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Trailer Leasing (continued)

Identi    The answer in a nutshell is "price". Compared to trailer ownership (assuming you can afford to own), trailer leasing carries a sizeable premium in daily operating costs (significantly more than other transportation equipment types like ocean containers). After all, how else could lessors pay for the branch infrastructure and payroll costs associated with available trailer inventories if they don’t add a premium to their rates. In addition, lessors must factor in the "utilization" effect of having varying amounts of idle inventory at any moment in time. This alone can add a 20-30 % premium to the base daily cost on short term rental units.
     While these structural factors certainly add to lease owner costs, shouldn’t be some equalizing cost advantages from enhanced purchasing power and lower borrowing rates due to size and scale?       
     Well, frankly, no. At least, if there is, it doesn’t generally flow through to rental/lease customers. For example, both industry leaders (TIP & XTRA) certainly pay OEMs the lowest prices available for their large quantity trailer purchases. In addition, there is no one we can think of that has a lower cost of funds than parent companies GE and Berkshire Hathaway (TIP and XTRA respectively). (Two years ago, when Berkshire Hathaway first purchased XTRA, a senior XTRA executive was quoted as saying that their monthly cost of funds had declined by $100 per trailer due to Berkshire’s lower borrowing rates.) Nevertheless, daily and monthly lease rates remain high and fiercely protected by leasing execs and their parent companies even in the face of lower utilizations and market penetration.
     To some customers, the premium attached to a leased trailer is not an issue. Perhaps they are in an aggressive growth mode and can only spread precious capital so far. Maybe certain contracts are highly seasonal in nature and 365 day trailer ownership can’t adequately cover peak needs. Maybe recent financial performance has been shaky and the bank won’t approve additional acquisitions. There are numerous legitimate reasons why lease customers may chose to "go quietly into the night" of trailer leasing, but, as a general rule, they are financially better off owning than leasing.
     As a result, even after 50 years (the last 15 of which has seen significant industry consolidation), trailer rental and leasing remains a marginal, non-core influence in the world of trucking.
     In the next Trailer Traffic, "Tips on Successful Trailer Leasing"

LARGEST HIGHWAY TRAILER OPERATING LEASE & RENTAL COMPANIES

Last modified: December 11, 2003