Leasing: Weighing in on Economies of Scale

March 1, 2004

March 2004

With the current state of the aviation industry, companies are coming up with creative answers to help their customers, writes
Alicia Hammond.

In the perfect aviation world there would be no bankruptcies, enough money to buy all the equipment you need and a staff of qualified employees. Unfortunately, in this day and age money is not plentiful and companies have to change and come up with new ideas to maintain equipment utilization and profitability.

With all the expenses an airline, airport or ground handling company has to worry about sometimes ground support equipment could come lower on the list of concerns than it should. But having to buy and maintain thousands of dollars of equipment becomes a Catch-22 situation: You can't run your business without it, but you don't have money to buy it. Companies who have noticed this problem; including Lex Transfleet, Stewart & Stevenson TUG, TCR and Fortbrand Services, have stepped up to provide innovative solutions for their customers.

Although most companies who have to deal with GSE would probably prefer to own and maintain their equipment,this is not necessarily the smartest choice at this point in time. Leasing offers companies a chance to regain some capital by not investing as much money into costly yet needed equipment.

TCR is a GSE total management company based in Belgium with operations in the main airports in Europe. They offer both long and short term renting (leasing) options. Their unique approach provides customers with equipment, preventive maintenance (both labor and parts), repair and maintenance of all normal wear and tear and fleet management.

TCR has been offering leasing programs to their customers for about six years. "The base of our leasing [renting] program is GSE rental solutions, both long- and short-term," says TCR. "One of the key issues we have learned was the customers felt they were not getting real value from the ownership of ground support equipment but rather from its optimal usage. We understood that this represented a fundamental difference."

Flexibility is a key part of TCR's offerings, allowing customers to choose the length of time for the contracts, which can be as little as one month.

Another concern many customers have is the cost compared to the amount of use. "GSE needs can vary significantly with the seasons. To help customers avoid investing in the equipment that can lie idle, we analyze our customers' flying schedules to ascertain their exact GSE needs," says TCR. "This is then used to develop a tailor-made rental package that includes a range of equipment for a defined period."

TCR offers several types of leasing, which are gaining popularity in Europe. One being fleet conversion, where the customer sells their GSE fleet to TCR and then rents it from TCR as it is required. This plan also includes a fleet renewal plan over the contract term to replace obsolete GSE.

Another option is GSE Pooling, which is the sharing of a common pool of equipment between different operators at the same airport. TCR believes this can improve equipment utilization and achieve cost efficiencies for all the parties involved. "By managing the fleet of several companies as one, the overall number of GSE operating at an airport is reduced and customers achieve significant economies of scale by sharing the resources for repair, maintenance, purchasing and fleet management," says TCR.

Stewart & Stevenson Tug
Stewart & Stevenson Tug, based in Houston, TX, is an industry leader, providing GSE vehicles for ramp users. They have recently added a new option for their customers, Stewart & Stevenson Equipment Finance, which according to Jeff Whitcomb, is designed to provide all customers with financing options including leases and lines of credit to make it easier for customers to buy their equipment.
"We are excited about the program because in a changing industry we are looking for new ways to assist our customers with all of their needs. Financing and leasing is a new alternative that we bring to the table," says Dick Baxter. "Leasing has become a more popular option because the financial situation is challenging in our industry. Some of our customers are already leasing and so we believed that the time was right."

Stewart & Stevenson Equipment Finance believes it can help companies improve cash flow, preserve bank lines of credit, hedge against inflation, as well as give their customers more for their money and offer tax advantages.

"Everything is individual. The unique thing about our program is that instead of going to a bank where you have one option, we offer a lot of other funding sources through a single program," says Whitcomb. "What that does for a customer is gives them a lot choices. We are trying to give our customer the very best rate that we can and give them what they ask for."

S&S Equipment Finance allows their customers to create plans customized to their specific needs and available finances. "There isn't a typical example, everybody comes with a different set of needs," Whitcomb adds.

Whitcomb says that although S&S has been offering this program for two years this idea is still new to the United States. "It was never done under the name S&S Equipment Finance. It is a custom program where we look a lot more closely at the customers needs and it is rare," he says. "This is an extra service that a lot of companies don't offer. It is going above and beyond what customers expect."

Lex Transfleet
Lex Transfleet, based in the UK, is the provider of a range of services for ground support equipment and vehicles with services covering fleet management, maintenance and repair. While they offer many management options, leasing is something that is gaining popularity.

"The leasing market has been very strong in the UK during the last ten years particularly for cars, trucks and plant items," says Richard Taylor, Development Director at TCR. "The market in the rest of Europe is moving to leasing but the UK remains the leader in this type of funding."

Lex Fleet offers two types of leasing, which includes the sale and leaseback of the existing fleet and contract hire on new assets only.
"Leasing is normally costed on an asset rather than a customer basis. An asset life is ascribed to determine the lease term although most are calculated between five and ten years," Taylor says. "To ensure that the transaction is defined as a lease the supplier must take a realistic residual value on the asset, normally more than 15 percent of the capital cost."

Each of the leasing options provides a maintenance program. The first offers an "at cost" maintenance solution or a fixed price maintenance risk transfer, while the latter offers to replace older or additional assets along with maintaining only the existing assets.
"Leasing with maintenance is becoming increasingly popular in the ground handling industry. Companies that have previously always bought are not considering lease with maintenance as a very realistic option," Taylor says. "A number of companies are also selling their fleet to suppliers and leasing back, possibly a reduced number of assets with a fixed price for the maintenance. This provides a cash injection, reduces the current number of assets and gives a fixed price for the lease term to the customer."

Having the maintenance risk transferred to the supplier can help a customer out quite a lot, however, strictly following the lease agreement keeps the customer from acquiring any additional fees.

"As funding is relatively easy to calculate, the major element is the maintenance over the term of the lease. Any under provision may result in losses on the transaction. Past data is used to determine the maintenance and the customer has to agree to a defined vehicle usage and operational limitation," Taylor says.

Fortbrand Services
Another U.S. company that offers a lease option is Fortbrand Services in Plainview, New York. Fortbrand specializes in leasing, financing, renting, trading and dealing in all aspects of airport ground support equipment to customers throughout the aviation industry. Fortbrand has been in the business of leasing, renting and trading in GSE for more than 20 years.

"Leasing is beneficial to different types of customers for different reasons," says Alan Stearn, Executive Vice President of Fortbrand. "Leasing preserves the customer's capital, which is extremely important in today's aviation industry environment."

Although Fortbrand does not offer leases with maintenance included, they can mold a lease to the needs of the customers. "Leasing can be tailored to the specific cash flow needs of the customer," Stearn says. "It can meet the seasonal equipment needs of the customer."

By leasing equipment, a service company can have equipment available for a specific contract term of a customer that it is serving and return the equipment to Fortbrand at the end of the contract.

Throughout Fortbrand's 20 years of service it has come across many different lease possibilities.

"Fortbrand can structure a lease to meet any particular customer needs or requirements. Recently, Fortbrand embarked on a program to fill the needs of customers who face capital expenditure constraints and yet need new equipment," Stearn says. "The customer will order equipment from a manufacturer. Fortbrand will purchase the equipment from the manufacturer and lease the equipment to the customer for a short term. At the end of the term, the customer can either extend the lease, return the equipment or purchase the equipment at a predetermined price."

According to Stearn, there is nothing standard or typical about the lease program at Fortbrand. They have an extensive fleet of used equipment available for use. "If Fortbrand does not have equipment available from its fleet, Fortbrand will acquire either new or used equipment to satisfy the customer's need," Stearn says.

These four companies offer a variety of services that, instead of locking companies into the same financial hardships, allow for some maneuvering to attempt to overcome the economic downturn that has occured during the last few years. Although nothing is certain yet, clear skies are predicted in the not so distant future and hopefully this will affect the ground support industry as well. That does not mean leasing is a passing fad, but only time will tell.