The revenue outlook for truck leasing firms is undergoing a shift as truck operators begin to re-assess the economics of long-term leasing opportunities, according to Fitch Ratings. Demand for short-term commercial truck rentals has been relatively strong since the economic downturn, but we expect demand to shift to longer term leasing solutions, which will support operating fundamentals for lessors such as Ryder and Penske in 2013, even as U.S. economic growth remains sluggish.

Healthy commercial truck rental demand and good used vehicle sales have boosted operating results for truck leasing companies since the downturn. Much of this strength has been influenced by customers' reluctance to sign up for long-term leasing contracts (often five years or more) in favor of shorter term arrangements that preserved flexibility and kept costs down in a period of continuing demand uncertainty when trucking volume growth lagged previous economic recoveries.

However, as customer truck fleets have aged and newer, more fuel-efficient trucks have become available for long-term leasing solutions, the key growth drivers for firms such as Ryder and Penske are expected to shift away from commercial rental markets.

As commercial rental demand has slowed in recent months, leasing companies have reduced the size of their rental fleets through more aggressive sales of used vehicles and by trimming rental fleet capex. Ryder indicated at a recent investor conference that in 2013, it expects to spend significantly less than this year's level of approximately $500 million on commercial rental fleet capex.
Despite the expected decline in rental demand next year, long-term leasing contract volumes are likely to pick up as lessees weigh the benefits of locking in lower operating costs and better fuel efficiency in new trucks being leased to them over a longer term.

Capital investment in the leased fleet for Ryder and Penske is therefore expected to remain high in 2013, yielding negative free cash flow as leased fleets are modernized and the average age of the fleet is driven down.

While free cash flow is expected to be negative in 2013, the fleet investment is expected to yield growth in revenues, which is positive from an earnings perspective. Free cash flow should improve as the vehicle replacement cycle subsides or if truck leasing firms scale back capital investments in the event of a return to recessionary conditions.