Long lease terms covering four and five years have been considered standard in the commercial trucking industry for some time and a pathway to lower monthly payments. That’s changing as lease terms spanning two and three years gain traction.
Part of the reason for this is growing awareness. More carriers are learning that shorter lease options are available to them. But what’s really driving interest are economic pressures – which, as CCJ reports, once again top the list of industry concerns cited by motor carriers in the American Transportation Research Institute’s annual survey.
Simply put, freight market conditions are tough, and operational costs are rising. This encourages carriers to look more closely at their total cost of equipment, factoring in variables including vehicle reliability, uptime and fuel economy. They are also considering the impact of changing technology on equipment lifecycles and the need for operational flexibility, given the shifting regulations affecting them.
So when does a shorter lease make strategic sense for a carrier? How does the length of a lease impact operational and financial goals for the company? It pays to know that the length of a lease term affects overall costs and efficiency.
Carriers who are not currently leasing also can benefit from understanding that the length of a lease term matters. Given market conditions, it’s likely more businesses will incorporate leases into their mix of fleet financing strategies.
The main consideration when selecting the preferred lease term length is to look at total costs – not just the amount of the monthly or weekly payment. These costs include maintenance and operational downtime when the vehicle is out of service.
In a shorter lease involving new equipment, the assets are more likely to be under warranty throughout the term. They also will require less maintenance and downtime than aging vehicles. On the other hand, the longer the lease term, the lower the monthly or weekly payment. But the overall costs will be higher. Equipment in a longer lease will incur greater maintenance expenses as it ages over the lease term. There also will be more downtime when the vehicle is being serviced, negatively affecting revenues.
Here’s an estimate for calculating the costs of downtime when vehicles are off the road and in the shop. A typical truck generates revenue roughly 240 days a year. The older the vehicle, the more often it is offline undergoing maintenance. And whenever that truck is out of service, it costs about $1,000 a day in lost revenue.
Financing partners may offer loaner vehicles to mitigate the impact of service delays. That’s helpful, but there are logistical issues when relying excessively on loaners. Picking up and dropping off loaners takes time and resources, so keeping the leased vehicle on the road as much as possible is the better strategy economically.
What about annual maintenance costs for equipment in shorter term vs. longer term leases? Earlier this year, our company calculated typical expenses for leased commercial trucks both with and without accompanying fleet support services to lower maintenance costs. As part of that, we compared trucks in two- or three-year leases vs. estimated costs for running the same trucks over a four- or five-year lease term, based on a range of 132,000 miles per year.
Without fleet support services, the cost per mile (CPM) estimated average was in the $0.0297 - $0.0305 range for the first two years. It climbed in later years, to an estimated $0.0863 CPM by year five. Viewed another way, truck maintenance that averaged roughly $4,000 per truck annually in years one and two more than doubled later, exceeding $11,000+ in year five.
With fleet support services, it’s difficult to provide a ballpark industry CPM as we used our own services as a benchmark. But it is clear that fleet support reduces CPM and should be considered in two- and three-year leases. Beyond that, the requirements of maintaining equipment as it ages require careful evaluation. It often makes better sense economically for carriers to upgrade to a new truck, when possible, after three years of operation.
That said, every carrier is unique. It’s up to decision-makers within the business to determine the right mix of financing strategies for equipping their fleets, including leased and owned assets. When leasing, opt for longer lease terms if the amount of the monthly or weekly payment matters most. Choose shorter two- or three-year leases if the goal is lower overall costs when equipping and upgrading fleets.
