Commercial

Optimizing Fleet and Vehicle Management

collage, truck fleet - man on laptop
 

Fleet programs have seen a resurgence as a core cost-efficiency tool to manage automotive needs. After reaching a peak in the late 1990's followed by a decline until 2009, fleet inventory levels have enjoyed a 13 percent increase since 2010. That puts today's fleet inventory at 12.3 million vehicles with a balanced mix of 47 percent automobile and 53 percent class 1-5 trucks.1

Efficient vehicle management and operations are a priority for companies with fleet programs, most of which contain 15 or more vehicles. While fleet management has undergone a host of changes over the years with increases to vehicle reliability, sophisticated maintenance management and richer financing options, a host of newer technologies from technology-based safety features and driver-monitoring telematics to driver-less cars are projected to push the pace of change in coming years. Whether contemplating your first fleet purchase, or handling a mature program, business leaders who want to effectively manage their programs should consider three core aspects of fleet administration: financing options, lifecycle and total cost of ownership (TCO).

Financing options

Fleet operators need to make decisions on whether to purchase their vehicles outright or lease the fleet. While many factors enter the equation, the primary consideration is cash flow and use of capital.

Purchasing vehicles outright ties up more capital than leasing a fleet, reducing the amount of funds available for you to operate and grow your business. The cost of the vehicles is reflected in your assets and liabilities, thus affecting your balance sheet. Companies do derive benefit from depreciation, but also assume all responsibilities of ownership. At the end of each vehicle's useful life, the company is responsible for the remarketing of the vehicle, but also receives all the income from the sale of that vehicle.

Leasing, on the other hand, conserves cash for operations and growth, while providing predictable monthly costs for vehicles that show up as an operating expense on income statements. There are minimal upfront costs with the leasing option, and depending upon lease type, businesses can rely on a predictable outcome at the end of the lease. Companies can still claim depreciation on the portion of the vehicle used, as opposed to writing the vehicle down to zero with outright ownership.

There are two primary types of leases, open-end and closed-end. An open-end lease obligates the lessee to paying the difference between residual and fair market value of the vehicles at the end of the lease. On the other hand, a close-end lease allows the lessee to "walk-away" at the end of the lease. By approaching the future value risk differently, the two types of leases offer businesses an opportunity to choose the lease that best fits their situation.

Open-end vs. closed-end leases: Which type of lease is right for your fleet?

Category Open-end Closed-end
Best for companies with Vehicles have higher and/or unpredictable mileage Need predictable payments and no residual risk
Typical term Minimum 12 months and then terminate at will Set term
Set residual value at end of lease No Yes, payments based on set residual value
Restrictions on mileage and wear and tear No Yes, fees levied for any overage
End of lease outcome Company or lessor remarkets; company captures any profits or loss from resale Lessor remarkets and captures all profits or losses from resale
Predictable outcome No Yes

 

Truck leases add additional complexity to the financing decision based on usage of the vehicle, type of truck, body style, up-fits and regulations. In certain cases, leases can be tailored separately for the cab and the chassis. A business may get a longer life out of the body — for example, a refrigerated unit may have a 10 or 15-year lifespan — while the company manages pairing the body with multiple, shorter-lifespan cabs.

Lifecycle Considerations

Optimizing your fleet lifecycle can put additional dollars back on your balance sheet and keep your fleet operating more productively.

Short lifecycle

The biggest consideration with cycling vehicles every few years is the ongoing lease payments, which typically are the largest operating cost for any fleet. The upside of turning fleet units over quickly is realized through:

  • Repairs and maintenance, particularly non-preventive repairs, are mostly sidestepped due to the shorter time in service and less wear and tear.
  • Selling the vehicles faster, with the flexibility to choose the most optimal market conditions, can produce more dollars from your remarketing efforts.
  • Rapid turn-over can also upgrade the entire fleet, enhancing overall performance and lowering operating costs with newer vehicles that typically have better fuel economy and advanced technology.
  • Regular vehicle purchases from OEM's may offer larger discounts, driving down the origination costs and overall lease payments.
  • Depreciation and amortization are affected by short lifecycles, but the gains in lower maintenance costs and additional cash from the sale may outweigh any write down advantages.

Long lifecycle

Minimizing capital expenses on the balance sheet are the primary benefits for keeping vehicles in service for long lifecycles. Other benefits include:

  • No monthly lease payments once the vehicle has been amortized.
  • The useful life of specialty vehicles that don't hold much value outside your specific business or industry is maximized with long lifecycles.
  • Maintenance costs may be more unpredictable and repairs can take longer, however using the vehicle for its entire useful life can lower the Total Cost of Ownership (TCO).

Total Cost of Ownership (TCO)

Evaluating the costs of purchasing or leasing, length of time in service, residual values, maintenance and operating expenses, as well as administrative and technical staffing, all factor into the TCO equation. In the 2016-2017 51st Annual Fact Book Guide, Automotive Fleet Magazine reports that fleet operating costs have remained flat for three consecutive years, due mostly to lower fuel costs combined with longer maintenance intervals and lower commodity prices to manufacture tires.2 However, Element Fleet Management's Annual TOC Index, released May 4, 2017,3 is forecasting an 11 percent rise in fuel costs, a seven percent increase in depreciation spending and a ten percent increase in maintenance spend for 2017.

To offset rising TOC, fleet managers must pay careful attention to fleet cycles and vehicle turn-over. When considering new purchases, a company may be able to mitigate some increases by focusing on more fuel-efficient models. Operation and maintenance costs can be better managed by using corporate or business credit cards, some of which provide rebates or cash back for specific purchases such as fuel. A corporate purchasing card may also help to keep control of fleet operating expenses.

Advances in telematics can improve TCO expenses by providing insight and visibility into in vehicle operation and maintenance. New technology available offers basic maintenance early warning sign alerts, allowing you to proactively manage vehicle maintenance with minimum downtime and fewer unexpected repairs.

Looking for ways to optimize your fleet management? Contact your SunTrust Relationship Manager or visit suntrust.com.

1 Automotive Fleet Fact Book 2016-2017, Bureau of Transportation Statistics, Bobit Publishing Co., accessed on August 17, 2017 at http://digital.automotive-fleet.com/FactBook2016#&pageSet=0.

2 Automotive Fleet Fact Book 2016-2017, Bureau of Transportation Statistics, Bobit Publishing Co., accessed on August 17, 2017 at http://digital.automotive-fleet.com/FactBook2016#&pageSet=0.

3 Element Fleet Management’s Annual TOC Index, Element Fleet, Inc., May 4, 2017, accessed on June, 1, 2017 at https://www.elementfleet.com/news/news-releases/are-fleet-fuel-costs-rising-in-2017-annual-tco-index-shows-a-likely-increase-is-coming.

This content does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.

Related

Investment and Insurance Products:

Are Not FDIC or any other Government Agency Insured   Are Not Bank Guaranteed  May Lose Value 

© 2018 SunTrust Banks, Inc

equal housing logoSunTrust Bank is an Equal Housing Lender. Member FDIC

equal housing logoEqual Housing Lender. SunTrust Mortgage, Inc

SunTrust, SunTrust Mortgage, SunTrust PortfolioView, SunTrust Robinson Humphrey, SunTrust Premier Program, AMC Pinnacle, AMC Premier, Access 3, Signature Advantage Brokerage, Custom Choice Loan and SunTrust SummitView are federally registered service marks of SunTrust Banks, Inc. All other trademarks are the property of their respective owners.

Services provided by the following affiliates of SunTrust Banks, Inc.: Banking products and services are provided by SunTrust Bank, Member FDIC. Trust and investment management services are provided by SunTrust Bank, SunTrust Delaware Trust Company and SunTrust Banks Trust Company (Cayman) Limited. Securities, brokerage accounts and insurance (including annuities) are offered by SunTrust Investment Services, Inc., a SEC registered broker-dealer, member FINRA, SIPC, and a licensed insurance agency. Investment advisory services are offered by SunTrust Advisory Services, Inc., a SEC registered adviser. GFO Advisory Services, LLC is a SEC registered investment adviser that provides investment advisory services to a group of private investment funds and other non-investment advisory services to affiliates. Mortgage products and services are provided by SunTrust Mortgage, Inc.

SunTrust Mortgage, Inc. - NMLS #2915, 901 Semmes Avenue, Richmond, VA 23224, 1-800-634-7928. CA: licensed by the Department of Business Oversight under the California Residential Mortgage Lending Act, IL: Illinois Residential Mortgage Licensee #MB-989, Department of Financial and Professional Regulation, 100 W. Randolph, Suite 900, Chicago, IL 60601, 1-888-473-4858, MA: Mortgage Lender license #-ML-2915, NJ: Mortgage Banker License - New Jersey Department of Banking and Insurance, NY: Licensed Mortgage Banker—NYS Department of Financial Services, and RI: Rhode Island Licensed Lender.

"SunTrust Advisors" may be officers and/or associated persons of the following affiliates of SunTrust Banks, Inc.: SunTrust Bank, our commercial bank, which provides banking, trust and asset management services; SunTrust Investment Services, Inc., a registered broker-dealer, which is a member of FINRA and SIPC, and a licensed insurance agency, and which provides securities, annuities and life insurance products; SunTrust Advisory Services, Inc., a SEC registered investment adviser which provides Investment Advisory services.

SunTrust Private Wealth Management, International Wealth Management, Business Owner Specialty Group, Sports and Entertainment Group, and Legal and Medical Specialty Groups and GenSpring are marketing names used by SunTrust Bank, SunTrust Banks Trust Company (Cayman) Limited, SunTrust Delaware Trust Company, SunTrust Investment Services, Inc., and SunTrust Advisory Services, Inc.

SunTrust Bank and its affiliates do not accept fiduciary responsibility for all banking and investment account types offered. Please consult with your SunTrust representative to determine whether SunTrust and its affiliates have agreed to accept fiduciary responsibility for your account(s) and if you have completed the documentation necessary to establish a fiduciary relationship with SunTrust Bank or an affiliate. Additional information regarding account types and important disclosures may be found at www.suntrust.com/investmentinfo.

SunTrust Robinson Humphrey is the trade name for the corporate and investment banking services of SunTrust Banks, Inc. and its subsidiaries, including SunTrust Robinson Humphrey, Inc., member FINRA and SIPC.