Lemons To Lemonade
New engines and sluggish economy mean challenge — and opportunity — for truck lessors.
Patricia Smith
Senior Editor
Two things are giving full-service truck leasing companies cause for concern: lingering questions regarding the reliability and costs of the new engines, and the sluggish economy.
But those same two things could also make 2003 and 2004 banner years for full-service truck leasing.
Obviously, the trick will be to turn uncertainty to their advantage or, as one executive noted, turn lemons into lemonade.
Leasing executives candidly admit that they're uncomfortable with the shortage of real-world operating data on engines modified to meet the '02 emissions standards. "Our business is built on being good at determining the cost to maintain trucks," explains Bill Ford, president of the National Leasing System (NationaLease). "When we go after a customer's business we have a very good understanding of what running costs are going to be. We have to be good because we're stuck with whatever cost we set for a five- or six-year contract."
Residual values are another concern. Full-service lease contracts are priced on estimated maintenance costs and residual value. If market value of the used truck falls short of that estimate, the leasing company can end up losing any profits on maintenance.
"Those who own their trucks have an advantage over us because they can decide to keep the truck a little longer if it isn't equitable to get out after five or six years," notes Lance Bertram, Idealease marketing vice president. "But we've got a commitment to the customer. At the end of the contract, we're taking the truck back. We can ask them to hold onto it for another year, but they don't have to say yes. So we have to be a little more exact than end users."
When used truck values crashed a couple of years ago, leasing companies took a beating. The general consensus is that the used truck market has hit bottom and is on its way back — helped some by new engine concerns. But those same concerns make it difficult to price new lease deals.
"When we talk about actual engine life of these new engines, nobody really knows what kind of life they're going to have when they come out of service in five or six years," Bertram notes.
"Never before have we been faced with needing to run an unproven engine," says Mark Murfin, senior vice president of sale and marketing for Ruan Transportation Management Systems. Nevertheless, he adds, "I think it's time to move on ... to focus on things we can do for our customers."
One thing Ruan can offer nervous customers, he says, is a network of hi-tech, totally paperless shops that will enable them to keep a close eye on the new engines and react quickly if potential problems are detected. "The faster we can measure, monitor and understand what's taking place, the more proactive we can be," Murfin notes.
Ford says some NationaLease customers have agreed to keep their equipment longer — in some cases at bargain maintenance rates — while leasing companies gather data on the new engines. For the most part, however, "we just have to take some risk. Customers have relied on us to do that before, and they're relying on us now."
Ryder System met the problem head on with a marketing campaign inviting customers to let them take the risks. "We put a lot of resources into understanding the best path forward and that's what our campaign is about — to assure our customer base and the marketplace that this is a good time to be looking for outsourced services," says Tracy Leinbach, executive vice president of Fleet Management Solutions. "We don't believe that this level of uncertainty has been good for the industry. It isn't good. But we think we're in a pretty good position to navigate our way through it and to help our customers do the same."
Members of the Mack Leasing System, which are also Mack dealers, are in an excellent position to deal with customer concerns, says Terry DuBowick, director. "In the case of Mack, it's our engine so we're not dealing with various manufacturers. And our familiarity with the product is probably the highest in the industry. Dealers have factory trained technicians and they receive the very latest service information. They're on top of what's going on. If we have customers who are concerned about the new engines, we may be able to provide them with that added level of confidence because we are confident that the engines will perform and we'll be able to service them."
More Business In The Shops
For leasing and even trucking in general, one of the first signs of recovery is an upturn in rental truck demand. Bertram had some good news on that score. The combined Idealease rental fleet has gone from about 5,000 trucks a year ago to just under 6,000 today, and utilization has climbed from 72% to 84%. Unfortunately, his was the only really positive news. "OK" to "fair" were the most popular assessments. Some lease/rental executives noted a slight uptick in the third and fourth quarter of last year — probably a combination of seasonal demand and reluctance by some fleets to be the first to buy the new engines. On the whole, however, the lease/rental industry isn't counting on rapid freight growth to bring customers through their doors.
"We don't think we're going to get a lot of help from the economy this year — there's just too much uncertainty out there," explains Leinbach. "But having said that, we do believe there are opportunities." While few companies are expanding their transportation operations, many are making changes. That, she says, presents multiple opportunities for leasing.
"To me, leasing is about service," says Frank Daley, president of Amtralease. "It's about getting the people who do things better to do them through outsourcing." And the hot item for outsourcing appears to be maintenance and repairs.
The shortage of qualified technicians, coupled with the cost of technical training and sophisticated equipment, will make fleet-run shops — especially those run by private fleets — "a thing of the past," predicts Bob Southern, president of Paccar Leasing. Operational changes in the transportation industry also point to more maintenance outsourcing. For instance, he says, just-in-time delivery places a high priority on flexible, multi-location preventive maintenance and emergency roadside service — something few fleets can afford to provide on their own. Traffic congestion could very well prompt distribution managers to abandon the 9-5, Monday through Friday workweek, which means more need for 24/7 shops.
NationaLease Purchasing saw a 25% increase in tire and parts sales last year, which Ford sees as a definite sign that NationaLease members were doing a brisk business in their shops. Some of the growth may be short term — truck owners looking to keep older trucks on the road while they wait for positive news about the economy and the new engines. But he thinks a good share of that new shop business will stick as more truck owners determine that they can economically extend their trade cycles.
Maintenance is an area where dealer-based leasing organizations expect to shine. As DuBowick points out, the driving force behind outsourced maintenance is economics and the ability of truck operators to find competent technicians — a major concern as trucks become more sophisticated. "Leasing companies in general attract technicians with very good skill levels," he says, "but dealers probably offer more opportunities for technicians, especially high-end technicians."
And while most leasing companies fear that "retail" or "pay as you go" shop business will muddy their contract business, dealer-based leasing companies view the combination as opportunity — and necessity.
"It's all about careful inspection, competent diagnostics and turning wrenches to install fresh components. These are services a dealer provides to customers every day," says DuBowick. "The question is, what kind of management you're being asked to take on. In retail situations the customer is taking responsibility for managing his expenses and deciding how and when the truck is going to be serviced. If they switch to full-service or contract maintenance, someone in the shop must make those decisions."
Dealers are bringing in people with strong fleet management backgrounds to provide that extra level of maintenance management, he adds. "Providing this management service to customers is profitable business and is becoming an increasingly important element to their survival."
Dealer-based leasing organizations also argue that they're able to serve a broader customer base, including vocational fleets and for-hire carriers, because their shops offer multiple levels of service.
Bertram says 75% of the Idealease franchises — all International truck dealers — are contained within the dealerships. Typically, he explains, they have dedicated service bays and technicians for Idealease customers. If the truck needs work that has to be done by the dealership, they just pull into another bay.
"Let's say we're structuring a program for a dump truck operation," says Bertram. "We can't guarantee maintenance on the hydraulics because we can't do the work, but we can arrange to have it done on the dealership side of the shop. So we might put together a preventive maintenance package at a monthly rate, then offer maintenance at a discounted labor rate and national fleet pricing for parts."
But there's competition from another industry sector: for-hire carriers. D.M. Bowman, one of the country's 200 biggest carriers, started Bowman Truck Leasing in 2001 as a NationaLease affiliate. Like many regional carriers, Bowman used to keep trucks as long as eight to 10 years and had developed an extensive maintenance infrastructure, including general repair shops, major overhaul and rebuild facilities, a body shop and a trailer shop. When it began recycling trucks before the first overhaul, it had two options — close the shops or find a way to utilize the people and facilities. They chose to keep them, first opening the shops to retail customers then adding contract maintenance and full-service leasing.
"Leasing was a natural progression," says Joe Lillis, general manager of the lease/rental operation. "They had shops, technicians, and expertise in purchasing, maintaining and operating trucks. Everything was in place. We can bring that expertise to the table and, through our affiliation with NationaLease, we can offer nationwide coverage and emergency roadside assistance."
Lillis says that, so far, good scheduling has enabled the shops to satisfy all customers: retail, leasing and Bowman's own fleet. "An indication of growth for us will be when somebody complains that we're disrupting the shop," he says. "Then we'll face the same problem everyone is facing — we've got the room, we just have to find the people."
Something For Everyone
In times of economic recovery, leasing has some financial advantages — namely minimal up-front costs and off-balance sheet financing, which helps preserve working capital and borrowing capacity. But "the financial component of leasing is just one aspect of what we provide our customers," says Jim Feenstra, vice president of marketing, Penske Truck Leasing.
Penske Leasing's services menu can, in fact, hold special attraction for companies squeezed by the economy on one side and high insurance, driver and fuel costs on the other."
For instance, notes Feenstra, Penske's maintenance and safety programs can help convince insurance companies that fleet management is taking comprehensive steps to ensure proper performance and standards. "Additionally," he says, "the on-board technology we can offer gives fleet managers performance metrics to identify trucks and drivers performing in and out of parameters."
Many leasing companies offer insurance for their lease and rental customers. PacLease, for instance, will bundle liability and collision coverage into monthly lease payments — and do it at what a company spokesperson says are "very competitive" rates.
Fuel is another common menu item and can be a bargain item, especially for small fleets with little buying clout on their own. Good maintenance and driver training also helps. "You can really move fuel efficiency based on the quality of your drivers," says Leinbach. "And it doesn't take much of a move to have a significant impact on the bottom line."
From Leasing To Logistics
Many leasing companies in fact believe their best opportunities for growth in this recovery will come from customers looking at bigger changes than longer trade cycles and more leasing services.
"In tough times people are more open to doing things differently, whether it's converting full-service leased fleets to dedicated contract carriage or some other logistics solution," says Leinbach. "The time is ripe to have those conversations."
According to Murfin, the strongest piece of Ruan's business over the last couple of years has been dedicated contract carriage and carrier management activities. "A lot of things that were going on in the rest of the economy probably had a more severe impact on transportation than we might normally see," he explains. Issues like high insurance costs and the competition for good drivers have caused many companies to take a hard look at how they were handling transportation and logistics. "When they do that, it gives us an opportunity to be a little more inquisitive and possibly come up with some different solutions. We're faced with a customer prospect base that is a little more open minded than we've seen in a while," he says.
Ruan has made some changes of its own. "If you looked at us five years ago, most of what we did was move products on our own vehicles, or vehicles leased to our customers. Now we sometimes need to supplement that with other partners or carriers," Murfin notes. Sometimes that also means getting into new businesses. As part of its logistics services, Ruan has developed software and other tools to help fill empty miles. Murfin says they got so good at it that last year they opened their own brokerage business, Ruan Certified Brokerage Services.
Again, though, there is competition from the for-hire side. Trucking companies have long been courting the freight-hauling business of private carriers. Some, like Bowman, offer the full package — from maintenance and leasing through for-hire and contract carriage, and on into warehousing and logistics.
"It's a matter of how much control the customer wants to maintain over distribution," says Lillis. "Companies that have their own fleets often prefer to turn loose gradually, maybe starting with contract maintenance or full-service leasing and easing into contract carriage. With our carrier background, we bring some expertise to the table that a leasing company might not have."
After a couple of years of consolidation, there may be room for more carriers and dealers to get into the leasing business — and get some help from the start. A couple of years ago NationaLease started having trouble finding companies qualified to fill holes in its emergency network.
"We began to recognize that for the first time in our 58-year history we had to start developing some of our own franchising through training and assistance," explains Ford. The result was a "developing member" program aimed at introducing regional trucking companies and truck dealers to the rental and leasing industry.
Developing members get training and education. They can also buy parts, tires, fuel, trucks, tractors and capital equipment through NationaLease Purchasing and the Capital Equipment Group. To join, companies must agree to have at least 50 trucks in full-service lease fleet and they must be ready to meet all franchise standards within five years. If they don't make the grade, the deal is terminated. Ford says they've had lots of interest and, despite the "miserable year" for most companies, NationaLease signed some 15 developing members in 2002.
On To 2007
Leasing companies have historically prided themselves on being on the cutting edge of technology, and the continuing focus is on technology that will improve fleet service while trimming costs.
"At the end of the day, fleet managers want uptime and on-time delivery, along with optimized fleet costs," says Penske's Feenstra. "We partner with third party technology providers to offer our customers systems that provide 'best in class' data on these metrics."
But today's dominant technology concern seems to be another round of very tough emissions reductions due for 2007 heavy duty engines. "Everyone in the leasing industry, the carrier industry, and the truck transportation industry has to really focus on 2007," says Daley. "We have to provide a more unified front. By 2004 we have to be prepared with numbers and statistics and good data in order to deal with the next deadline."
As Bertram reminds us, many of the new trucks placed in leasing service this year will come onto the used truck market at about the same time those 2007 engines will be making their debut. "Ironically," he says, "the trucks we're worried about today could be pieces of gold in 2006."
