Thu January 20, 2022
John Rickette, Special to CEG
Recent increases to the Consumer Price Index (CPI) are having a noticeable effect on costs of certain truck financing structures — but not all. Understanding these specific nuances can mean the difference of millions of dollars lost or preserved toward the bottom line of a fleet with hundreds of trucks.
The CPI measures the price of many goods and services, including groceries, clothes, restaurant meals, recreation and vehicles — light vehicles as well as commercial. According to a recent CPI report price pressures remained elevated year-over-year. In fact, the government's consumer-price index increased 5.3 percent in August from the previous year. This is due to many reasons, but inflation has been a main culprit for the rise in prices.
Inflation has risen this year for a few key reasons. U.S. gross domestic product rose at a rapid 6.6 percent seasonally adjusted annual rate in the second quarter, largely because of consumer demand on many goods. Spending jumped at an 11.9 percent pace in the second quarter as more people received vaccinations, businesses continued to reopen and trillions of dollars in federal aid made its way through the economy.
The changing dynamic of CPI can have a monetary impact on a fleet organization's bottom line because CPI can have a direct correlation to finance costs. These finance costs can be significant depending on the type of investment structure (lease versus purchase), and even as more companies shorten their equipment life cycles through leasing, many firms are realizing that not all lease agreements are equal.
The decision for many fleets comes down to whether or not to structure their agreements through a Full-Service Lease (FSL) or that of an Unbundled Lease (UBL) agreement.
Full-Service Leasing — A Myth of Convenience
Full-Service Lease is a lease in which the lessor provides financing and other transportation services packaged in a single monthly payment. Full-Service transactions are often that, just transactions and the contracts are tenured and strategically designed to avoid high impact deal breakers.
In an FSL agreement, fleets essentially hand over all decisions affecting the fuel and maintenance costs to their lease provider and instead focus on a "bundled" monthly payment.
While on the surface, this may sound like a marriage of convenience, Full-Service leasing eliminates flexibility since it locks the organization into a rigid contract and terms for a set long-term period, wherein the cost for maintenance and finance are combined along with general overhead costs. Unfortunately, limiting the operational flexibility can be disastrous when business conditions change, or industries experience severe shifts overnight.
Unbundled Leasing: Flexibility & Competitive Costs
In contrast, UBL agreements are designed for fleets to work with a provider that can help break out costs individually and identify the lowest-possible financial costs involved with operating a fleet, including fuel economy efficiency and eliminating unnecessary maintenance and repair costs.
A UBL offers flexible financing options based on actual costs; not what costs were projected at the onset of the decision process. UBL offers vehicle life cycle management for better cost and performance optimization. In a UBL agreement, companies have greater flexibility on these individual costs and the freedom to upgrade and scale the size of their fleet, guaranteeing the lowest-possible financial costs involved with truck acquisition.
How An Increased CPI Impacts Truck Financing
Finance costs are a significant calculation in any equipment acquisition. The decision to purchase or lease requires a cap cost number and a finance number. Fleet organizations in an unbundled lease structure work with their lease finance partners to gain access to multiple original equipment manufacturers (OEMs) and lenders, which is key to obtaining the lowest equipment and finance cost. The Unbundled agreement allows the freedom and flexibility to shop for the most competitive options available.
A traditional Full-Service Lease includes a fixed cost, a maintenance and repair cent per mile (CPM), which increases over time based on the Consumer Price Index (CPI). An Unbundled Lease fixed cost on the other hand does not increase based on a CPI, and M&R is based on actual costs fleets incur, not a fixed amount per month regardless of maintenance events.
As the CPI increases, fleets locked into an FSL see their costs rise, and these additional increases can be severely detrimental to the bottom line. What's more, an eroding bottom line can decrease competitive potential in a market where every penny counts and additional cash is needed to expand the business.
What's more pressing for fleets locked in a Full-Service Lease is the notion that few economists see the CPI rate declining significantly in the near future. Continued supply chain issues in the foreseeable future are expected to keep pressure on the cost of goods — heavy-duty trucks included — and this means these fleets won't see any relief to their profits anytime soon, a business strategy that won't please investors and other financial stakeholders. While they are locked in their current lease agreements, they would be wise to re-evaluate their longer-term truck acquisition strategies and begin planning for the right time to convert to a more flexible, bottom line-friendly unbundled lease structure.
For more information, visit www.fleetadvantage.com.
John Rickette is vice president of portfolio and manager of the transaction management team at Fleet Advantage.