Market Overview

Crisis cash: Leasebacks Could Help Struggling Fleets Stay Solvent

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Row of used trucks

The worsening economic crisis is creating an opportunity for Fleet Advantage. The data-driven seller of new and used trucks is offering to cash out a fleet's excess trucks at book value in exchange for a lease that could lead to a new truck sale later.

As the COVID-19 pandemic ravages business, Fort Lauderdale, Florida-based Fleet Advantage is first targeting customers that provide the data the company uses to monitor fuel, maintenance, and total cost of operation (TCO).

"This is really a terrible situation, not only for the short term, [but] it could be for a little longer than that, meaning the next 60, 90, 100 days," Fleet Advantage CEO John Flynn told FreightWaves. "We thought the most important thing to do for our customers is to [help them] conserve cash."

So, Flynn is offering to buy unused and underused tractors from fleets with 100 to 1,000 trucks, then writing leasebacks for 12 to 48 months depending on the age and equipment content of the trucks.

"We have essentially an unlimited amount of funds for it," depending on the fleet's credit profile, Flynn said. Fleet Advantage manages more than 10,000 trucks worth $1 billion.

Fleet Advantage tries to balance newer and older used trucks in its inventory. (Photo: Jim Allen/FreightWaves)

Dormant equity

"What people don't often think about is that they have dormant equity in their truck assets," he said. "That money's already been spent. There's a way to monetize that truck by putting it into a simple lease transaction. That's what we're doing."

Small and medium-sized fleets that have bank credit facilities secured by assets such as receivables, computers, and their trucks can borrow 50 to 70 cents on the dollar, Flynn said, Selling trucks outright nets more cash than asset-based lending and avoids interest. 

"Taking cash out to survive the bad times sounds like refinancing your house," Kenny Vieth, president and senior researcher at ACT Research, told FreightWaves, "There's obviously a risk, but it gives the opportunity to get past this situation."

From an accounting perspective, a fleet that sells a truck can book the proceeds as profit, Flynn said. Target candidates for the program include food service delivery companies whose business has cratered because dine-in restaurants are mostly closed, some permanently.

"They could probably get rid of 10% of them without even beginning to think about it," Flynn said. "In some of those fleets, there are 20% to 30% of the trucks idle. We went to them first and said, ‘We'll get rid of the ones you think are surplus. And if it's still not enough, we'll let you get rid of some more later.'"

But the program is not altruistic.

A Fleet Advantage lease carries a so-called money factor, similar to an interest rate, of about 3.5%. When the lease is up, the fleet owner either repurchases or replaces the truck.

"We expect that at some point we'll get some new trucks into service," Flynn said. "We haven't made it a mandate yet, but that's a matter of negotiation."

Fleet Advantage purchased about 3,000 new trucks in 2019 from a variety of manufacturers. The company tries to balance younger and older used trucks it takes in trade and sells to independent truckers.

Flynn acknowledges some financial risk.

"If 12 months later the lease is over and the market hasn't come back, I guess we've made a bad bet."

Financial flexibility

TSD Logistics, a truckload and bulk shipper in Texarkana, Texas, points to flexibility as a hallmark of working with Fleet Advantage.

"We've got 34 trucks that we're taking possession of and due to the uncertain economic times, they're working with us," CEO Ryan Berry told FreightWaves. "They are able to adjust the timing of delivery on those trucks so we're able to have them when we need them."

TSD will start taking eight to 10 trucks a month in August through late in the fourth quarter. That delays when it has to start paying for the trucks. Berry said he doesn't think he will need to cancel his orders, "just hold for a little bit."

Delivery push-outs are increasing as uncertainty lingers over the economy. One major truck manufacturer removed 10,000 units from the industry backlog in April. The orders weren't canceled but now fall outside the 12-month production definition of being in the backlog. They could be added back later depending on demand.

Data-driven

Fleet Advantage thinks its appeal to new customers is its lifecycle management tools and data analytics that maximize a fleet's efficiency. It retains 90% of its customers.

"We have a huge database that has 15, 20 billion miles worth of maintenance data and fuel economy," Flynn said. "We have 55,000 trucks per month recording into that database."

It didn't take the company's six data scientists to figure out that a truck's maintenance cost rises as it ages. But that expertise determined that upkeep on a new truck under warranty with new tires swells from about 1.5 cents a mile to 14 cents a mile in its sixth year of operation.

"At some point in time, there's an economic tipping point at which it's far less expensive to go and get a brand new truck," Flynn said.

Fuel economy, safety equipment, and driver comfort all weigh in purchase decisions. Newer equipment helps keep and attract experienced drivers. Pressure by federal and state regulators for lower carbon dioxide (CO2) and oxides of smog-forming nitrogen (NOx) emissions also favors newer trucks.

Fleet Advantage conducts studies it says show the wisdom of running modern equipment. Beginning in 2014, one customer upgraded 1,500 trucks over a three-year period, some of which were 10 and 11 years old.

About 20% to 25% of TSD's 140 trucks are leased through Fleet Advantage. Berry expects that will grow over time.

When I [took] over as president and CEO, I began to use data to make decisions," Berry said. "In years past, it's been a good ol' boy kind of approach. Now we're using intuitive software programs bordering on the AI [artificial intelligence] concept to help us make smart, informed decisions."

Within a year of plugging into Fleet Advantage's data analytics, a methodology to lower a fleet's overall costs is created, Flynn said.

"And we'll convince them they should upgrade to newer trucks sooner than they normally would have."

 

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