Transportation organizations and private fleets found new ways to cope with the major challenges thrown at them in 2020, particularly by the COVID-19 pandemic.
While each has their own set of unique challenges specific to their organizations, for-hire and private carriers battle ways to deal with a difficult financial climate, rising costs from adapting to new routes and health concerns, and overall shrinking margins and bottom lines.
For transportation fleets, issues like rising insurance costs are now impacting the bottom line and are a growing concern. Increased tonnage means more miles and stress are aging trucks at an increasing pace. Case in point, the American Trucking Associations’ advanced seasonally adjusted (SA) For-Hire Truck Tonnage Index increased 6.7% in September after a handful of volatile months’ worth of activity.
Meanwhile, private fleets are facing specific challenges as well. Depending on the industry, companies with private fleets have had to rapidly adjust to changing market conditions, adapt to new routes and scale fleets quickly to align new economic realities with the changing market.
Changing utilization driving changing truck needs
According to a recent industry survey, 36% of companies had to change routes for as many as 40% of the trucks in their fleets, and 25% have had to change what their trucks are primarily hauling. Much of this shift was a result of the closing of many restaurants across the country, with fleets shifting their routes to handle increased demand for grocery items and retail/merchandise (non-food) delivery.
The survey also illustrated that roughly 50% of respondents used less than 30% of the typical miles accumulated in routes when the pandemic hit. This also meant that roughly four of every ten fleets were operating at 80% of normal utilization. As a result, along with the broader impact from the economy, 27% of organizations said they were forced to downsize their fleets.
Extra flexibility available for companies
These changing utilization patterns show how imperative it is that companies recognize they must be as flexible as possible with their own business models. The health pandemic has forced many to scale their truck utilization depending on the specific industries they serve. This has created a shift in some companies in how they approach their own business and driver programs.
The structure of their truck acquisition deals needs to be flexible to meet this changing demand. The agreements must also allow them to return the asset when the impact of the current circumstances return to normal, which is an unknown at this point, even though some states are beginning to rebound slowly and the rising COVID-19 numbers force some states back into lockdown.
One option that works well in this type of scenario would be a sale-leaseback agreement. A company can select the assets that are older models, which are less efficient and less reliable, and work with a firm that can purchase those assets and lease them back for an interim period and then transition to new equipment when ready. This would enable the company to generate cash, which can then be used for immediate internal needs or simply provide extra working capital.
A sale-leaseback program allows for the downsizing of fleets if an organization has a surplus of trucks, and it will have a positive effect on the bottom line since the ensuing lease payment will be lower than the current depreciation charge.
While extra money now is helpful, the flexibility to upgrade to newer truck technology with advanced safety features later will assure that organizations come out of the pandemic with a competitive edge through financial and operational efficiencies gained, and therefore, is worth it.
Financial benefits of a sale-leaseback
- More Efficient Use of New Capital
- Reduction of Risk to Seller
- Excellent Tax Treatment for Seller
- Avoidance of Debt Restrictions
Operational benefits of a sale-leaseback
- Right-size your fleet if you have surplus trucks
- During the lease, you can further downsize as needed
- During the lease, when you are ready, upgrade to new, more cost efficient and safer trucks
- Savings from this program will help substitute for lost revenues during quarantine period
Truck Upgrades Promise a Safer Future
A sale-leaseback program helps position organizations with equipment fleets favorably for tomorrow’s competitive environment. Advanced business intelligence has helped America’s corporate transportation fleets leverage data analytics, asset management and flexible financing to identify and act upon vehicle obsolescence while sustainably driving down supply chain costs and increasing productivity. In addition, companies are now paying closer attention to their trucks’ safety obsolescence, where data shows the impact new safety technologies have on fleets, their drivers and the savings that newer technologies and shorter lifecycles contribute to the bottom line.
A recent industry survey revealed that 11% of transportation fleets estimate they have saved more than $1 million in crash avoidance by upgrading to newer trucks with advanced safety features.
This win-win scenario helps companies realize immediate near-term relief for the business today, while all organizations continue to do what it takes to get through the hard times of the pandemic. However, this program also helps to position businesses favorably for tomorrow through a stronger long-term financial position, with the opportunity to upgrade into newer, more efficient trucks that boast the industry’s leading safety advancements.
Katerina Jones is Senior Director of Marketing and Business Development at Fleet Advantage, a truck fleet business analytics, equipment financing and lifecycle cost management firm.