Pickups: Lease Or Buy

Nov. 1, 2004

Whether you buy or lease your pickup trucks, a strong case can be made for either option. The right answer depends on your financial situation, says John Brewington, president of Brewington & Company, a fleet asset and management consulting firm based in Mount Airy, NC.

“If a contractor has access to ready cash or to competitively priced financing, then I’ll recommend that he buy pickup trucks,” Brewington says. “The rule of thumb I hear is, who can provide the cash the cheapest—the leasing company or the contractor? A leasing company is going to build in fees to cover their costs, profit, and various fees for services they provide, like license tags, or an 800 number to call in case of a breakdown or accident.”

On the other hand, Kelly Walker, owner of Kelly Walker Associates, a Dallas-based fleet-management training firm and consultant, recommends leasing pickup trucks. “Why spend one penny more than the depreciated value of the pickup truck while it’s in your fleet?” Walker asks. “Conserve your capital to invest in your core business activities.

“Using capital budgets to buy vehicles is proven to cause overaged fleet assets,” Walker says. “The thinking is that because we own it, we don’t have to get rid of it. But overaged vehicles cause the excess consumption of technicians’ hours—and those are hard-to-find hours.”

Still, many contractors like to own pickups and equipment. Traylor Bros. Inc., a large contractor based in Evansville, IN, makes it corporate policy to pay cash for all equipment, including pickup trucks. “We don’t finance anything,” says Tom Besing, Traylor’s equipment coordinator. “Salesmen come in and offer low-rate financing, and we say, ëNo, send us an invoice and we’ll send you a check.’ “

Traylor owns “probably close to 175 pickups and SUVs,” Besing says. Virtually all of them are Chevrolet and Ford units, but there’s one Infiniti SUV and one Toyota pickup that the company bought to get good gasoline mileage. “We checked the gas mileage on a Chevy S-10 versus that Toyota, and the little Toyota gets better gas mileage,” Besing says.

An Internal Lease

He explains how Traylor does business. “Our Equipment Division owns the equipment and leases it back to each job. Our mandate as the Equipment Division is to assist the jobs, but not to make a profit. Our goal is to hit zero. If we lease equipment, then we’d have a problem turning around and leasing it to a job.”

On average, Traylor keeps pickups for five years or 150,000 miles, whichever comes first. But that’s not a hard-and-fast rule. Some units go for six or seven years, and some get 120,000 miles on them and are worn out. “If we think the engine’s going to go at 120,000 miles, we’ll sell it,” says Besing. “But if it’s in the 70,000- to 80,000-mile range, we’ll probably fix it up, because we can recoup that repair money.”

Moreover, owning pickups affords Traylor the opportunity to get a second life from the units as “parts-runner trucks.” Such pickups are assigned to a project, but not to any one person, and they’re used to go fetch equipment repair parts.

When Besing buys pickup trucks, he gets bids from at least two dealers: one in Evansville and one in the project’s location. “I think that’s good business, and it builds good community relationships,” Besing says. “Number one, when you want somebody to work on your pickups, you probably get better service if you bought it locally.”

Traylor usually, but not always, buys pickup trucks in the job site area. “Once I bought three [Chevrolet] Blazers in Evansville, and it cost me $900 each to ship them to California, but I still saved $900 each on those Blazers,” Besing says. Naturally, Traylor gets a fleet discount rate from General Motors, Ford, or Chrysler—as do most contractors.

Fleet dealers are negotiable on price, and Besing negotiates. “If I’m from out of state, I’m extra business,” he says. “If I buy 50 pickups, as I did for a job in Louisville, Kentucky, that’s about $1 million in business. If that dealer gets an additional percentage from the manufacturer—say half a percent—to sell that $1 million more in business, that’s gravy to him. So he can negotiate.

“Plus, selling to a fleet customer saves a dealer the time it takes to make the sale,” Besing points out. “I call up and say, ëWhat’s your price?’ And I say, ëOK, I’ll take it.’ I don’t spend two hours looking at this one and that one. We buy because we have a job that needs vehicles. It’s all based on need. We have looked at leasing numbers, and when we take them to our accounting people, they say, ëNo, buy them.’ “

Unknown Costs

Leasing companies often try to attract customers with low monthly lease payments, then compensate with overly generous resale values, Brewington says. “They entice you into a deal that really looks great, yet it may not turn out to be as great as projected, because the vehicle depreciated faster than was projected,” he explains.

That leads to another situation: The total cost of a leased pickup truck isn’t really known until the lease expires. “You the customer may have to make up the difference between the projected residual value and the actual resale value at the end of the lease,” Brewington says.

“In late 2001, 2002, and 2003, the used vehicle market was pretty sad,” he adds. “That translated back into a lot of residuals that didn’t hold up to projections. People had to cover the difference, which was fairly large in a number of cases. When you get in that predicament we say you’re in an upside-down case—you owe money.

“If you own a vehicle, I think you have more interest in how the deal works out,” Brewington says. “You can keep it longer than you originally planned; you can pass an older vehicle down to a new hire, and reward your long-term employee with a new vehicle. You have more flexibility in reselling the vehicle or in keeping it longer.”

Upside of Leasing

Still, many contractors only lease pickup trucks. One example is Ryan Inc. Central, of Janesville, WI, which operates an estimated 125 pickups, all Chevrolets.

“The leasing company manages the pickups,” says Greg Kittle, Ryan Central’s equipment manager. “They contract with companies for maintenance, and give us a list of those preferred companies for maintenance and repair. All repair invoices go through the leasing company. We don’t go out and negotiate either repair or preventive maintenance costs for pickups. The leasing company does that for us.

“With leasing, someone else manages the assets rather than Ryan,” Kittle says. “That is outside our core competency. We negotiate prices directly with manufacturers; the leasing company does not do that. Then we pay a lease rate that is like an installment loan. And there’s a monthly management fee for the fleet. They make money on the monthly lease rate based on the price Ryan negotiates.”

The leasing company has agreements with maintenance companies that provide service at locations nationwide. “The leasing company provides detailed reporting and management support,” Kittle says. “And they’ll manage warranty matters and product recalls. Their reports compare the cost of one brand to the industry standard.”

That’s a standard leasing arrangement, says consultant Walker. “The vehicles are maintained and repaired at Firestone Auto Centers and places like that. I recommend full-service leases, with maintenance provided by these service centers. That way the equipment manager is out of the business of maintaining pickups, which is a non-core business.”

TRAC Leases

It’s better for a contractor when the leasing company owns the assets, says Walker. “To own pickup trucks hurts your credit and bonding capacity, because it’s an on-balance sheet asset that generates no sales or profits,” he says.

“The lease I’m talking about is a TRAC lease—meaning terminal rental adjustment clause,” Walker notes. “It’s a non-ownership lease that allows the contractor to establish a residual value at the end of the lease. Lease payments cover market value depreciation plus interest, plus profit for the leasing company. Full-service, non-ownership TRAC leases conserve capital, conserve technician man-hours, and improve credit and bonding ratings. And there’s a tax benefit in expensing the monthly payments.”

With a TRAC lease the end-user has no limit on the number of miles, says Tom McLean, fleet account manager at Al Piemonte Ford in Melrose Park, IL. But with a regular commercial lease the number of miles is prescribed at the outset—and so is the residual value. The leasing company will set the residual value at a fairly high level to cover itself against too much depreciation. If the residual value is set lower than the vehicle is worth at the end of the lease, the leasee usually just buys it—and could sell it for a profit. “But if it’s worth less, you’re better off giving it back to the leasing company,” McLean says.

Under a TRAC lease, the customer agrees to a monthly lease payment—and has the option to buy the vehicle, at the end of the lease, for a certain percentage of its capitalized cost. “Thirty percent is break-even,” McLean says. “And I’ve got some people who agree to pay 25%. So they have to pay the 25%, and you own the vehicle, and you hope it’s worth more than the 25%.”

American Infrastructure, a heavy-construction contractor based in Worcester, PA, uses the leasing process for its 300 pickup trucks. The company operates rolling stock numbering in excess of 1,000 or more pieces, says Dave Markey, vice president of equipment services.

“We use an open-ended lease,” says Markey. “There’s not a specific time or mileage cutoff. We can lease it until we own it. Generally when we have leased a vehicle for four to five years, we own it.

“We do the maintenance on specialty trucks and we outsource the bulk of our pickup truck maintenance,” Markey says. “That enables us to focus our internal maintenance efforts on our core construction equipment. We use dealer and other service networks, such as a fast-lube service, for the convenience of our employees.”

“We believe that leasing is more cost-effective for us than owning,” he says. “It streamlines the time involved to acquire new vehicles. We currently specify Ford pickups in our fleet. We’ve had good success with them and that helps us to maintain a more consistent corporate image.”

Vehicles as Incentives

Many contractors reward upper management with more luxurious vehicles, and less-experienced managers get basic pickups. “Our basic pickup starts with an 8-foot bed, regular cab, AM/FM radio, automatic transmission and two-wheel drive,” says Traylor Bros.’ Besing. “As you go into upper management, we’ve got Expeditions with power mirrors, power door locks, power windows—the works. But we don’t do sunroofs, even for upper management.”

Traylor’s project equipment managers get four-wheel drive, as do some superintendents and foremen, if they need it. Traylor frequently buys hitch-and-trailer packages on pickups.

And as an aftermarket feature, the company likes spray-on bed liners. “We’ve tried several different kinds of bed liners, and the spray-on ones are the best,” says Besing.

Most contractors don’t buy sporty features offered to consumers. “We buy basic work pickups,” says Richard Ashmore, CEO of Ashmore Brothers Inc. in Greer, SC. For example, Ashmore eschews the option of a removable mid-gate between the cab and bed. “We want a good solid barrier between the workers and the bed,” he says.

“We usually buy the largest engine offered in the pickup,” Ashmore continues. “When the oil crisis drove up fuel prices in the ’70s, we went to mini-pickup trucks, and that was very unsuccessful. We went to the S-10 Chevy, and they didn’t have the durability we need.

“We buy four-speed automatics, and we vary between gasoline and diesel engines,” Ashmore says. “Just about all of our smaller half-ton trucks have gasoline engines. But if we get into a four-wheel-drive three-quarter-ton truck, we’ll go to a diesel because it has more torque for towing and heavy loads.” Ashmore estimates that his company has 40 or 50 pickups, and about one-third of them have four-wheel drive. The company does a number of grading projects, and four-wheel drive greatly improves traction in off-road situations.

“We use a lot of crew cabs and extended cabs,” Ashmore says. “Our foremen pick up different workers and riders and bring them in each morning, and we use the crew cabs to get the workers out to the jobs. We don’t allow any personnel to ride in the backs of pickup trucks. We’ve got very strict safety policies. We just reached 2 million man-hours with no lost-time accidents. And that’s over 175 to 200 people including office staff.”

Whether you buy or lease, there are more options than ever to choose from. For more information on pickup truck options and what’s ahead in 2005 models, go to http://auto.consumerguide.com/auto/new/reviews.