Horses for courses

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In these days of cost cutting and efficiency, the need for safe and quality GSE is no less important and leasing companies must provide a range of reliable, safe equipment – as well as a comprehensive maintenance package – if they are to succeed. Megan Ramsay explains

Mark Percival, director and owner of UK-based tractor manufacturer and lessor The Little Big Tug Company (LBTC) and owner of specialist vehicle financing company Projects International, explains that there are several models within the GSE leasing arena.

First, there is hire purchase, whereby the customer chooses to spread the cost of the purchase over a set number of years and owns the equipment at the end of that term.

Second, a finance lease involves simply hiring the equipment for a set term. Because the customer does not own the item at the end of the lease, this option is slightly cheaper than hire purchase.

The third model is the operating lease, whereby a statutor  y minimum residual value is set on the equipment at the end of the term. This reduces the cost of the rental because there will be a physical value on the equipment after the lease is completed. The lessee can then either give the equipment back to the lessor, or pay the residual value and keep it. Percival notes that while this is fine for commercial industries such as car leasing, it is less suitable for specialist vehicles because there are more variables – for example, “for a gritter/snowplough you don’t know if it will still be worth anything, it could be rotten by the end of the term. Lots of lessors lost money through operating leases and this model has phased out of the specialist vehicles market,” he adds.

A fourth option is the complete rental package. There is no obligation for the customer here except to put in fuel and pay for any damage that may occur, with the lessor being responsible for making sure the equipment functions as it should. “This model is based on performance rather than finances alone,” Percival summarises. “Unfortunately, the dominant side of the industry is on the finance side. In aviation, lessors don’t have a great reputation because they nickel and dime their customers (that is, they charge for lots of little things over and above the rental) and they’re expensive for what you get.

“All the leasing models are just a vehicle to allow the customer to achieve what they want to achieve. For instance, a start-up with two flights a week is better off renting equipment than purchasing a fleet.”

The benefits of leasing

According to Paul Drever, network manager technical standards and compliance at handler Menzies Aviation, there are several arguments in favour of leasing equipment. “Most of our GSE is leased through one supplier in the UK and Europe, there being just a few small exceptions,” he says. “We do lease odd pieces of GSE across the network as well. The leasing model we use 95 percent of the time includes preventive maintenance and repairs but excludes damage costs. When you lease with full maintenance coverage it is up to the lease company to make sure all preventive maintenance and repairs are done as soon as possible and on schedule to ensure your customers’ flights are not delayed through poor maintenance and repair.”

He went on: “In some locations it is better to lease (with full maintenance coverage), especially if workshop and maintenance availability is not optimal. Cost control is more effective if you lease equipment, as you know what your costs will be for the GSE outside of the damage costs. Lease is used if the contract with the customer is perhaps three years and there is no guarantee that after that period the contract will be renewed and we do not want to be left with an excess of GSE, which maybe cannot be located at another station.”

In addition, Drever noted that for a handling company to set up correct maintenance and repair shops can be quite complicated, depending on the region they are operating in. The set-up process involves finding a workshop, skilled staff and tools, as well as considering any environmental impact, ensuring maintenance programmes comply with regulations, obtaining a reliable spare parts supply and budgeting for the whole operation on an ongoing basis. For a leasing company offering maintenance, all of the above would be included in the rental package.

Speaking at the GSE Buyers’ & Ramp Ops Conference held in Lisbon in April this year, Jorge Vellón – general manager of TCR Ibérica (the lessor’s operations in Spain and Portugal) – noted that with access to credit proving tricky these days, leasing can be a useful alternative to purchasing one’s own equipment. He questioned: “Why put money into assets when you can put it into your core business? This makes for more flexible operations too, as you can adapt to the needs and demands of your customers.”

What about purchasing?

Items such as air start units, air-conditioning units, de-icers, heaters and towbars are better to buy outright as they are “low hour use” (and the towbar is low maintenance and cost), or used on a seasonal basis according to need. This means that a handler may end up paying the full lease for a machine that is used only periodically, Drever points out. Of course the flip side to this is that owned equipment must be stored while not in use.

But there are other advantages to purchasing GSE outright. Peter Speck, vice president, head of corporate supply and GSE maintenance management at handler Swissport, notes that it is perhaps easier to achieve the flexibility Swissport aims for by redeploying its own equipment within the network. The decision to lease equipment would depend on several factors, including the country, the risk levels at start-up, the nature of the new operation – and also, of course, on what the customer wants.

John Edmunds, business manager – central services at dnata, agrees that each approach has its place, stating: “We own most of our own GSE but we lease some; we like to take control of our own destiny, although there’s a good argument for leasing things like GPUs (ground power units). GPU and air starts are a ‘just in case asset’ for a ground handler dependent on an airport. There is only a requirement for a GPU at London Heathrow when the fixed electrical ground power is not functional or the aircraft is on a remote stand and requires power. Likewise for an air start unit: you only require it if the APU on the aircraft has for some reason malfunctioned.

“These assets come at considerable cost and therefore they spend a good period of their time doing nothing; however, I cannot afford not to have them in the fleet. It therefore, in my opinion, makes good sense to lease them out on an hourly type contract so the capital you would spend can be used elsewhere,” he explains.

Reliability

There seems to be a general consensus that the key to a successful leasing operation is reliability, with Vellón pointing to the inclusion of maintenance and repair services within a leasing contract as a major benefit of this model. As Percival puts it: “When you’re renting something, it’s all about performance. If the equipment doesn’t work, you’re not inclined to pay for the rental. Older equipment tends not to be reliable enough; some of the blame lies with a lack of conscientious maintenance in some cases. Some companies are very good – they have their own on-call maintenance staff and so on – but others don’t have this set-up or knowledge so there can be a huge gap; the same piece of equipment might be fine with one user and in a terrible state with another.”

At The Little Big Tug Company, tractors are built with reliability in mind and are designed to eliminate weaknesses. For example, there are no computers on LBTC tractors: although usually reliable, they are notoriously unreliable in some circumstances and a tractor can completely shut down simply because the water has not been checked. All the parts used on LBTC tractors are industry-standard, making them easier to maintain since spare parts can be readily sourced.

“We have not solved the overall problem though,” Percival considers. “Most users are cutting back on preventative maintenance, and some handlers have put all their maintenance out to third parties who do checks off site once every three or four months, whereas really you need to be doing this on a daily basis.”

It is important for handlers to retain control over the quality and safety of the equipment they use, whether leased or owned. At Menzies, Drever observes: “We have a lot of control on the GSE as we specify what will be used (preferred suppliers) and the minimum maintenance requirements. Monthly meetings are held with the lease company at each location to discuss any issues and requirements.” These requirements might include safety feature updates, and are reviewed on a regular basis.

The costs for such improvements, and for the repairs required in the event of damage to equipment, must be paid by someone. Speaking at the GSE Buyers’ Conference, David Anderson (head of operational safety at UK-based carrier British Airways) asked who should be held accountable for these costs, and whether employees at handling companies might neglect to report damage in order to avoid penalties. But Edmunds replied that being billed for damage to leased GSE is “fair enough” and that dnata has contracts in place with its employees that include penalties for damage alongside continuous training. “We reward employees for on-time performance, good safety records and avoiding damage, so it’s not about blame but understanding leading to prevention,” he notes.

Making the right decisions

Summing up his point of view on renting as opposed to purchasing GSE, Drever remarks: “Leasing with maintenance is not the cheapest method but it relieves the handling company of setting up workshops, employing technicians and controlling a budget for GSE maintenance and repair, as you know what your GSE costs are per month (outside damage costs). It also allows you to spread your costs instead of capitalising to purchase the GSE. Leasing with maintenance is a good option for short-term contracts with customers too,” he says, referring once more to the operational flexibility this model can offer.

“Different types of customers choose rental for different reasons, such as optimising flexibility, minimising risk, being able to pay as they go, preferring a one-stop shop, or using their cash to grow their business instead of investing in GSE,” remarks Tom Bellekens, director Continental Europe at TCR. Echoing his colleague Vellón, he goes on: “It’s a question of allocating funds to get the highest return on investment. Rental can make sense – you can invest in growing your business rather than in equipment. It depends on market conditions too – for example, in Europe the trend has been for rentals to increase in the last 10-15 years.”

So, what is the future for GSE leasing? Will more handlers be persuaded to rely more on this business model? Anderson is of the opinion that it would take a large volume of equipment to really influence the industry, and wonders if the strategy for getting that volume of GSE into the market will tend more towards a reduction in leasing costs or a focus on improving quality and safety features. While there is certainly a desire among manufacturers and lessors to work on the latter, it cannot be denied that in this market, as in any other, the customer’s demand for cost savings is an important factor.

However, Percival believes the market is driven by much more than just price, in spite of today’s financial constraints. “Nowadays, equipment purchasing and use is disjointed, it’s not within one department. The problem for the industry is that this makes it very prone to fashions and trends; it can tend to be driven by gimmicks rather than customer needs. A big problem is that the people making the decisions on leasing are not the people who actually use the equipment; there’s a lack of experience, and a lack of understanding of the big picture – i.e. the life cost of the equipment, and whether it is going to do what the users need it to do. The other big change is that people very rarely have old-style round-the-table discussions between procurement, management, the user and maintenance to decide what is required.”

He informs: “There will always be a tendency for certain airlines and handlers to buy their own equipment. Leasing in its various forms will continue and may take a slightly bigger share as the airline industry is becoming more fractured; there are still some dominant players but lots of smaller ones are emerging too who don’t have a history of buying their own equipment. But a major breakthrough is doubtful as the big alliances and airlines are so disjointed and departmentalised that there is no intelligent control over leasing choices; this makes it likely that the industry will go with trends. I can’t emphasise enough the importance of an experienced procurement party which makes good decisions,” Percival concludes.

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