Leasing helps firms control costs - business vehicles - includes list of car and truck rental firms - Special Report

Nation's Business, May, 1993 by Julie Candler

Thanks to lower interest rates and the increasing durability and improved fuel economy of late-model cars and trucks, transportation costs--including the costs of leasing--have stabilized, and for some businesses they are even lower than in previous years.

"Our overall leasing costs are stable because interest rates are way down," says Bob Wagner, fleet manager for Eaton Corp., a vehicle-component and electronic and electrical controls company headquartered in Cleveland. For Eaton's fleet of 1,800 leased cars and light trucks, he adds, "we are financing over $10 million. When we lease, we are sensitive to interest rates."

Wagner points out that price increases on 1993 car models are modest. And although Eaton's average new car costs about $15,500, Wagner says, prices often include safety accessories such as dual air bags and antilock braking systems.

Eaton and other businesses are also saving by increasing the cut-off mileage for vehicle replacement, which is possible, in part, because vehicles are more durable.

Until a couple of years ago, Warner-Lambert Co., a healthcare and consumer-products company based in Morris Plains, N.J., used to trade in leased vehicles at three years or 55,000 miles, whichever came first, says Suzen Moye, who helps supervise the company's fleet of 2,700 leased vehicles. Now the policy is three years or 65,000 miles.

"By increasing the mileage, we have seen some increase in maintenance and tire expense, but this has been more than offset by our improved effective depreciation rates," says Moye.

At the end of the company's typical lease, it usually gets back at least as much as the 2 percent per month that was depreciated over the lease term.

Eaten also stretched its replacement policy to three years or 65,000 miles, beginning with the 1993 models. "It was cost-effective to keep them another 10,000 miles," says Wagner. "And resale values have been holding strong," he says, referring to resale-value clauses in open-end lease agreements.

Under such clauses, the company must return the vehicle it has leased--or a stipulated amount of money representing its resale value-at the end of the lease. A firm sometimes can sell a vehicle it has leased for more than the amount it owes the leasing company.

Wagner adds that now Eaton is "thinking about a replacement period of four years or 65,000 miles."

Leasing is popular for all categories of business vehicles. In a recently published survey of 515 corporate/business fleet managers, the National Association of Fleet Administrators, in Iselin, N.J., learned that 63 percent of the cars, vans, and trucks, including medium-duty and heavy-duty vehicles, in fleets of fewer than 200 are leased. In fleets of 201 to 400 vehicles, 78 percent of the same vehicle types are also leased.

One reason that leasing finds favor among business-fleet operators is that the vehicles can be off the balance sheet, says Richard V.. Snyder, senior vice president of Enterprise Leasing Co. Snyder's company, headquartered in St. Louis, specializes in leasing to companies with fleets of 10 to 100 cars and light trucks.

If the vehicles are being purchased, the payments due show up as a liability on the balance sheet. That could affect borrowing limits. "Leasing," he adds, "can free up lines of credit with lending institutions."

Another possibility for companies is finance leasing, usually through a financial institution. Finance leasing offers advantages. It does not require an outlay of cash to acquire vehicles, and the company is not required to pay a monthly management fee to a leasing firm.

Finance leasing also permits fleet managers to make their own deals in acquiring vehicles from dealers, which means the company could get back a higher dollar amount on the resale of each car.

For companies with good cash flow, an alternative is capitalized leasing. Although still technically a lease, it permits vehicle ownership to remain with the lessee and show on the balance sheet. An accountant must decide if a lease agreement fits the accounting requirements for a capitalized lease.

A Trend Toward Employee-Owned Vehicles

More and more companies are saving money by moving away from both leasing and owning, choosing instead to have employees use their own cars for business.

Companies using only employee-provided vehicles grew from 7 percent in 1983 to 21 percent in 1991, according to a survey conducted by Runzheimer International, a Rochester, Wis., firm that tracks transportation costs. Increases in insurance costs have spurred the move, says Lee Czarapata, vice president of Runzheimer for sales and consulting services.

If an employee owns and insures a vehicle, Czarapata says, it is covered seven days a week for the employee and other family members, although many insurance companies charge a higher premium for vehicles regularly used for business.

Czarapata also repons that many companies providing cars to employees are limiting personal use of the vehicles outside of business hours. Under the Tax Reform Act of 1986, the value of personal use of a vehicle must be reimbursed to the company or included in the employee's taxable income. Czarapata claims many employees are saying: "Let me get my own vehicle. I pay the insurance and have no limits on the hours I can use it."