for a new more-efficient model.

Although logic may tell you that a new truck will cost more, the reality is that it is much less costly when compared to the ever-escalating maintenance, repair and fuel degradation costs of continuing to operate the older vehicles.

Proper life-cycle management is the single most important shift a fleet operator can make to control costs. In order to make cost-effective equipment life-cycle decisions, managers need reliable data analyzed correctly. New trucks are becoming more fuel-efficient every year and require less frequent maintenance and repair intervals. A lease that is structured with consideration given to a customer’s unique operation and duty cycle will allow the fleet managers to turn their operation into a preventive-maintenance operation, in-servicing new equipment every three to four years at a lower cost than previously.

Proper life-cycle management also has the added benefit of increased purchasing power. An 800-truck fleet operating under an eight-year life-cycle philosophy typically purchases 100 trucks every year and, in turn, must sell 100 eight-year-old trucks in the secondary market — usually at auction prices. That same fleet, operating under a flexible leasing structure based on a three- to four-year life cycle, purchases 200 trucks per year and has no obligation to dispose of used vehicles. That increased purchasing power equates to more competitive equipment pricing.

Government mandates to reduce CO2, which improves fuel economy in heavy-duty trucks, are adding to the demand for the flexibility a lease-finance solution provides. Exclusive of driver wages, fuel cost is 70% of the total operating cost of a vehicle and a chief concern of fleet operators. Miles per gallon has consistently increased in new Class 8 trucks and trailers, and will continue to do so through the year 2022.

When fuel costs go down, it is beneficial for the transportation industry as well as the general economy. It also has an effect on how it factors into the life-cycle analysis and timing. For example, about three months ago, analytic models reflected savings of $500 per month in fuel costs; today that figure is $400 per month. But don’t be fooled by decreasing gasoline prices as diesel is not falling in tandem. The ratio is 1.75 to 1 — meaning that, for every 1.75- cent decrease in gasoline price, there is only a 1 cent decrease in the price of diesel.

As fuel prices continue to decline at the pump, chatter of higher fuel taxes is increasing and is supported by the U.S. Chamber of Commerce. We are confident a new bill for highway, bridges and infrastructure will include an increase in the per-gallon tax — which has not changed for 20 years and was not tied to inflation or the consumer price index.

Although a lower fuel price is good news for fleet operators in the short term, winning the long game will depend on the flexibility to cycle in and out of new equipment at the right time and with no penalty costs while remaining focused on the core business.

Flynn has more than 30 years of experience in the Class 8 truck industry. Fleet Advantage is a Fort Lauderdale, Florida-based leasing and technology company that specializes in truck-fleet business analytics, equipment financing and life-cycle cost management.