COVID-19 Complicates the Lease Vs. Buy Decision
The lease versus buy decision is one that equipment buyers wrestle with whenever they are adding assets to their operation. A host of factors go into the decision with the goal of ensuring the lowest total cost of operation over the life of the asset.
The COVID-19 pandemic has muddied that decision even further as it has become even more difficult to determine long-term implications of a purchase.
Nowhere is this clearer than with residual values, which are one of the key factors in the lease vs. buy calculation.
In the Class 8 truck market, there always has been variability in the residual value of assets. New Class 8 truck sales have historically followed a peak and valley pattern that then plays out with a similar pattern in the resale market — six to 12 months later — of either too many or too few used assets with supply and demand dictating price.
COVID-19 caused a couple of things to happen in the truck market. Fleets that were not delivering essential goods saw business drop precipitously. In addition, used truck auctions closed down on-site sales, hampering the ability to reduce the existing excess inventory of used trucks.
Recently we have seen the average resale price of used trucks drop. The average resale price of a Class 8 truck fell to $36,954 in May compared to the May 2019 average value of $47,877, according to ACT Research.
Unfortunately, fleet financial planners often don’t take a long enough view of used truck values when making decisions to acquire a new asset, and they often assume that the values they are seeing today are the same ones they will see four or five years from now when they go to replace assets. However, if used truck values can change by 6% in one year, from the ACT Research figures, imagine how different they can be during the long period of a fleet’s normal asset replacement cycle whether that is three, four, five years or more.
Since they are asset experts whose core competency is managing asset-based risks, leasing companies know how to evaluate risks based on the long term. Given their years of experience dealing with diverse and large asset portfolios, it is best to leave residual analysis to fleet lifecycle experts — a.k.a. leasing professionals.
Leasing companies use a combination of historical patterns in the resale market along with forward-looking adjustments based on known facts such as pending emissions regulations, the growth trend of various industries, upcoming changes to financial regulations, etc.
COVID-19 has made the lease vs. buy decision more complicated than it has been. Fleets are trying to determine the new normal for right sizing their operation. It is likely that for some time fleets will struggle with the decision of when is the right time to add vehicles to their operation.
Fleet lease experts can provide fleet operators with the predictability that will allow them to more accurately measure their costs year-over-year and make better decisions about asset acquisition.
Patrick Gaskins, Senior Vice President of Corcentric Fleet Solutions, oversees both sales and operations for Corcentric’s fleet offerings. Over the past 10 years, Gaskins has grown the fleet services area of Corcentric’s business by implementing a best-in-class asset management database and a data-driven approach to providing Corcentric clients with visibility into all areas of their fleet spend. He joined Corcentric in 2010, bringing over 30 years of experience as a financial services professional in the transportation industry. Gaskins leads a team of industry experts who work with a supply base of over 160 manufacturers to help the country’s largest fleets manage all aspects of their fleet operations and fleet related spend. Gaskins earned his BBA in Finance from the University of Miami, FL, and his CTP certification from the National Private Truck Council.