By Brian Antonellis, CTP, Senior Vice President of Fleet Operations, Fleet Advantage
September 25, 2024
One of the hottest buzz phrases of 2024 is turning out to be “hidden fees.” Every day, a growing number of both consumer and business customers are fed up and are feeling the need for transparency. In response, more businesses like hotels and rental car companies are starting to unbundle fees and add-on charges for greater transparency. The problem is that for many businesses, the prices we see in plain sight are rarely the prices we end up paying – whether that’s at a restaurant, or for a truck lease.
These fees have become a significant problem for companies with heavy-duty transportation fleets and their leasing structures, especially those that are trapped in what is known as a “Full-Service Lease.” These companies are fighting back by better understanding how these fees impact their financial health, and they are seeking alternate approaches that are more beneficial to their financial picture.
Business owners say fees are necessary to cover costs and show customers where their money goes. However, the impact of hidden fees – also known as secondary fees – on consumer spending is significant. Analysts and advocates, such as the Consumer Financial Protection Bureau (CFPB), warn that these hidden fees can diminish a person’s ability to shop around. CFPB data also shows that these fees cause people to pay more overall because businesses can charge more than what the market would otherwise allow in the sticker price.
These secondary fees have become so problematic that President Biden is making a fee crackdown one of his administrative priorities. In fact, the administration believes Americans pay more than a collective $90 billion (about $280 per person in the US) in what the president has dubbed “junk fees” each year on a variety of goods and services.
According to a recent article in The Wall Street Journal, “Congress introduced a bill last April to ‘limit and eliminate excessive, hidden, and unnecessary fees imposed on consumers,’ while similar measures have recently passed the New York and Illinois state senates. California, too, added restaurants to the list of industries covered under its existing hidden-fee ban.”
Hidden Fees For Organizations With Transportation Fleets
While the story of hidden fees is only now exploding into page-one headlines, this problem really began to surface a few years ago following the onset of the pandemic, when flexibility and agility became a cornerstone of the business strategy of operating a fleet. The pandemic and rapidly changing economy made it important to scrutinize every detail of a fleet’s vehicle lease structure, especially as this meant the difference of millions gained or lost toward the bottom line.
Back then, it was important to scale the number of trucks in a fleet – both up and down – as business demand rapidly changed because of the economic climate. These immediate needs meant the lease structure and lease provider needed to accommodate immediate demands or the unfortunate lack of demand. Today, the industry’s penchant for hidden fees has only exacerbated this problem further, underscoring the importance of transparency in lease structures. Companies utilizing Full-Service Leases are paying the price for this lack of transparency.
Full-Service Leasing Defined
A Full-Service Lease (FSL) is where the lessor provides financing and other transportation services packaged in a single monthly payment. In an FSL agreement, companies essentially hand over all decisions affecting the fuel and maintenance costs to their lease provider and instead focus on a “bundled” monthly payment.
While on the surface, this may sound like a marriage of convenience, Full-Service leasing eliminates flexibility since it locks the organization into a rigid contract for a set long-term period, wherein the cost for maintenance and finance are combined along with general overhead costs and administrative and secondary fees.
Unbundled Leasing: Flexibility & Competitive Costs
In contrast, Unbundled Lease (UBL) agreements are designed for companies to work with a provider that can help break out costs individually and identify the lowest-possible financial costs involved with operating a fleet.
A UBL offers flexible financing options based on actual costs; not what costs were projected at the onset of the decision process. UBL offers vehicle life cycle management for better cost and performance optimization. In a UBL agreement, companies have greater flexibility on these individual costs and the freedom to upgrade and scale the size of their fleet, guaranteeing the lowest-possible financial costs involved with truck acquisition.
Significant Cost Savings Involved when Unbundling
The monthly cost savings can be significant, along with avoiding hefty hidden fees associated. After considering the lease payments, warranty and maintenance fees, an organization pays an average of $2,054.00 per month (unbundled) compared with $2,921.00 per month (FSL). When calculated over 100 trucks, that fleet would experience a first-year savings of about $1.04 million toward the bottom line.
How Breakout Costs Differ Depending on Type of Lease Structure
One of the most significant differences between a UBL and FSL is how maintenance and repair (M&R) costs are calculated. M&R is “Front Loaded” in an FSL agreement. As an example, companies will pay a fixed $500 fee per month plus a minimum of .07 per mile in year one versus .02 per mile when unbundling (national average for year one) along with a much lower monthly fee (usually about $125). All trucks come with a bumper-to-bumper two-year warranty that can be extended to four years. Expenses for year one includes wearable items (tires, brakes) plus Preventive Maintenance (PM). A shorter truck life cycle produces long-term savings beyond the first year. In a UBL, the CPM average equals 5.675 cents over five years. However, in an FSL, fleets pay up to 9 cents per mile.
Even more so, companies with FSL are also paying warranty costs, but they aren’t getting credited back for the use of the warranty because of the fixed M&R costs enforced on day one. Fleets in an FSL experience these extra costs, especially when replacing tires, where the typical cost of a tire casing can be $70 – $90 per tire, whereas in an unbundled lease these would be included and exercised under the warranty. This recapture rate can total between $1,900 – $2,200 per truck over the first five years.
There are other cost differences as well. In an FSL, the original equipment cost is typically 10% higher (which includes the finance costs). Furthermore, there are additional secondary administration or registration fees charged that vary depending on the organization’s location of their various distribution centers.
Fuel costs can also be more expensive with secondary fees because in an FSL fleets can’t determine the true cost per mile as all fuel and services are bundled into one fixed payment. This means fleets can’t operate on a “pay as you go” basis contrary to asset management partners, who are helping to identify low fuel cost options. This also means companies have no incentive to maintain or even improve fuel economy over the life of the truck.
Understanding these secondary and hidden fees differences are important as organizations with transportation fleets today pay closer attention to their Total Cost of Ownership and financial bottom line in operating the most efficient businesses possible.
About The Author
Brian Antonellis, CTP, is Senior Vice President of Fleet Operations at Fleet Advantage, a leading innovator in truck fleet business analytics, equipment financing and life cycle cost management. For more information visit www.FleetAdvantage.com.
