Understand these three common misperceptions of vehicle leasing and how a few simple changes can reduce your fleet operating costs by 20 percent
Under the traditional leasing model in the UK and Germany, a fleet leasing company charges a set price for managing every aspect of a vehicle’s life cycle from start to finish including acquisition, maintenance, to final vehicle disposal. Commonly referred to as the full service lease method, it is favored by many organizations because it is considered to be a “safe bet.” The perception is that the leasing company provides a turnkey solution with the certainty of predictable, non-fluctuating costs.
This method may seem to be the most fiscally prudent because it may protect a company against the risk of potentially poor residual values at the end of the lease term and keeps the fleet off the company’s balance sheet. Plus, historically it’s been hard to gather the information needed to proactively reduce risks and mitigate costs.
This is no longer the case. Improvements in technology and access to increasing amounts of data have actually turned all of the reasons for choosing the full service lease method into barriers to effective fleet management. Today, when a business relies on the traditional full service lease model it misses an opportunity to take advantage of more innovative, cost effective fleet management and financing alternatives that are in the market. Now that’s risky. Instead, smart companies are demanding increased transparency and control, all of which can be provided if the proper technology and lease structure are in place. So what are some of the common misperceptions and what is the truth in today’s environment?
Misperception #1: Residual values are risky. First, there’s the perception that the full service lease model reduces cash flow fluctuations and residual value risk, preventing your organization from realizing a financial loss when a vehicle’s value plummets at the end of its lease term. Full service lease companies are more than happy to take advantage of the fear around residual value as they reap the rewards of resale at the end of the lease term. In actuality, residual value risk is an artificial risk: it’s only a risk if you have no control over when you take your vehicles out of service. A flexible, open lease structure will provide companies with more options to reduce TCO and maximize returns.
Misperception #2: Fleet vehicles should remain off the balance sheet. The new IFRS 16 lease regulations will require all leased equipment to move onto your company’s balance sheet in January 2019, making this thinking now null and void. Have you thought about how you will transition to this new standard? Will you handle this retrospectively? This may require additional cost and effort. Will your leasing company be a partner to help you adjust to these new accounting standards or are they saying they don’t expect much change and not offering alternative lease structures for you to consider? Now is the time to consider – and answer – these questions so you are ready when the time comes.
Misperception #3: Full service lease fleet management is simple. Companies pay a premium to avoid risk and subsequently fund the inflated margins for the suppliers. However, the true cost of the vehicle is very likely to be significantly less than the full service lease price. The total cost should be set and predictable, but maintenance charges and penalties can be significant, creating major hassles as the lease ends and charges for damages appear that were assumed to be included in the agreement. The full service lease model—touted for its simplicity—is anything but simple as time is wasted understanding hidden fees and fighting damage charges.
This is never more evident than with light commercial vehicle fleets (LCV’s). LCV’s are designed as work trucks and tend to operate for longer terms and higher mileages. LCV’s often experience some degree of damage over their lifecycle due to the nature of their use. With mileage penalties and inflated damage repairs, LCV’s simply are the wrong fit for a full service lease.
What the full service lease model really drives is complacency. Instead of working with their leasing company as a partner together to effectively manage costs, organizations remain trapped in an expensive relationship in which they get no control or visibility, are subject to inflated premiums, and receive far less financial value than they anticipated. This delta between actual costs and the fixed leasing company fees allow leasing companies to routinely earn 25 to 30 percent return on equity.
And that’s why companies in Germany and the UK are turning to ARI.
With ARI, companies in the UK and Germany gain fleet management transparency. The flexible approach ARI provides reduces total costs by eliminating ill-defined, often unnecessary premium charges and punitive penalties. Using the latest technology available, ARI provides fleet clarity, so companies can actively manage and minimize costs. Organizations are able to take control of the all-important end-of-life vehicle disposal experience, proactively lengthening or shortening vehicle lifespan based on the economic drivers with the biggest impact—and keeping the assets’ value inside the organization. With an ARI solution, companies get a consultative partner who delivers savings while easing the administrative burden for our clients.