Along with Todd Berger of Paccar Leasing and Jim Lager of Penske Truck Leasing, our Vice President of Sales & Marketing, Josh Krause, was featured in a Transport Topics article “Market Pressures, Availability Push More Fleets to Leasing.”
Here’s The Full Article
With the combination of increasing prices and interest rates, supply chain shortages and the rise of electrification, fleets are collectively at a tipping point. With these market conditions, are more trucking companies looking for alternative options, such as leasing, to purchase new units to hedge their uncertainty?
“I would not go as far as to communicate the reasoning behind it,” said Josh Krause of OTR Leasing. “But we are seeing a higher level of interest in a leased instrument for securing an asset than we were previously. I don’t know if it’s because of the uncertainty or the relative dearth of inventory we’ve been running through over the past year.”
According to Todd Berger of Paccar Leasing, today’s challenges are not the same as in 2020 during the beginning of the pandemic. “The [market conditions] were pretty similar challenges from last year with supply chain and things of that nature,” he noted. “But I’ve been doing this for 40 years, since 1982, and I’ve never seen the types of challenges we are dealing with altogether today.”
Jim Lager of Penske Truck Leasing says fleet operators that would normally purchase new units find they can only get a fraction of what they wanted. “We certainly have seen more companies come to us because they can’t get trucks anywhere else or need maintenance help because they can’t get new trucks and they’re not used to running them longer,” he said.
With the used truck market driving higher, OTR’s Krause noted there’s much more pressure on the small carrier. “I think the reason most fleets aren’t growing in the current environment is lack of equipment, more so than the ever-present driver shortage,” he explained. “I don’t know if it’s the uncertainty looking forward or the historic unavailability or high-priced availability looking backward that’s causing people to pursue leasing. But interest is up.”
According to Paccar’s Berger, many fleets that traditionally buy new trucks are considering other options now. “Fleets are asking, ‘who can source the truck for me?’ And ‘who has a truck that they can build for me when I need it?’ ” he said. “That’s the main thing, whether they buy or lease. They have to find out who can get them a truck.”
Krause added that some of the demand pressures stem from having more opportunities to add lanes, which means they need more trucks. “It isn’t something that is part of a business plan that’s long and thought out,” he noted. “It’s more of, ‘This place will give me two extra lanes if I can come up with two extra trucks. I can’t come up with two units with 40% or 30% down. I can’t come up with $72,000 within a week to finance these. I wonder what other options I have?’ I think we hit that segment.” Lager said Penske typically runs its trucks to 700,000-750,000 miles, but some fleets are running longer.
“That’s what we’re comfortable with, but we run some longer than that. I think many fleet operators previously ran them for four or five years at 100,000 miles a year. They were getting out of them in that warranty period, and now, suddenly, they’re running the trucks out to the maximum mileage,” he said. “Now they’re in the back half of the maintenance curve. Many companies aren’t used to running trucks that far out. And they need a maintenance partner to help run them longer.”
PacLease, a division of Paccar, gets allocated a certain number of vehicles from Peterbilt and Kenworth, according to Berger. The allocation, he explained, is divided amongst all of its U.S. and Canada accounts group. Those dealers then find what equipment is coming to term and maturity. Based on those conditions, the lessor can decide when to replace or extend the lease. Everything Penske does is based on an operating lease, according to Lager, whether it’s a full-service lease or something in between.
“Not only do you get the truck and, of course, the financing is built into that, but we’ll maintain every aspect of that vehicle and do all the licensing registration, anything to keep the truck compliant except put the driver behind the steering wheel … It’s turnkey,” he said. “We structure that lease based on the customer’s needs, and they’re all a little different, but at the end, hopefully, the customer will reapply for a new truck and keep on going down the road.” The bigger concern is the residual risk at the end of the term. Lager says Penske offers its customers options, so they don’t have to worry about disposing of the truck.
Manufacturers and finance/leasing companies must employ alternative methods to assuage the current financing fears with today’s market fluctuations. “The challenge for our business is to provide enough volume of units for our customers because we’re not alone as a financing company,” OTR’s Krause said. “There are multiple [companies] in the same space that we’re in. I think we’re getting more exposure because we are being found as an alternative solution.”
While PacLease primarily offers full-service operational leases, which include the truck and preventive maintenance repairs for the term of the agreement, Berger adds that they are also picking up steam with nontraditional financing options. “One alternative we offer is managed maintenance leases (MLA), which allows us to finance the truck for a customer,” he said. “They have the responsibility for all the maintenance and turn-in conditions. Some of those finance leases have residual exposure, and some don’t. When we write the finance leases where the customer does not have residual exposure, they turn it back in for a specific residual. We take the hit if it is below the market value.”
With residual values strong right now, MLAs may seem like a good option, but that could turn once things start to normalize, Berger adds. Other options add flexibility, such as a TRAC Lease, which is a terminal rate adjustment clause. “This is where the residual responsibility is shared. In today’s environment, that truck might be worth $70,000, whereas, traditionally, it might be worth $45,000,” he explained. “With a residual value of $55,000, if it’s worth $60,000, then we both get $2,500 back. If it’s worth $50,000, we both write a check for $2,500. So there are options for shared responsibility.”
In addition to some of the alternative financing options, Berger says PacLease can also unbundle some of the maintenance services which were only available in full-service leases. “With our Managed Maintenance Program, we bundle the financing with whatever the customer chooses; we can bundle in some services they traditionally had with a full-service lease. That could be the maintenance, licensing or toll pass usage across the country,” he said. “The customer gets the benefit of our vast maintenance network and then all the ancillary services we currently provide, but we can do it an unbundled way.”
In the current environment, one thing is certain: no one knows where we are in this cycle. But some signs point to a plateau, according to Krause. He noted industry-high metrics across the board, from year of record-high DOT originations to record-high spot rates. “From all data sources, we see record high income for truck drivers, too,” he added.
Krause noted that even with the spot rates dropped to where they were and some of the uncertainty in the market, it is still close to record highs. He contends that market has plateaued. “I don’t believe the market will get significantly better as it has for the truck driver for the past 20 to 24 months. It’s not going to get better than it has been. But it’s not going to be anywhere close to where we started this climb,” he said. “That’s what we’re experiencing currently with fuel prices, truck inventory and capacity relationships in the supply chain. I think we’ve plateaued. We’ll see maybe some level of a variation. But I believe we’ve reached the top of the current cycle.”