The leasing alternative

posted on 27th June 2018

Leasing has taken a long time to become established in the GSE sector – but it is starting to gain ground now, explains Chris Lewis

Driving down the motorways of Europe or North America, the majority of the trucks that you pass will be leased or rented to the companies that operate them, or under some sort of contract hire arrangement. The same is true for a good proportion of the private cars that you see, and if you take the train to the airport, there is a fair chance that the rolling stock may not actually belong to the railway company, especially if it is one of the newly privatis ed companies.

But down on the airport ramp, chances are that most of the ground support equipment whizzing about the tarmac will actually belong to the airline or handling company whose name is painted on the side. According to the latest estimates, only a little more than one-fifth of GSE equipment in Europe is supplied under an operational lease agreement. Europe is probably the most advanced market in this respect; North America and Asia are lagging behind, especially in countries where airlines remain in state ownership.

That said, the GSE leasing market has come a long way in the last couple of decades; leading GSE leasing firm TCR estimates that the figure was only 1% at the turn of the century, as opposed to around 20% now.

For many years, GSE was put in the ‘too difficult’ basket by the equipment leasing and rental industry – too specialised and too fragmented to interest the major players. Its cause wasn’t helped, either, by the fact that many handlers and, especially, airlines saw GSE as a critical aspect of their operation and weren’t prepared to take risks with leasing firms that might not be able to come up with the goods at critical times. There were also alternative models available, such as equipment pooling.

One factor that has changed the balance in favour of the leasing approach is the development of the low-cost carriers, airlines that are much more open to the idea of outsourcing where it can save them money and improve their bottom line.

GSE leasing and rental services have generally been provided by specialist companies, notably TCR, although lately GSE manufacturers and providers have also started to offer it as an option, either in-house or in partnership with a finance provider.

Contract hire of equipment used in business is a well-accepted concept in large parts of industry in the UK, US and Europe but it has yet to make its mark to the same extent in GSE, says the chairman of Heathrow-based equipment provider Rushlift GSE, Peter Cosgrove. In some sectors, such as ompany cars, commercial vehicles and industrial equipment such as forklift trucks for example, market penetration is as high as 70% or 80%. At an estimated market penetration of 20% to perhaps 30%, GSE runs a long way behind, he considers.

Cosgrove continues: “When we talk about contract hire or ‘leasing’ of equipment in Rushlift, we are talking about not only the funding of equipment but the management of it through its life cycle, encompassing procurement, maintenance and repair and disposal. It is much more than a funding solution.”

Benefits of leasing

The general popularity of contract hire is based on two broad factors – operational and financial. Operational factors include all those reasons normally associated with outsourcing of activities that are not part of the core expertise of the business, such as simplifying the business and management focus, but also the benefits of scale and expertise that should be brought to bear by the leasing company. These latter advantages should relate to workshop efficiencies, parts and equipment procurement, expertise in specification of equipment, removal of residual value and obsolescence risk, and the benefit of the knowledge gained from running a large fleet of GSE.

In Rushlift, “we believe it is part of our function to work closely with our customers to find ways of improving their operational efficiency,” Cosgrove says. For example, Rushlift’s web-based fleet management system gives customers real-time information about many of the aspects of their GSE fleets. It provides information on routine maintenance, vehicle off-road (VOR) and repairs in real time, as well as a suite of key performance indicators (KPIs) such as downtime and utilisation. It also allows them to view maintenance histories and access their account information, as well as being able to log breakdowns 24 hours a day.

“The customer sees what Rushlift sees within our IT systems, the ultimate in transparency,” he argues, continuing: “In addition we hold regular customer reviews so that we can discuss and take proactive actions to finding solutions to those aspects of the business that we know cause irritation, such as excess hours and damage costs. It is this approach to customer relationships that has enabled Rushlift to achieve consistently high levels of contract renewals.”

Cosgrove says that the financial arguments for contract hire can be summarised by the two concepts of discounted cash flow and the opportunity cost of capital. Discounted cash flow is the recognition that a pound paid today is worth more than a pound paid in, say, three or five years’ time, so by paying in installments the value paid for an item is reduced by spreading the payments over a long period of time. Contract hire therefore gives the customer a benefit in terms of cash flow as compared to buying equipment outright. Contract hire also has the benefit of matching cash flows in the company, in that revenue is received by the customer as it is being paid out for the use of the asset, as opposed to a large capital investment up front followed by gradual recovery over many years.

 

The opportunity cost of capital is the concept that money can be used in one area of a business to give a higher return than if it was invested in other areas, such as GSE. So, for example, an airline is likely to get a better return from investing in aircraft than by investing in GSE. To invest in GSE is a lost ‘opportunity’ to improve its profitability and return to shareholders.

Cosgrove states: “As no business has an endless supply of capital it is in the understanding of opportunity cost where smart decisions are made. For example, some companies have been known to use contract hire, and especially the sale and leaseback type of deal, to partly fund the acquisition of competitors.

“Leasing or contract hire is therefore much more than a method of funding the business. It should be considered in the context of the expertise within a business, the strategy of the business and the many demands placed on its available capital. An effective contract hire deal should also be about operational efficiency, cost reduction and a mutually beneficial relationship where both parties work together for mutual benefit.”

Alternative source

Vestergaard marketing manager Karina Læssøe says that her company is involved in leasing both directly and through partners, offering deals mainly where customers lease first and then buy later. Customers lease for three and five years. Some clients have also leased equipment with their own finance partner, such as TCR.Vestergaard has been engaged in leasing and renting GSE for a long time, adds sales manager Lars Barsoe. He notes: “We have our own finance company which can assist customers who are short of cash and/or have other financial obligations, yet have need for GSE. We thus have equipment in North America, Europe and the Middle East under various contracts. Vestergaard will always be the ‘alternative leasing source’ and typically used if normal local means are exhausted.

“We are also involved in hire-purchase arrangements, which can be combinations of customers wanting to trial equipment before purchase or cases of putting off capital investments to future budgets, where the need for the GSE is imminent. Customers very often ask for financial solutions at the same time as requesting prices and recommendations for products,” he adds.