Myths in the marketplace

MYTH #1

Full-Service Leasing providers enhance their profit by charging a variable cost per mile (CPM) that is much higher than their true cost in the early years of a lease.

A Fixed & Variable (F&V) pricing methodology is common in the full-service leasing industry as it’s a clear way of basing the expected Total Cost of Ownership (TCO) of a truck on its projected usage and mileage application in order to maximize its primary financial and operating useful life expectancy. Typically, a fixed monthly lease rate will encompass the asset’s procurement and end-of-term disposition, depreciation, interest, legalization, replacement vehicle insurance, and other operating and administrative overheads while the variable cost per mile (CPM) will be based upon anticipated preventive maintenance services along with expected replacement items including tires, brakes, lubricants, and parts. In theory, this cost accounting should fairly represent all of the identifiable maintenance and related costs projected over the term of the lease. However, unexpected occurrences like over-the-road breakdowns, premature component failures and vehicle towing can add an additional element of risk that full-service leasing providers understand and should factor into their TCO equation. Thus, the easiest and most transparent way of displaying the combined Full-Service Lease monthly cost is on a projected, straight-line basis over the term of the agreement – using a median CPM to counterbalance the effects of interest (declining) and maintenance (increasing) expenses over the full term of the agreement. The resulting predictable and budgetable TCO is an important consideration in a CFO’s financial assessment toolbox. Additionally, with full-service leasing, the risks of unexpected, potentially significant, repair costs during or at the end of the lease are assumed by the lessor, as is any negative consequential effect to the expected asset resale value. It is also good to understand that while it is true and logical that the actual CPM should be less than the invoiced CPM in the early years of a Full-Service Lease, it is also very likely that the opposite may occur in the latter years of the agreement.

MYTH #2

Full-Service Lease providers profit by applying CPI (consumer price index) adjustments during the lease term. Most service-based contracts contain verbiage that enables the provider to account for the economics of inflation. While inflation has been relatively benign over the past twenty years, it has certainly become a dinner table conversation more recently. The misleading premise is that CPI adjustments within a Full-Service Lease are designed to create profit for the lessor during the agreement at the expense of an undiscerning lessee. In reality, most CPI adjustment formulas are presented to apply to those portions of the Full Service Lease payment that are truly inflationary, such as labor, parts, supplies, and operational overhead expenses – and not to the true financial components of vehicle depreciation, interest, and legalization fees. Thereby, the lessor is not seeking additional profits when a CPI is applied, but is instead just looking to maintain the intended ROI of its original negotiated agreement with the lessee.

MYTH #3

Full-Service Leases limit a customer’s control and flexibility while operating a commercial fleet.

This commonly mentioned statement most likely comes about because of the age-old debate between insourcing versus outsourcing. This is a viewpoint where people may say that the outsourced provider, being a “for profit” business itself, simply adds more cost and thus is more expensive than a DIY model. This has proven over time to be untrue. Because the full-service provider industry has continued to invest in state-of-the-art tools, training, and technology, their cost-to-serve is significantly lower than most internal maintenance operations, with the exception of those who possess the scale and willingness to similarly invest in their maintenance people, processes, and technology. In reality, customers can enjoy more control and flexibility by leaving the hassles of fleet maintenance, and administration, to an experienced full-service lessor, such as Rihm Leasing. Additionally, it is always a goal of each of our Rihm Leasing service departments to quickly diagnose, repair, and get all customer trucks back to work. Besides just wanting to provide good customer service, we are also motivated to efficiently get the trucks back on the road so that we, as a full-service lessor, can continue to fulfill the originally proposed value benefit of more uptime for our customers. We are also able to provide customers even more flexibility by providing our fleet of Kenworth rental trucks for full-service lease customers to take advantage of, when available, in cases where a leased truck may require a longer service visit. Additionally, since Full-Service Lease providers regularly invest in new equipment for their rental fleet, they are often the first users of new models and technology entering the commercial marketplace every year. As the trucking industry continues along a path toward zero-based emissions, Full-Service Lease customers have the added benefit of being able to “test the waters” as a beta for enhanced technology before making a fully informed, long-term decision of purchasing one themselves.

This article was provided by NationaLease and has been added to by Rihm Leasing to be information to customers.