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