When it comes to fleets, there’s a lot to consider when deciding whether to lease or own. By comparing the total cost of ownership with the alternative—full service truck leasing (FSL)—fleet managers can determine which option will deliver the best financial and strategic benefits to their companies.
Every reputable FSL company recognizes that its service may not be suited to every business, so it will walk fleet managers through the process of identifying costs and customer service benchmarks associated with both ownership and leasing. Let’s look at both options.
Strategic reasons to own
• Transportation is a core business function. Businesses that traditionally have chosen to own their fleet might include trucking firms, route delivery companies, or even mass retailers. These businesses consider transportation to be a core function because the trucks and drivers are tasked with fulfilling inventory and supporting their companies’ brand appeal through regular contact. These organizations often have the size and scale to handle such a function with the supporting requirements of fleet maintenance, safety, finance and administration.
• Vehicles are highly specialized. These types of vehicles could be dump trucks or construction vehicles. Typically, FSL companies prefer to work with a more standardized spec when ordering trucks in order to maximize their parts inventory, their purchasing, and maintenance shop infrastructure, so leasing vehicles like these may be prohibitive. However, the line that differentiates what is specialized and what is not has changed over the years. For example, it’s not uncommon to find refrigerated and flat-bed trucks in a FSL fleet today.
• Vehicle annual mileage is low. While most FSL contracts do not have a set “cap” on the number of miles driven, they often rely upon a minimum mileage usage to generate sufficient variable revenue to cover appropriate preventive maintenance costs. Such examples might be 10,000 mpy on a route delivery van or 40,000 mpy on a day cab tractor. So, vehicles with low mileage and/or low utilization may work better on the balance sheet if they are owned.
Calculating total cost of ownership
The way to calculate financial justification for both owning and leasing commercial vehicles is by carefully studying Total Cost of Ownership (TCO), which comprises several key components:
• Acquisition cost of asset. The financing arrangement/interest costs/costs of capital are the most obvious components of TCO.
• Corporate tax rate. This is the after-tax write-off after calculating depreciation of assets. Specialized components are depreciated differently on some vehicles. For example, refrigerated bodies or heavy duty lift gates may be held on the books for a longer term than the truck cab and chassis.
• Maintenance. This includes both preventive and unscheduled maintenance, as well as roadside repair, throughout the life of the vehicle.
• Warranty coverage and recovery. This has become a key component of TCO and is dependent on the ability of the fleet owner to recapture the available warranty on equipment. It’s now an important business function and significantly reduces lifecycle maintenance costs for that asset when it’s properly negotiated and administered.
• Resale/remarketing of vehicles. The ability to find a ready market and the best possible prices for used vehicles can have a huge impact on TCO.
• Administrative Costs. Owning a fleet brings with it perhaps a disproportionate amount of administrative costs that include licensing, DOT tracking and compliance, tax reporting and permitting, to name just a few.
Strategic reasons to lease
Full Service Leasing (FSL) is often the best option for companies that view transportation as an enabling business function, rather than a core function. For example, many foodservice distributors rely on FSL companies to provide the necessary equipment and service infrastructure to enable them to better serve their customers, which may include restaurant chains, convenience stories, and public institutions. These businesses demand flawless customer delivery and a modern, efficient trucking fleet makes that possible.