Full-service truck leasing is a popular option for companies that choose to run private fleets but don’t want the headaches associated with ownership. The trend is expected to gain more momentum in 2007, as many companies are looking at leasing for the first time due to ever-changing technology and a chronic shortage of qualified truck technicians. 

“These companies want to off load responsibility for vehicle maintenance and emergency roadside service,” says Olen Hunter, director of sales for PACCAR Leasing (PacLease), which leases Kenworth and Peterbilt trucks through more than 270 locations throughout North America. “Additionally, they value the flexibility of substitute vehicles to ensure a high level of uptime – critical for those in a JIT operation.”

It is the case that many fleet customers are not simply looking for the familiar offerings of leasing companies – vehicles, fuel, maintenance and safety services. They’re also interested in a partner that can help them grow their businesses. John Deris, Ryder’s senior vice president for fleet management solutions, says, “They’re just as interested in our ability to help them plan for growth. They hope to utilize our network as a means of growing their businesses.”

Even relatively local leasing companies are able to serve many unique requirements of their fleet customers. Vince DiShino, director of business development at Rochester, N.Y.-based Regional International and Idealease, says, “I have fleet customers that lease because they are tied into specific contracts with their customers. They need a truck only for as long as they have the contract. If they were to lose the contract, they would no longer need the truck, so don’t want to be obligated to finish a lease. We’re able to give them an ‘out’ if they fail to renew a contract with their customer.”

But, what about the financial aspects of a lease? What can a lease do for an operation, and how does leasing affect cash flow, taxes, and, eventually, the disposal of equipment? 

According to PacLease’s Hunter, with a full-service lease, a customer pays only for the use of the truck, as opposed to paying for the truck itself. “That normally means a big savings – up to 25 percent less in some cases – in your monthly lease payment as opposed to financing to own,” he says. “In a lease, the cost of the vehicle, apportioned tax and license, finance charge (set interest rate for the lease term), and calculated cost-per-mile maintenance expenses, minus the calculated residual value determine your monthly payment. That may seem like a lot of charges, but in reality, it’s not. Keep in mind you’re dividing those costs over the lease term – normally five to seven years.” They are also all expenses that will be incurred when a truck is purchased and operated.

A quick ROI

That lower payment pays immediate dividends to many companies. It frees working capital, plus keeps your bank line of credit open for ongoing operations. This is critical for many companies in growth or expansion mode. Leasing preserves capital that can be utilized for growth, expansion or for purchasing additional inventory — all of which typically provide a higher return on investment when compared to purchasing rolling stock.

Most companies can see the value of leasing. Too often, however, they don’t know the costs they will incur over a vehicle’s life cycle. It’s very difficult for a company that does some of its maintenance in-house and outsources the rest to capture all of the costs involved. With leasing, all of that cost is known and deductible. DiShino says, “Our biggest competitor is people’s attitudes. They believe that they can do it for less money. But, the reality is that they can’t when all involved costs are included.”

Hunter says that not only is improved cash flow a valuable asset, but also full-service leasing allows for predictability and protection from the unknown. “Unlike truck ownership, where preventive maintenance and repair costs can fluctuate month to month, full-service leasing ensures a constant payment every month. It allows for accurate budgeting and preempts cash-flow concerns when a truck faces major repairs.” 

Deris says, “Leasing generally results in a very positive contribution to cash flow for most businesses. Companies need to make substantial investments in their businesses so generally prefer not to tie up capital in vehicles. They want to invest is assets that appreciate, not depreciate.”

From a tax standpoint, full-service leasing allows each lease payment to be 100 percent tax deductible, and the lease works as off-balance sheet financing to improve key financial ratios. In ownership, the IRS limits depreciation on equipment (based on the assigned property class). Tractors are considered a three-year property class, and straight trucks are in the five-year property class. The Modified Accelerated Cost Recovery System established by the IRS governs how much per year and over how many years the asset is depreciated. An operating lease can provide substantial tax advantages because the lease is 100 percent tax deductible over the life of the lease.

“Lastly,” says Hunter, “companies like PacLease have extensive knowledge of resale value and have a used truck disposal network that can expeditiously sell lease equipment once it’s termed. A traditional full-service lease (closed-end lease) allows the customer to avoid the ups and downs of the used truck market at the time of replacement. The leasing company bears full residual responsibility and exposure.”

DiShino adds, “Many fleets that are not committed to leasing want to own the vehicle at the end of a lease. My question to them is always: ‘Why do you want to be in the used truck business five years from now? You’re going to need a means of marketing the used truck. Even though it might not be in service, you’re going to have to continue to license and insure it.’ When a vehicle is done with its first useful life, get rid of it.”

Most leasing companies have a leasing ROI calculator to help fleet managers make informed decisions.

After all, only when you have as much information in hand as possible can you make the right choice for your business.