Leasing experts can provide predictability to fleets to help manage costs

Originally appeared in Fleet Owner

If only there was a crystal ball to show fleet owners the residual value of a truck they are purchasing today and what that value would be when they went to sell it on the secondary market in three, four, five or more years.

Of course, there is always historical data to look at and that typically can provide some guidance. Unfortunately, the COVID-19 pandemic has turned the whole world upside down, including the new and used truck markets. So even historical information might not be of much help for a fleet manager who may be considering adding equipment.

All too often when it comes to used trucks, people make their decisions based on what is happening at the moment. There is a name for that — it’s called the recency effect and means making decisions that have long-term implications based on current conditions. Even under the best of time, that is short-sighted.

In addition, savvy fleets have gotten away from just looking at the purchase price of a vehicle and now factor in its maintenance costs, fuel efficiency and its residual value — among other things — to determine an asset’s total cost of operation (TCO). This makes it more important than ever for a fleet to have an accurate idea of what the residual value is likely to be. Failing to accurately peg residual value could result in a significant change in TCO making it either higher or lower, especially for fleets that have longer trade cycles. Year-over-year changes can add up.

This comes into play when a fleet is making the lease vs. buy decision. Leasing companies are less likely to be guilty of succumbing to the recency effect because their core competency is managing asset-based risk. They are less likely to chase the market as they evaluate risk based on the long term, not just by looking at what’s happening today.

Leasing experts provide predictability to fleets, which helps fleet managers more accurately manage their costs. To be clear, it is difficult to accurately estimate the residual value of a truck years in advance of when it will be disposed of. However, leasing experts are able to perform a credible, informed analysis so are more likely to come to more accurate conclusions about what those residual values will be.

They look at not only historical patterns but also make adjustments based on things they see coming in the future like upcoming changes to emissions regulations, the growth trend in specific industries that will impact demand for certain types of vehicles, and changes to financial regulations that might be on the horizon. All of these affect the resale value of an asset.

Deciding whether to lease or buy a truck or trailer is never an easy decision. The seismic changes in the general economy and in the trucking industry that have resulted from COVID-19 have made that decision even more difficult. Fleets are struggling with whether or not to even add assets as there is still a great deal of uncertainty surrounding economic performance, at least in the short term. Depending on how it is structured, a lease can provide a fleet manager with more flexibility and mitigate the risk of miscalculating residual value. It’s something to think about.