In light of the economic recession, it's no shock that some refuse fleets are finding that cash for buying new trucks is scarce. Yet, even with scrupulous maintenance practices, trucks can't last forever. At some point, repairs just become too expensive to justify.
That's why the age-old practice of leasing is getting a second look from many in the industry. With leasing, fleets usually only pay for the use of the truck — sometimes they have to cover maintenance — and not the truck itself. “This approach can often provide cash flow and operational advantages to ownership,” says Olen Hunter, director of sales for Bellevue, Wash.-based Paccar Leasing (PacLease).
While many in the freight-hauling business can idle trucks until volumes pick up, that's simply not an option for refuse haulers, as demand for their services remain. As a result, Hunter says, refuse fleets often must run much leaner operations, with little-to-no money available from lowered capital expenditure budgets to buy replacement units.
“Some fleets can be tempted to extend oil drain intervals and defer other routine preventive maintenance to save money in the short-term, but [these tactics] can lead to increased maintenance costs over the long-term,” Hunter says. “Deferred maintenance leads to more unexpected repair events, which often increase downtime.”
Also, resale values can plummet as equipment is kept past its economic useful life, and many refuse fleets count on decent “residual value” from their equipment to help fund new purchases.
Benefits & Drawbacks
Enter leasing. Typically, leasing is a way to obtain trucks without a large down payment, and the mechanism often features options to provide maintenance coverage as well. “[Leasing] normally means a big savings, up to 25 percent less in some cases, in your monthly payment as opposed to financing to own,” Hunter says.
Exposure to the variability of resale values declines as fleets adopt a more disciplined approach to replacing aging units through leasing, Hunter adds. “Owning trucks is a bit like timing the stock market,” he says. “If they hit it right when it comes time to sell, fleets reap high residual values for their agencies. If their timing is wrong, the value of their equipment may be too low to make a much-needed move to new trucks.”
Yet while there are many advantages to leasing, there can be drawbacks, too, especially as the equipment involved in the lease gets more complicated. “It really depends on the trucking applications,” says Darry Stuart, president of Wrentham, Mass.-based DWS Fleet Management Services, a firm specializing in fleet maintenance issues.
“If you are talking about Class 8 tractors hauling waste transfer trailers from point A to point B, it may not be a bad idea to look at leasing them — even use a full-service lease, where maintenance is included,” he says.
That maintenance component becomes important the longer the routes those trucks travel, Stuart adds. “If you've got those tractor-trailers traveling from, say, New York City to Richmond, Va., a full-service lease gives you the opportunity to have maintenance taken care of along that route without you having to bring those vehicles back into your shop, which costs you in terms of downtime.”
But Stuart, who spent five of his 40-plus-year career as a fleet manager at BFI, says the leasing equation can look very different when customized refuse trucks themselves are involved. "When you are talking about front-loaders and rear packers costing around $250,000 that you're going to try and run seven years or more, that's a completely different leasing story," he says. "You can do it, but it isn't as easy, especially when you are looking at rolling maintenance into it. It's far easier to lease a Class 8 tractor versus a refuse truck because there's a wider market for tractors and maintenance isn't as complicated."
Those two issues make it vastly trickier for leasing companies, as they are laying out a lot more money to buy a refuse truck versus a tractor, with more complex — and expensive — technology to care for. That's why Stuart says leases for residential and commercial refuse trucks remain rare; for the risk involved in managing them successfully so the leasing firm can make money are much higher.
Despite that wrinkle, though, the outlook for the truck leasing business in general is brightening.
"There are a lot of positives in the mix for the leasing business — though, of course, it all depends on how the economy behaves next year," says Thomas James, president and CEO of Alexandria, Va.-based Truck Renting and Leasing Association. "The advantages are there as credit remains tight and new trucks get more expensive."
While the continued tightness in credit markets is viewed as an advantage of sorts, it poses difficulties for leasing firms and fleets alike. "Credit remains tight, and that's difficult for everyone," James says. But it's an issue the truck renting and leasing industry is used to — as it's responsible for approximately 35 percent of all new Class 3 through 8 commercial truck registrations.
"In terms of leasing equipment, that credit issue puts more pressure on the leasing company rather than the fleet, and the fleet gets a fixed transportation cost as a result," James says, because it's the leasing company that is buying the equipment in this case, rather than the fleet, and thus is the one that needs the credit in order to make the purchase.
The growth in credit availability remains a major concern in the business community as a whole and there are still some strong headwinds as far as the financial sector is concerned, adds Chris Kuehl, chief economist for the Columbia, Md.-based National Association of Credit Management. "Access to credit remains a limiting factor for many businesses but there is evidence of the logjam loosening," he says. "In conversations with credit managers … there is a sense that there are growing opportunities for the best customers and a willingness to get engaged with those showing a plan and some progress."
The Perfect Storm
Hunter also believes a number of factors — including the down economy — are creating a perfect storm that is driving many customers not just to look at leasing trucks but to full-service leases, which cover maintenance as well. The factors include a shortage of trained diesel technicians; the growing complexity of the trucking business; ever-changing governmental regulations; and the need to deploy new technologies to stay competitive — in addition to the usual worries about managing risk, improving customer service, safeguarding profitability and growing the business.
The flood of new technologies into the industry is putting steady pressure on fleets large and small to keep up with or yield business to their more nimble competitors. In many cases, though, keeping up means acquiring hardware and software, changing processes, training staff and developing support systems to keep everything running smoothly. According to many in the leasing business, relief from this perpetual scramble is another reason they are attracting new customers from across the trucking spectrum.
"Leasing really makes sense any time new technology is introduced to the trucking industry," Hunter says. "Full-service lease programs insulate customers from the uncertainty that goes along with any new technology and truck ownership."
The Fine Print
According to DWS' Stuart, if refuse fleets decide to lease vehicles, they should hire an expert that understands leasing contracts to perform the negotiations. He also stresses that lease agreements only cover "predictable" costs - that is, nominal wear and tear on the vehicle.
"They don't cover damage from abuse or accidents," Stuart says. "Now, if you owned your own equipment, you'd pay those costs anyway, but many people assume that a lease agreement covers the costs for all of that. In reality, it doesn't. You need to figure that into your equation."
While getting a lease on refuse trucks might prove difficult, obtaining them for other vehicles in a waste hauler's fleet might be a good option if it needs equipment but simply don't have the cash or available credit to obtain it through traditional channels.
"If, say, you absolutely need 10 trucks, with four of them front loaders and six of them tractors, you could look at leasing the tractors to preserve cash for buying the front loaders," Stuart says. "It's another way for you to conserve capital funding."
- Read the "New Services" sidebar to learn about new options available to lessees.
Sean Kilcarr is the senior editor of Fleet Owner, a sister publication of Waste Age.
Leasing companies are bringing a spate of new services to the table to give current and potential customers more options. For example, Reading, Pa.-based Penske Truck Leasing recently rolled out "Claims InSite," which is a new collision-management service designed to help fleets facilitate management of the entire accident process in real time. Penske developed the service in collaboration with The CEI Group.
The service begins with incident reporting and locates nearby collision repair centers; chassis, body and trailer repair centers; and vehicle refinishing, frame and alignment work centers. After an accident, the customer calls into a 24/7 claims national call center. A claim specialist gathers information and uploads it to a password-protected Web-based management system that the customer can use to track the process of their claim through Penske's Web site, MyFleetatPenske.com.
The company also retooled its Web site in 2009 to provide more "digital reach" for customers, says Ann Walsh, vice president of interactive marketing for Penske Truck Leasing. Through MyFleetatPenske.com, lease and contract maintenance customers now get access to their fleet's detailed information as well as online preventive maintenance scheduling, real-time emergency roadside assistance call status, Penske fuel-stop locations, driver safety training programs and fleet compliance programs.