Motorcoach

Cost-Effective Fleet Financing: Strategies for Bus, Motorcoach Companies

Posted on July 5, 2018 by Austin Wilson

To remain competitive and stay ahead of the curve, some operators may consider leasing on shorter terms that allow for more frequent, seamless, and cost-effective upgrades.
ABC Companies
To remain competitive and stay ahead of the curve, some operators may consider leasing on shorter terms that allow for more frequent, seamless, and cost-effective upgrades.
ABC Companies
The bus and motorcoach industry is thriving. This success has been driven largely by a strong global economy and the growth of travel and tourism as a whole, with travel bookings hitting $1.7 trillion last year.

The sector is also constantly changing in several ways — which presents owners and operators of private sector specialty, tour, and charter companies with a variety of factors to consider when it comes to growing, upgrading, and maintaining their fleets.

With ever-evolving technologies impacting vehicle design, a range of new regulations being introduced, and environmental concerns at the forefront, it’s important for bus and motorcoach company owners and operators to remain informed and prepared as to how these changes can affect their business and cash flow — and, in turn, the ways they acquire and finance their vehicles.

Below, we highlight some of the trends impacting the industry, and discuss how bus and motorcoach companies can utilize varying lease types and structures for efficient and cost-effective fleet financing.

Factors Impacting Industry
Rapidly advancing technology is changing the ways in which most industries operate, and bus and motorcoach transport is no exception. Further, new regulations and industry standards regarding safety and environmental impact are requiring bus and motorcoach companies to evaluate their operations and, in some cases, vehicles.

One of the major trends driven by technology has been the advancement toward autonomous vehicles. As companies like Google’s Waymo and Intel’s Mobileye are testing autonomous cars, the bus and motorcoach industry is implementing this smart technology as well. In fact, California’s first autonomous bus service began in March 2018 in the city of San Ramon.

In addition to advancements in technology, new regulations have been established, which are affecting the industry as a whole, as well as individual company operations.

For example, as of April 1 of this year, motorcoach drivers in the U.S. who are found to be out of compliance with a new mandate requiring an electronic logging device (ELD) or automatic on-board recording device (AOBRD) can be put out of service for several hours. This means that companies must not only make the initial investment in these devices, but put additional time and cost into ensuring that they are maintained, functioning properly, and in use by all drivers.

Further, environmental concerns have been another leading driver of the changes occurring in the public transportation industry. Several major companies are implementing eco-friendly initiatives.

For example, electric buses are becoming increasingly common in an effort to reduce pollution. In fact, the global electric bus market is expected to grow at a CAGR of 30.2% during 2018-2024, which will likely transform fleets in a relatively short amount of time.

Lease Types for Varying Needs

A rendering of MCI’s new all-electric J4500e prototype, which completed its phase
one testing.
A rendering of MCI’s new all-electric J4500e prototype, which completed its phaseone testing.
With changes to vehicle technology and industry standards on the horizon, as well as potential increased costs to ensure compliance, this begs the question: What is the best way to acquire and maintain bus and motorcoach fleets?

The average lifespan of a motorcoach can range from approximately 12 to 20 years, depending on the mileage travelled and whether or not the vehicle has undergone proper routine maintenance.

That said, to remain competitive and stay ahead of the curve when it comes to efficiency and compliance with regulations, some operators may consider leasing on shorter terms that allow for more frequent, seamless, and cost-effective upgrades.

With capital leases a company will essentially own the asset at the end of the lease term. Because some of these commercial vehicles can last up to 20 years, this can be a viable option for fleet owners depending on their specific needs and circumstances.

For example, a vehicle would be owned outright after a seven-year lease term, and could go on to experience another decade of usable life, rendering the purchase a solid investment for the company.   

On the other hand, operating leases provide no obligation of ownership when the lease ends and involve lower monthly payments. This leasing option is often favored by some companies because it allows operators to upgrade their fleet more frequently, reducing maintenance expenses, and increasing profits.

Motorcoach operators who offer more high-tech or luxury features as a part of their services, or that operate in areas with stricter environmental regulations, might benefit from these structures to allow more frequent fleet updates.

Further, other lease variations that motorcoach fleet operators can consider are terminal rental adjustment clauses, or TRAC, motor vehicle leasing, which is one of the most popular leasing options when it comes to commercial vehicles. This clause requires an adjustment of lease payments to compensate for the difference between the actual value of the vehicle when the lease ends and the originally projected amount.

These leases provide financial incentive for the lessee to perform routine maintenance, therefore improving the overall value of the vehicle. Split TRAC leasing structures can be especially useful for bus and motorcoach companies because it entails that the lessor assumes some of the estimated residual risk.

Flexible Structures to Match Company Cash Flow
While the industry is strong, choosing the right leasing and financing options can be absolutely critical to maintaining a motorcoach fleet and stable cash flow throughout the short- and long-term.

In addition to the types of leases, fleet owners should take the leasing payment structures into consideration as well. For instance, the flow of business for many bus and motorcoach companies, such as tour operators, is highly dependent on the season. A company’s slow season can vary by location and the exact services offered.

In some cases, leases can be structured so that payments are non-existent, or minimal during certain months and higher other months. As an example, we offer seasonal-payment lease structures, which is highly beneficial to fleet operators that experience low and high seasons in their business. We can structure the lease to fit the specific needs of the operator so that they can avoid having to worry about payments when cash flow is slower, whether it’s winter months or slow season for tours in the time of year.

In addition to the types of leases, fleet owners should take the leasing payment structures into consideration as well.
Krapf's Coaches
In addition to the types of leases, fleet owners should take the leasing payment structures into consideration as well.
Krapf's Coaches

The Bottom Line
The bus and motorcoach transportation industry is strong and dynamic. Owners and operators need to take their specific needs into consideration when choosing fleet financing strategies.

For example, if operators are concerned with upfront costs or high monthly payments, a TRAC or split TRAC lease might be a more favorable option. If their business is cyclical, they might consider a seasonal-payment lease structure to avoid having to make payments during their less profitable months.

While the bus and motorcoach industry will certainly continue to change due to technological transformations, changing laws, and eco-friendly initiatives, owners and operators can stay ahead and maintain smooth operations through embracing these changes and financing wisely.

Austin Wilson is an Account Executive at Summit Funding Group ([email protected])

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