The most common fleet funding method in Europe is the closed-end lease. However, ARI is making a case for open-end leases, in a market that has traditionally leaned away from this particular model, in an effort to provide more transparency for fleet operators.
Traditionally, a closed-end lease model in Europe would present a fleet operator with its services and costs wrapped in a single fee. However, ARI believes recent technological advances will make the open-end lease model much more appealing and affordable for fleets, and would ultimately prevent fleets overpaying on premiums.
Closed-End vs. Open-End Leases
The closed-end lease model in Europe has customers paying a monthly fixed fee that covers all asset interest rates, expenses, and depreciation against a set residual value, said Majk Strika, managing director, Europe, ARI. This eliminates transparency in terms of how much value the model provides.
“[Closed-end leases] are going to take the most conservative residual value and then build in a cushion. When it comes to maintenance, the are going to take the worst case scenario and build some cushion into that as well,” said Mark Bryan, senior vice president of European operations, ARI.
Ultimately, ARI believes the open-end lease model will improve visibility into operations and costs for fleets operating in Europe.
“To me, one of the benefits of an open-end lease model is the flexibility that it provides. The client is in control of their asset. If they want to terminate the lease early, they have the flexibility of doing that with no penalty,” said Bryan.
How Changes Will Impact Leasing Strategies
Improvements in technology and access to increasing amounts of data has created the opportunity to have fleets consider the open-end model, which is being adopted more in Germany and across Europe, says ARI.
“We invested a lot into technology and systems over the last three to four years in Europe to be able to successfully manage the volumes of data that are now available and make that data actionable. The data comes from telematics or maintenance transactions or manufacturer information or fuel information. We collect millions of points of data and provide visibility for our clients into how their fleet is operating via our ARI insights tool,” said Bryan. “Our insights system collects and integrates critical vehicle and driver data from around the world and provides it to our clients via intuitive charts, reports and KPIs.”
Such technology should provide a particular benefit on light commercial vehicles (LCV), which is a market ARI is looking to focus on.
Because LCVs act as work trucks, and tend to operate for longer terms and higher mileages, they often experience some degree of damage over their lifecycle.
The resulting mileage penalties and inflated damage repairs in a closed-end lease doesn’t work for LCVs, argues Bryan.
However, the open-end model for ARI would offer pay-as-you-go type services; they would still manage everything for the client into a consolidated package
“We do all the consolidation. They get one invoice on a monthly basis that ties it all together. It’s not messy. It just has to do with paying for expenses as they occur in that fashion as opposed to having a bundle the number that includes premiums,” said Bryan.
The reason there was hesitance for the open-end model, was the assumption that there was an uncontrollable risk, said Strika.
However, in addition to the technological advancements, regulatory changes may also sway fleets toward open-end leases.
“The International Financial Reporting Standards are going to require fleets to put a closed-end lease on the balance sheet,” said Bryan. Effective January 2019, closed-end assets will have to go in the balance sheet.