The broader economy has rebounded quite well from the severe market turbulence of 2020. In fact, seven countries, including the U.S. and China, have already reached their per capita GDPs return to pre-pandemic standing, according to the latest report from the Organization for Economic Co-operation and Development (OECD). According to the group, global economic output will rise by 5.8% in 2021, up significantly from 20201.
Key to this economic activity are companies with transportation fleets that provide the movement of goods across America. However, many of these firms must make strategic organizational decisions that can impact their bottom lines when determining the right procurement strategies to upgrade hundreds of aging trucks in their fleets. The costs involved can be significant depending on the type of investment structure (lease versus purchase), and even as more companies shorten their equipment life cycles through leasing, many firms are realizing that not all lease agreements are equal.
Companies in a Full-Service Lease (FSL) already know it is not a flexible option. But it is also critical to understand the many variables and costs under an FSL program when compared to an Unbundled Lease (UBL) agreement.
Businesses Need Flexibility for Market Changes
2020 was a difficult year for virtually every business because of the drastic market changes felt across every industry. Businesses needed flexibility to adapt to the turbulent environment and scale their organizations accordingly.
Entering 2021, Federal stimulus measures and pent-up consumer demand have resulted in the American economy now heating up, forcing many companies to look for an expansion of operations. Companies with transportation fleets also need to keep an eye on costs as inflationary pressures are increasingly resulting in profit erosion.
A key inflation indicator rose a faster-than-expected 3.1% in April as price pressures built in the rapidly expanding U.S. economy, the Commerce Department reported recently. The core personal consumption expenditures index was forecast to increase 2.9% after rising 1.9% in March 2. Whether through market contraction or expansion, companies with transportation fleets today need to be as flexible as possible in running their fleet operations.
Unfortunately, not all lease structures are created equal, and some fleet organizations have suffered from an inability to exercise this flexibility through a full-service lease structure, which binds them in a lease contract over a specified period of time.
With flexibility at the forefront of the business strategy of operating a fleet, scrutinizing every detail of a fleet’s vehicle lease structure can mean the difference of millions gained or lost toward the bottom line, which can be detrimental when organizations need to preserve every penny for profits today.
Full-Service Leasing Defined
Full-Service Lease is a lease in which the lessor provides financing and other transportation services packaged in a single monthly payment. Full-Service transactions are often that, just transactions and the contracts are tenured and strategically designed to avoid high-impact deal breakers.
In an FSL agreement, fleets essentially hand over all decisions affecting the fuel and maintenance costs to their lease provider and instead focus on a “bundled” monthly payment.
While on the surface, this may sound like a marriage of convenience, Full-Service leasing eliminates flexibility since it locks the organization into a rigid contract and terms for a set long-term period, wherein the cost for maintenance and finance are combined along with general overhead costs. Unfortunately, limiting the operational flexibility can be disastrous when business conditions change, or industries experience severe shifts overnight.
Unbundled Leasing: Flexibility & Competitive Costs
In contrast, UBL agreements are designed for fleets to work with a provider that can help break out costs individually and identify the lowest-possible financial costs involved with operating a fleet, including fuel economy efficiency, and eliminating unnecessary maintenance and repair costs.
A UBL offers flexible financing options based on actual costs; not what costs were projected at the onset of the decision process. UBL offers vehicle life cycle management for better cost and performance optimization. In a UBL agreement, companies have greater flexibility on these individual costs and the freedom to upgrade and scale the size of their fleet, guaranteeing the lowest-possible financial costs involved with truck acquisition.
Significant Cost Savings Involved when Unbundling
The monthly cost savings can be significant. After taking into account the lease payments, warranty and maintenance fees, an organization pays either an average of $1,816.11 per month (unbundled) compared with $2,792.00 per month (FSL). When calculated over a span of 100 trucks, that fleet would experience a first-year savings of approximately $1.2 million toward the bottom line3.
These monthly costs are further exemplified when finance costs are also taken into account. Finance costs are a significant calculation in any equipment acquisition. Purchase or lease requires a cap cost number and a finance number. The most effective process to reduce the truck cost and finance cost is to have competitive equipment and finance options. Access to multiple Original Equipment Manufacturers (OEMs) and lenders is key to obtaining the lowest equipment and finance cost. These competitive options can be achieved when lease agreements are unbundled, allowing the freedom and flexibility to shop for the most competitive options available. The cumulative per-truck savings over a six-year life cycle amounts to $60,000, or roughly $6 million for a fleet with 100 trucks3.
The need for organizations to adapt through flexibility is no longer just a buzzword, it’s a competitive strategy. According to McKinsey and Company, businesses that operate with agility in mind will enjoy a powerful impact on their bottom line, as well as other significant benefits to the organization. This level of agility will not only help companies navigate through today’s unpredictable market, but will help position for growth tomorrow.
About The Author: Katerina Jones is Vice President, Marketing and Business Development at Fleet Advantage, a leading innovator in truck fleet business analytics, equipment financing and life cycle cost management. For more information visit www.FleetAdvantage.com.