Have you heard of a fuel service lease? If not, you may be missing out on an important tool designed to save trucking companies money and increase efficiency. In fact, operating using a unbundled lease (UBL) can save a trucking company up to 25% in operating revenue. But what exactly is it? Let’s take a look first at why it may be necessary in the current climate.
Consider what the COVID-19 pandemic has done. Not only has it significantly impacted the entire world, but it has resulted in major disruptions. These disruptions have impacted supply chains and operating conditions for all sorts of companies.
The essential link to keeping America moving and open for business are the thousands of organizations with transportation fleets. Include their drivers, and you have a huge workforce. These truck drivers are being called upon to deliver food and necessary health items like the Covid-19 vaccine to the estimated 350 million Americans. In doing so, companies must quickly respond and adjust to a new normal that requires more flexibility in their business operations. Flexibility is the key word here.
Flexibility at the Front of Your Mind
Trucking companies operating in the current climate must keep flexibility at the forefront of their decision-making. Fleet managers must scrutinize every aspect of their fleet operations to ensure they are meeting business needs. And they need to do all this while paying close attention to the bottom line. Not only that, but the pandemic has also forced many companies to scale their truck utilization depending on their industry. Others suddenly needed more trucks to keep up with soaring demand.
The U.S. economy suffered its worst period ever2 in the second quarter of 2020, with GDP falling a historic 32.9%. Neither the Great Depression nor the Great Recession nor any other slump over the past two centuries has ever caused such a sharp drain on the economy. And even though third-quarter results showed strong growth on the surface, more economic turbulence looms in the future.
While we are still in the throes of the pandemic, the economy has been improving. Even better, the commercial vehicle markets are recovering. Still, the path forward will not be easy. The fact is, the nation is still recovering from a horrible catastrophe. And trucking companies will need to use every tool in their arsenal to return to to a semi-normal operating environment. This is where something like an FSL or UBL comes into play.
Should You Consider an FSL
The first thing to note is that not all leasing is the same. There are big differences between unbundled and full-service leases. An FSL is a lease where the lessor provides financing and other transportation services with it all packaged into a convenient monthly payment. When a motor carrier enters an FSL agreement, they hand over all the decisions impacting fuel, maintenance, and vehicle usage.
An unbundled lease is quite different. These lease agreements are designed specifically for fleets who want to work with a provider that can easily break out specific costs and identify the lowest-cost option. This could cover everything from fuel efficiency to maintenance. UBLs offer flexible financing options that can be accurately predicted at the beginning of the decision-making process. In UBL agreements, companies are able to upgrade and have greater freedom to control costs, depending on the size of their fleet.
If you look at FSL and UBL side by side, it may seem like FSL is a better option for fleets, but depending on your operation, it could cost more in the long run. It is important to break down all costs associated with leases. Only this way will motor carriers ensure they are not paying more than they need to.
Examine Flexibility in UBL Leasing Options
With so many businesses closing, regardless of industry, fleets have had to make tough decisions. Many trucking companies service industries badly hit by the pandemic. When a motor carrier must make big, sudden adjustments, these can come with unneeded costs. These issues have created a big shift in how trucking companies approach business operations and truck driver interactions.
Some fleets find themselves suddenly in need of additional trucks to help keep up with increased capacity demand. Therefore, the structure of a fleet’s truck lease program needs to be flexible. Otherwise, how will they be able to meet this urgent demand? And how else will they be able to return the asset when the impact of the current circumstances recedes?
UBL agreements enable fleets to expand their business agility to be more fluid. Of course, this is dependent on how their operations are affected and impacted – positively or negatively – given rapidly changing economic conditions. This makes UBLs an attractive option for some fleets.
How FSL Leases Impact Procurement
In an FSL, the procurement manager specifies truck procurement according to their needs. Usually, they do this in bulk, with an eye toward components and buildouts that would mass-produce units. What does this mean in practicality? Those trucks receive basic specifications. This practice is detrimental to a fleet’s overall optimization and can eat into an organization’s bottom line over time.
In this case, some specs that directly compromise fuel economy could be impacted. Because in the end, the spec is catered to the FSL agreement and not vehicle need. In an FSL agreement, the OEM partnerships are typically locked into a few OEMs. This is mainly because of their bulk orders, making the OEM choice potentially limited. If you are looking for greater choice in partners, FSLs may not be for you.
Conversely, in a UBL agreement, the provider assists with custom specifications of trucks to be uniquely built for the region and route characteristics. This way the motor carrier is not stuck with vehicles and parts they don’t actually need. The right UBL partner also has various OEM partnerships and financial relationships to implement these specifications at a competitive cost. Trucking companies in these partnerships gain access to these special relationships.
Looking at Fuel and Maintenance
Two of the biggest costs trucking companies must deal with are fuel and maintenance. When entering lease agreements, fleets often worry how the lease will impact these factors. Lets again examine the two lease types from these perspectives.
One of the most apparent differences between a UBL and FSL is how fuel and maintenance, and repair costs are calculated. Fuel is the highest percentage of a fleet’s total cost of ownership. But it is also a large source of income for a FSL provider. Trucking companies would not be surprised to hear that FSL sales teams are often rewarded for selling fuel. All this while FSL providers are not responsible for maintaining a vehicle for the optimum fuel economy. They get to have their cake, eat it too, and stick trucking companies with the bill.
Conversely, a shorter lease life cycle of trucks utilizing a UBL will have much greater control over fuel and maintenance costs. UBL providers simply have no incentive to address these items with their trucking clients. However, at about 48 months, the costs reset to newer truck CPMs. When you utilize an unbundled lease, your fuel and maintenance costs are much lower. Over time, this will help improve margins toward the bottom line.
Financing Costs as Final Considerations
Finance costs are one of the primary motivating factors when procurement managers decide on equipment acquisition. Purchase or lease requires a cap cost number and a finance number. The most effective process to reduce your truck cost and finance cost is to have competitive equipment and finance options.
Never go with the first deal you find. Due diligence is important when it comes to financing and leasing. Make sure you have access to multiple OEMs and lenders. This is key to obtaining the lowest equipment and finance cost. These competitive options can be achieved when lease agreements are unbundled. In the end, unbundling allows for greater freedom and flexibility to shop for the most competitive options available.
The fact is this: Companies today cannot afford to throw away cash flow and margins. It is incredibly important that trucking companies find every opportunity to keep costs down. This is where leasing agreements come into play. The influence of technology and innovation, including data and analytics, has been among the most impactful developments in the fleet transportation industry over the last several years. Smart fleets learn to be nimble and utilize the tools at their disposal.
Through advanced technology and reporting platforms, data analytics are now completely reshaping how companies with transportation fleets run their businesses, including a fleet’s asset acquisition and overall life cycle management strategy and the decision to enter an FSL or a UBL agreement.