Should You Lease Your Garbage Truck?

Sean Kilcarr ([email protected])

So your refuse fleet needs a long-overdue upgrade, which isn’t surprising coming out of the worst global economic downturn since the Great Depression. As a survival tactic, many fleets put off buying new garbage trucks and equipment for years to save desperately needed cash for other expenses.

MORE DIFFICULT: Leasing specialized trucks such as a front-loader might not make as much sense for a refuse firm as leasing a more standard truck such as a roll-off vehicle.

As a result, the numbers of new heavy-duty trucks produced in the United States took a nose dive, dropping from 133,000 units in 2008 to 95,000 units in 2009 before climbing back to only 110,000 units by the end of last year, according to the Washington-based National Automobile Dealers Association (NADA). As a result, the average age of a heavy-duty commercial truck in the United States is now more than six years as opposed to about four years a decade ago, according to Portland, Ore.-based Daimler Trucks North America (DTNA). In specialized vocational niches like refuse, the average age of a fleet’s truck can reach 10 years in some cases.

But now you’re finally ready to add a new garbage truck to your operation. What can you expect when looking for new trucks? Increased prices, for starters, and that may make leasing vehicles an appealing alternative in certain situations. But leasing is far from a one-size-fits-all solution for refuse fleets.

Sticker Shock

Whether you’re looking at a medium-duty truck, a Class 8 tractor or a heavy-duty front-loader, all commercial vehicles today cost quite a bit more than they used to because of emission control systems. For example, the technology needed to meet the federally mandated emission regulations implemented in 2002 added up to $3,000 to the base cost of a Class 8 truck. Due to the systems required to adhere to the 2007 regulations, an extra $5,000 to $10,000 got tacked on to Class 8 sticker prices. Truck costs spiked by another $6,700 to $10,000 when the final round of emission mandates took effect in 2010.

Given these price hikes, leasing companies believe their path to equipment acquisition is becoming more attractive for the more “standard” types of equipment refuse companies use in their fleets, such as the Class 8 tractors and dump trailers used for hauling loads of waste from transfer stations to landfills, or the roll-on/roll-off trucks that carry the containers that pop up in front of homes undergoing extensive remodeling or in front of commercial construction locations.

“Changes in emission technology have increased truck prices and related taxes,” says Mark Smith, general manager of strategic consulting services for Eden Prairie, Minn.-based GE Capital Fleet Services. “The upfront costs associated with acquiring trucks have increased significantly. Leasing reduces the cost impact for acquisition because typically leasing does not require a down payment and because costs are spread over the life of the lease term. Thus, the higher acquisition costs increase the benefits associated with leasing significantly.”

The lease-or-buy decision has both financial and operational factors, according to Olen Hunter, director of sales for Bellevue, Wash.-based Paccar Leasing (PacLease). The financial component involves determining whether the truck equipment will generate a higher return than other investments. The operational component, in the case of a full-service lease, involves a fleet deciding if it wants to take on maintenance responsibility for vehicles with the new sophisticated emission control technology. With a full-service lease, Hunter says, the fleet is paying not just for the use of the truck but to have someone else take care of all of its maintenance needs.

“Adopting new technology carries costs associated with upgrading or adding new tools, training drivers and fleet operators on how to use the new technology, and ensuring fleet mechanics are up to speed on the new technology,” Hunter says. “Last, the unknown associated with the re-sale value of [trucks with the new emission] technology often presents additional risk that most lease structures can help eliminate.”

Pros and Cons

Leasing vehicles also can allow a firm to save capital for facility or technology improvements that will improve their overall business and profitability, according to Hunter. “With a lease you only pay for the use of the equipment over the lease term, as opposed to paying for the full value of the vehicle and selling the equipment at some point in time, usually when the equipment has maximized its useful economic life,” meaning when the vehicle’s value is less than its maintenance costs, he says.

However, while leasing may work easily for “standard” trucks such as Class 8 tractors and roll-on/roll-off vehicles, it doesn’t necessarily compute for more complicated — and far more expensive — front- and rear-loader trash trucks. “Those are big, highly specialized pieces of equipment that require special maintenance,” says Darry Stuart, president of the Wrentham, Mass.-based consulting firm DWS Fleet Management Services. “It’s far more difficult to lease trucks like that for 10 years or more compared to standard vehicles such as tractors, which can be more easily resold on the used truck market.”

The issue when it comes to specialized packers, front end loaders and similarly niche equipment centers around the anticipated depreciated value of the truck as the end of the lease, also known as its “residual value,” says Stuart.

A specialized truck that’s worked hard for 10 years might not have much value left over except for spare parts, and on top of that can only really be sold to another refuse company due to its specialized function — thus limiting the pool of used vehicle buyers.

By contrast, he explains, a used tractor can be sold into a much wider variety of operations, significantly broadening the customer pool.

The less complicated nature of “standard” trucks also comes into play here, says Stuart, who spent five of his 40-plus years as a fleet manager at refuse firm BFI.

For example, refuse rear- and front-loaders come with expensive hydraulic systems to operate everything from the trash compactor body itself to robotic arms for curbside receptacle pickup, he explains.

Maintaining such systems requires specialized knowledge and components, Stuart stresses, and often it is much easier for a refuse fleet to bring on the personnel and parts inventory to support such trucks than a full-service leasing firm trying to service a much broader mix of customer vehicles, from tractors to dump trucks and medium-duty units.

“Refuse fleets focus on just refuse vehicle maintenance — that’s their bread and butter. That’s what generates the revenue,” Stuart says. “A full-service leasing company is focused on maintaining many different kinds of vehicles and a larger number of them as well. That’s what generates their revenue.”

If a refuse firm decides to lease vehicles, it should retain the services of an expert who understands the ins and outs of leasing to perform the contractual negotiations, Stuart says.

Finance experts also note that if a refuse firm wants to acquire alternatively fueled vehicles, governmental grant programs often can be used to offset the transaction costs regardless of whether the trucks are leased or purchased.

More Detailed Details

Yet whether a refuse fleet decides to lease or buy its new trucks, it will have to supply far more detailed information during the financing process than it has in the past. Make no mistake: while leasing may offer a less cash-intensive option for acquiring vehicles and equipment, refuse fleets should expect to be strenuously scrutinized from top to bottom, Stuart says.

“Don’t be surprised if, when going through the approval process, the bank, finance company or leasing firm sends in people to walk around your maintenance shop and take a look at your facilities,” Stuart adds. “Today, more than ever, the people lending the money want to know how your operation is performing — especially if they’re putting $275,000 or more on the line for just one refuse vehicle.”

And if your maintenance shop seems disorganized, for example, that could weigh much more heavily on your finance rate than five years ago — or even determine if you get financing at all, Stuart explains. “That’s the real big change here,” he says. “It’s the level of detail required as part of the transaction.”

“Leasing companies today are requiring audited financial statements and also will need to know how many vehicles you intend to finance each year, the types of vehicles you require, any up-fitting costs plus your desired amortization terms and manufacturer discounts,” says GE Capital’s Smith.

Yet leasing and finance companies themselves are making changes, too, so they can adapt to the more topsy-turvy business cycles common in truck-dependent industries, such as the refuse market. “We’re really not seeing changes to basic truck financial products,” says Geoff Robinson, director of sales, marketing and remarketing for Dallas-based Daimler Truck Financial USA, an arm of Germany-based Daimler Financial Services. “What we’re experiencing are changes in how they are applied. What we’re seeing is a much greater need for more ‘flexibility’ in financial arrangements, such as payment holidays, seasonal payment plans, and the like — items now negotiated up front as part of the financial contract.”

The need for more “flexibility” is because cash flow has become a real challenge for many fleets, large and small, which is driving many lenders in the trucking market to rework traditional financing plans — be they lease, rental, or straight commercial loans — into packages that take into account more freight market volatility.

On the leasing side, more engagement early on in the process can also provide more options for customers, explains GE Capital’s Smith, which can make the equipment selection, ordering, up-fitting and delivery processes far easier.

Sean Kilcarr is a senior editor of Fleet Owner, a sister publication of Waste Age.

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Sidebar: Learn About Truck Purchasing at WasteExpo

The 2011 WasteExpo conference program includes the “Balancing the ‘Wants and Needs’ of Truck Purchasing” session. The session will take place from 3:15 p.m. to 4:30 p.m. on Monday, May 9.

For complete information on the conference program and other show events, visit www.WasteExpo.com.