Issuu

Summer 2019 • Volume 7 • issue 2 | www.canadianequipmentfinance.com

Enabling mobility CFLA Report: Reasons to attend CFLA Annual Conference Your Business: Leasing equipment?

Bill o’Neill

Management Strategy: Leveraging technology to go green PM40050803

Contents Summer 2019 Volume 7 Number 2

CFLA REPORT Publisher and Editor-in-Chief Steve Lloyd steve@canadianequipmentfinance.com Editor Brendan Read brendan@canadianequipmentfinance.com Creative Direction / Production Jennifer O’Neill jennifer@canadianequipmentfinance.com

Reasons to attend CFLA Annual Conference »4

Market Report U.S. market on expectations roller-coaster »6

Photographer Gary Tannyan Advertising Sales Mark Henry mark@canadianequipmentfinance.com

For subscription, circulation and change of address information, contact

Transportation

Enabling mobility Aircraft

subscriptions@canadianequipmentfinance.com

Publications Mail Agreement No. 40050803 Return undeliverable Canadian addresses to:

Automotive Circulation Department 302-137 Main Street North Markham ON L3P 1Y2 t: 905.201.6600 • f: 905.201.6601 info@canadianequipmentfinance.com www.canadianequipmentfinance.com Subscriptions available for $40.00 year or $60.00 two years. ©2019 Lloydmedia Inc. All rights reserved. The contents of this publication may not be reproduced by any means, in whole or in part, without the prior written consent of the publisher. Printed in Canada. Reprint permission requests to use materials published in Canadian Equipment Finance should be directed to the publisher.

11 Trucking

17 Rail

Canada’s business aviation spreads its wings »9 Chorus Aviation continues upward »10 How quality shapes the vehicle market »11 Consumers leave financing to the experts: for now »15 Canada’s truck fleet on cusp of change »17 Strong growth signals rail investments »19

More rapid transit down the tracks »20

Also Publishers of Payments Business www.paymentsbusiness.ca

Your Business

Contact Management www.contactmanagement.ca

Leasing equipment? »21

DM Magazine www.dmn.ca

Management Strategy Leveraging technology to go green »22

Made possible with the support of the Ontario Media Development Corporation Ontario Interactive Digital Media Tax Credit

canadianequipmentfinance.com | Summer 2019 | CANADIAN EQUIPMENT FINANCE

Reasons to attend CFLA Annual Conference By Michael Rothe

n September 18 and 19, 2019, the Canadian Finance & Leasing Association (CFLA) will hold our 46th Annual Conference at the Westin Bayshore Hotel in Vancouver, B.C.. As with past conferences, this year’s CFLA Annual Conference will provide delegates with economic, technological and operational trends, data and analysis from leading industry experts and insiders. And it also remains Canada’s premier networking event for executives within the assetbased finance and leasing industry. For these reasons the CFLA Annual Conference is Canada’s largest and most important annual gathering of industry leaders. When you attend you are investing in the success of your business, staff, industry and your career. Indeed, given today’s turbulent markets and economy, this year’s CFLA Annual Conference is sure to be a not-to-bemissed event.

Economic & Political Updates Traditionally, the Conference is kicked off with the annual Economic Update, given by a leading Canadian economist. This year is no different. Craig Wright, senior vice president and chief economist at the Royal Bank of Canada (RBC), will be returning to provide the Economic Update. He will opine on the issues Craig Wright, senior facing the Canadian vice president and chief economy, incorporating economist at the Royal Bank of Canada (RBC). the outlook for the U.S., 4

Europe, Asia and the rest of the world. The other annual highlight is the Political Update. Typically given by a notable local, national-level reporter, this year CFLA is tweaking tradition and has invited former B.C. premier Christy Clark (who has also been a radio show host) to give the Update. As Canada heads into a fall election, this year’s The Hon Christy Clark, former B.C. premier. Political Update is not only timely, but will provide you with important insights into the what to expect from the coming election and a better understanding of the key issues which will face the candidates and ultimately the new Canadian government.

Fireside Chat with Jim Pattison However, the highlight of the Conference is sure to be the Fireside Chat with Jim Pattison. Mr. Pattison, a Canadian business magnate, investor, philanthropist and owner of Jim Pattison Lease (a CFLA member), will be interviewed by retired CBC correspondent Robert Fisher. Jim Pattison, owner of Jim Pattison Lease You will hear about (a CFLA member). Mr. Pattison’s rise from humble beginnings in Saskatchewan to the founding of Jim Pattison Group and his current position as one of Canada’s most successful businesspersons. You will be certain to come away with some valuable insights and ideas which you can apply to your own business and career.

CANADIAN EQUIPMENT FINANCE | Summer 2019 | canadianequipmentfinance.com

Westin Bayshore Hotel and Conference Centre, Vancouver, B.C..

Networking opportunities Yet what is a conference without ample opportunity to network and make some important business deals? Whether in between sessions, during the two-hour luncheon or the spectacular evening events there will be plenty of time to make those valuable connections. Partake of a cocktail at the Conference Welcome Reception on the first evening, as you take in the spectacular Vancouver vistas from a private charter cruise. Or enjoy the wine, food and camaraderie at the Chairman’s Reception and Banquet on the final night of the Conference where CFLA’s Member of the Year will be announced. This year will also feature the everpopular exhibitors hall. There you can meet industry vendors, explore new business solutions and/or catch up with trusted partners. CFLA’s 46th Annual Conference is sure to be the event of the year with plenty to inform, entertain and enrich all those who attend. Conference registration opens at the end of June and special hotel rates are available: but don’t delay as the hotel sold out, in a record two weeks, at last year’s Annual Conference featuring Brian Mulroney. We hope to see you this September in Vancouver! Michael Rothe is president and CEO, Canadian Finance & Leasing Association (CFLA). The CFLA (www.cfla-acfl.ca) represents the asset-based financing, equipment and vehicle leasing industry in Canada. The largest provider of debt financing in this country after the traditional lenders (banks and credit unions), the CFLA’s more than 200 company members range from large multinationals to national and smaller regional domestic companies. They cross the financial services spectrum from manufacturers’ finance companies and independent leasing companies, to banks, insurance companies and suppliers to the industry. The industry’s customers include Canadian small, medium and large businesses as well as consumers.

CFLA Report

Market Report

U.S. market on expectations roller-coaster By Brendan Read

he U.S. equipment finance and leasing market continues to be strong, driven by a booming economy. This also bodes well for the Canadian equipment market, what with Canada’s economy dependent on exports to the U.S.. The agreement to remove punitive steel and aluminum tariffs and a hoped-for ratification of the new North American free trade agreement will help improve the markets. But the road ahead in the U.S. appears more like that of a roller-coaster, with a dizzying ride of global economic and trade uncertainties, such as the trade dispute with China and the threat to impose tariffs on Mexican exports as a tactic to force the country to limit migrants to the U.S.. And there appears to be a reported growing sense of foreboding on Wall Street that the U.S. economy is peaking and that a downturn is in the not-too-distant future. These twists and turns of expectations in the U.S. is reflected in recent reports published by the Equipment Leasing & Finance Foundation (The Foundation) (https://www.leasefoundation.org).

Courtesy Equipment Leasing & Finance Foundation

Source: 2019 Equipment Leasing & Finance U.S. Economic Outlook

Business, consumer confidence not as high, but still strong The Q2 update to the 2019 Equipment Leasing & Finance U.S. Economic Outlook, released April 10, reported that business and consumer confidence have fallen from the highs experienced in 2018 in the wake of tax reform. However, it said they remain elevated; a strong labour market and rising wages should lead to solid consumer spending growth. Highlights include:

◉◉ Capital spending exceeded expectations at the close of 2018, despite some weakening in the underlying economic fundamentals. However, business investment faces 6

Source: 2019 Equipment Leasing & Finance U.S. Economic Outlook

downside risk in the first half of 2019 given the recent slowdown in the industrial sector and weaker global growth. Credit market conditions remain mostly healthy, though banks continue to tighten lending standards for some loans and demand for credit has weakened among both

CANADIAN EQUIPMENT FINANCE | Summer 2019 | canadianequipmentfinance.com

businesses and consumers. Financial stress remains in check, however, as delinquencies and charge-offs are still well below historical norms; ◉◉ After achieving 2.9 per cent growth in 2018—tied with 2015 for the strongest year of growth during the current business cycle—the U.S. economy

Courtesy Equipment Leasing & Finance Foundation

Market Report

Source: 2019 Equipment Leasing & Finance U.S. Economic Outlook

appears to have slowed in early 2019. Consumer spending should continue to serve as the backbone for economic growth, but business investment appears likely to slow after a Q4 rebound due to lower oil prices, easing confidence and waning global demand. Recent declines in business and consumer confidence and the ongoing negotiations with China on trade policy are two wild cards that should be closely monitored; and ◉◉ Despite the soft patch in the first quarter, the equipment finance industry should resume its expansionary track in 2019. The industry does face headwinds moving forward, such as contracting investment in residential and nonresidential construction and softening small business sentiment. The Foundation-Keybridge U.S. Equipment & Software Investment Momentum Monitor, which is included in the report, tracked 12 equipment and software investment verticals. In addition, the Momentum Monitor Sector Matrix provides a customized data visualization of current values of each of the 12 verticals based on recent momentum and historical strength. Over the next three to six months:

◉◉ Agricultural machinery investment growth is likely to slow; ◉◉ Construction machinery investment growth should remain weak and may contract; ◉◉ Materials handling equipment investment is likely to expand at a modest rate; ◉◉ All other industrial equipment investment growth will likely remain weak and may stall; ◉◉ Medical equipment investment growth is expected to slow; ◉◉ Mining and oilfield machinery investment growth may improve, but a strong rebound appears unlikely; ◉◉ Aircraft investment should expand at a moderate rate; ◉◉ Ships and boats investment is likely to remain weak; ◉◉ Railroad equipment investment growth is likely to remain negative; ◉◉ Trucks investment is expected to expand at a moderate rate; ◉◉ Computers investment growth will likely growth modestly; and ◉◉ Software investment growth should slow. On April 16 the Foundation released the Q2 2019 Equipment Leasing & Finance Industry Snapshot. It reported: ◉◉ The U.S. economy softened to a 2.2

per cent annualized growth rate in Q4 2018 but posted a strong 2.9 per cent growth for the year; ◉◉ Consumer spending and business investment were the major drivers of growth in Q4 2018; ◉◉ Top economic headwinds include the softening Chinese economy, a slowing European economy and U.S. manufacturing weakness; and ◉◉ Robust wage growth and dovish U.S. Federal Reserve policy around interest rates are top economic tailwinds.

Market confidence dipped, rose and then dipped... The Foundation published two day later, on April 18, the April 2019 Monthly Confidence Index for the Equipment Finance Industry (MCI-EFI). This survey of finance and leasing industry executives reported that overall market confidence decreased after two consecutive months’ increases to 58.3, down from the March index of 60.4.

The industry does face headwinds moving forward. Confidence bounced back, to 59.2 in May. Then it dropped again, to 52.8, reported in the June MCI-EFI, published June 20. Here are the survey results:

◉◉ When asked to assess their business conditions over the next four months 3.3 per cent of executives responding said they believe business conditions will improve over the next four months, down from 16.1 per cent in May. 80 per cent believe business conditions will remain the same over the next four months, an increase from 67.7 per cent the previous month. But 16.7 per cent believe business conditions will worsen, an increase from 16.1 per cent in May; ◉◉ None believe demand for leases and loans to fund capital expenditures

canadianequipmentfinance.com | Summer 2019 | CANADIAN EQUIPMENT FINANCE

Market Report (capex) will increase over the next four months, a decrease from 16.1 per cent in May. 83.3 per cent believe demand will “remain the same” during the same four-month time period, an increase from 77.4 per cent the previous month. But 16.7 per cent believe demand will decline, up from 6.5 per cent who believed so in May; ◉◉ 13.3 per cent expect more access to capital to fund equipment acquisitions over the next four months, up from 12.9 per cent in May. 86.7 per cent indicated they expect the “same” access to capital to fund business, a decrease from 87.1 per cent the previous month. None expect “less” access to capital, unchanged from last month; ◉◉ 30 per cent expect to hire more employees over the next four months, a decrease from 41.9 per cent in May. 63.3 per cent expect no change in headcount over the next four months, an increase from 45.2 per cent last

month. Meanwhile 6.7 per cent expect to hire fewer employees, down from 12.9 per cent last month; ◉◉ 40 per cent evaluated the current U.S. economy as “excellent,” down from 51.6 per cent in May. 56.7 per cent rated it as “fair,” an increase from 48.4 per cent the previous month. But 3.3 per cent saw the economy as “poor,” up from none in May; ◉◉ 3.3 per cent believe that U.S. economic conditions will get “better” over the next six months, down from 9.7 per cent in May. 70 per cent indicated they believe the U.S. economy will “stay the same” over the next six months, a decrease from 77.4 per cent the previous month. 26.7 per cent believe economic conditions in the U.S. will worsen over the next six months, an increase from 12.9 per cent in May; and ◉◉ 26.7 per cent of respondents indicated they believe their company will increase spending on business

development activities during the next six months, a decrease from 35.5 per cent last month. 73.3 per cent believe there will be “no change” in business development spending, an increase from 64.5 per cent in May. None believe there will be a decrease in spending, unchanged from last month. “As unemployment is at record lows and employees are hard to come by, companies will rely more on capital equipment to support business growth and productivity growth from the employees they have,” said MCI-EFI survey respondent Quentin Cote, CLFP, who is president, Mintaka Financial, LLC, when asked about the future outlook. “My concern is primarily the trade wars, and their impact on the prices of goods. This will eventually weaken the purchasing power of consumers and small businesses.”

LEASING MADE SIMPLE

Flexible Leasing Opportunities with Expert Advice

LEASING WHAT YOU NEED, WHEN YOU NEED IT. • Equipment Leasing • Whole Fleet Leasing • Private Sale Leasing • Auto Leasing • Sales and Lease Backs Providing Leasing Solutions Since 2003 • Member of the CFLA, NVLA & BCTA

CANADIAN EQUIPMENT FINANCE | Summer 2019 | canadianequipmentfinance.com

Transportation

Aircraft

Canada’s business aviation spreads its wings By Isabelle Lafond

aking an aerial view perspective at the business aviation sector, a subset of general aviation, it appears that the Canadian sector is a force for good, supporting hundreds of companies and vastly improving connectivity. There are 1,900 business aviation aircraft across Canada, with the majority based in Québec, Alberta, British Columbia and Ontario. From being an economic lifeline for a large number of communities, to helping businesses be efficient and productive, business aviation has earned a pristine status of contributing directly to employment and the general economy in Canada.

Beyond market access and strength While companies that depend on business aviation serve many different industries and locations, they all share a common ground. That is, in a competitive environment, companies must maximize the use of their two most important assets: people and time. Canadian companies are choosing to have their workforces fly privately to avoid long gate lines, transiting through congested delay-prone commercial airport hubs and flying in cramped airline cabins. They gain by reduced travel time and greater productivity by enabling their staff to truly spend their time working1. Thus, the benefits of business aviation to Canada are quite clear, as it: ◉◉ Contributes over $5.1 billion in total gross domestic product (GDP); ◉◉ Produces 43,200 in jobs: 66 per cent

of which is higher than the average annual wage; and ◉◉ Generates over three-quarters of a billion dollars in taxes2.

Business air traffic drivers Rising GDP, and consequently, disposable income and living standards, result in an increased demand. This is also closely linked to the globalization of trade, where the average distance travelled tends to increase as people do business in countries which now have more favourable political and social environments. The advantages of business aviation achieved domestically grows multifold on international journeys. These trends, combined with continued wealth creation in fastgrowing markets, and coupled with aviation infrastructure development will accelerate the demand for business aircraft. Put differently, long-term indicators are pointing towards a robust outlook for the sector3.

Perks of financing According to the latest survey compiled by JETNET iQ, almost 45 per cent of respondents believed they would finance their next new or pre-owned aircraft purchase4. Aviation financing is often seen as complicated, expensive and restrictive. However, the main benefit that makes financing worth considering is that your capital is not tied up in a depreciating asset. Having such a large capital investment in an asset that depreciates in value over time makes financing an attractive option. Whether it entails the financing of a new aircraft or the refinancing of a pre-owned one, the lender is to

provide the best financing structure on par with what the client wants. While developing financing solutions, a lender must be accessible, knowledgeable and well-resourced in order to act as a true financing partner, understanding the assets at stake and demonstrating the ability to recommend the most valid plan. With great expertise comes great flexibility in understanding what to consider when financing business aircraft, whether for corporate, individual or operating use, such as: ◉◉ Guarantees provided will impact the financing terms; ◉◉ Monthly payments including operation expenses; ◉◉ Annual usage that will impact frequency of inspections; ◉◉ Maintenance programmes needed to maximize residual value; and ◉◉ Decision to charter the aircraft may sway the risk ratio. In addition to providing advice and expertise, the finance partner should be able to bring some peace of mind. By financing business aircraft with an expert, aircraft buyers will truly be able to soar. Isabelle Lafond is an account director, aviation finance at LBC Capital. LBC Capital’s Aviation Finance Group provides capital for the acquisition and refinance of corporate aircrafts including turbojets, turboprops and helicopters. It serves corporations, high net worth individuals and aircraft charter operators within the general aviation market across North America. Learn more at www.lbccapital.ca/aviation or reach out at Isabelle.Lafond@lbccapital.ca for additional details. Unless otherwise indicated, the content of this article is provided for information purposes only and does not constitute an offer to purchase or sell the products or services of LBC Capital. This information is of a general nature and is not intended as specific investment, financial, accounting, legal or tax advice and should not be relied on as such. Information provided is believed to be accurate when released. Despite its best efforts, however, LBC Capital cannot guarantee that it is accurate or complete or that it will be current at all times. 1 InterVISTAS Consulting, “Economic Impact of Business Aviation Operations and Business Aircraft Manufacturing in Canada”, September 27, 2017. 2 “Economic Impact”, Ibid. 3 Bombardier Business Aircraft, “Market Forecast 2016-2025”, 2016. 4 JETNET iQ “Q3 2018-Q1 2019 Survey”, 2019.

canadianequipmentfinance.com | Summer 2019 | CANADIAN EQUIPMENT FINANCE

Transportation

Aircraft

Chorus Aviation is expanding its aircraft portfolio and its revenues and is diversifying its business.

By Brendan Read

horus Aviation’s flight path continues its ascent. The Halifax, Nova Scotia-based company owns Jazz Aviation LP, Voyageur Aviation Corp. and Chorus Aviation Capital (CAC) and has a vision to deliver regional aviation to the world. Chorus reported that its first quarter 2019 operating revenue grew 6.2 per cent over the same period in 2018, to $344 million from $324 million. Propelling the company forward in 2019 are developments including: ◉◉ Amended and extended the capacity purchase agreement (CPA) with Air Canada to 2035, securing Jazz’s position in Air Canada’s regional network for the next 17 years; ◉◉ Completed a $97.26 million equity investment by Air Canada to fund new, larger-gauge aircraft at Jazz and further growth in regional aircraft leasing;

◉◉ Entered into a firm purchase agreement with Bombardier for nine CRJ900s as part of Jazz’s fleet modernization plan; ◉◉ Achieved an unprecedented 17-year collective agreement with Jazz pilots and enhanced the pilot mobility programme to access pilot careers at Air Canada; ◉◉ Secured a USD $300 million credit facility to support growth of regional aircraft leasing business; and ◉◉ Reached an agreement to acquire a portfolio of six aircraft with leases attached: two ATR72-600s on lease to Azul of Brazil and four Q400s on lease with two other existing customers. These results build on a strong performance. Chorus reported that its operating revenues reached $1.45 billion in 2018 from $1.35 billion in 2017. More recently, CAC reached an agreement to acquire five Q400s on lease

CANADIAN EQUIPMENT FINANCE | Summer 2019 | canadianequipmentfinance.com

with Flybe, and also entered into an agreement to deliver six ATR72-600s to IndiGo of India under a sale-leaseback transaction. Upon completion of these recent transactions, including other pending transactions, CAC’s announced portfolio commitments include 44 turboprops and 12 regional jets. When combined with the 47 aircraft leased under the CPA with Air Canada, Chorus’ fleet of leased aircraft comprises 103 aircraft valued at approximately US $1.7 billion. CAC has relationships with 14 regional airlines based in 13 countries. “I’m very pleased with the execution of our growth and diversification strategy, which continues to build on the momentum achieved in 2018,” stated Joe Randell, Chorus president and CEO when commenting on the company’s first quarter 2019 financial results. “We are well positioned for the future.”

Courtesy Chorus Aviation

Chorus Aviation continues upward

Transportation

Automotive

By Dennis DesRosiers

he three most important words that have shaped the automotive industry, and, more importantly, the automotive finance industry in the last 30 years are Quality, Quality and Quality. Over this timeframe the automotive sector has invested tens of billions of dollars into improving the quality of vehicles being offered to consumers. And when you do this guess what happens? The quality of vehicles improves.

The folly of planned obsolescence The automotive industry actually invented the concept of “planned obsolescence”. In 1924, when the U.S. auto market was reaching saturation, Alfred P. Sloan, the famous president of General Motors, suggested annual model-year design changes to convince car owners they needed to buy a new replacement vehicle each year or almost every year. Critics called his strategy “planned obsolescence”, Sloan preferred to call it “dynamic obsolescence”. Some also believed this was at the root of lower quality products in that by the 1950s the term came to represent products that were “designed to break easily, not work properly or become less functional”. Not

a good image to have for the automotive sector, to say the least! This strategy had far-reaching effects on the automotive sector, the field of product design and indeed the entire economy. The smaller automotive players could not maintain the pace and expense of yearly re-styling and as they failed, we ended up with the “Big Three”, which we now call the “Detroit Three”. And many would argue that the quality of vehicles, even those made by the Big Three, suffered because of this high cost, although the lack of serious competition was also a core reason for poor quality.

Here we are today with the highest quality of vehicles in the entire history of the sector.

The little bit of financing available for vehicles was also tied to these model year changes, since ownership was usually only one to four years the amortization of loans was also only one to four years.

Gary Tannyan

How quality shapes the vehicle market Can you imagine a 12- or 24-month car loan today? They were actually popular in the ‘50s and ‘60s.

Competition drove quality Volkswagen (VW) of all companies started to break the mould. In the late ‘50s, while recognizing the widespread use of planned obsolescence in the sector, the German automaker pitched itself as an alternative: “We don’t change a car for the sake of change” was their tag line. In 1961 VW actually ran an ad that showed a blank page with the tagline of “NO point in showing the 1962 VW, it still looks the same”. The Japanese invaded the North American auto sector in the mid-1960s. Because their products were initially viewed as highly inferior to Detroitbuilt vehicles, these automakers began a decades-long push to address their quality issues, much of which centered on adopting the practices preached by William Deming. These are: 1. Better design of products to improve service. 2. Higher level of uniform product quality. 3. Improvement of product testing in the workplace and in research centres. 4. Greater sales through global markets.

canadianequipmentfinance.com | Summer 2019 | CANADIAN EQUIPMENT FINANCE

Transportation

Survival Rates - All Light Vehicles Years Old

NEW 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36

2000

2005

2010

2015

2018

ACTUAL

100.0% 93.5% 92.6% 96.4% 97.1% 96.0% 94.8% 92.4% 89.6% 85.2% 76.9% 66.3% 54.2% 42.9% 33.7% 26.1% 20.5% 17.1% 17.0% n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

100.0% 99.7% 96.4% 94.4% 93.0% 90.2% 86.7% 87.5% 89.0% 85.8% 81.5% 74.1% 66.2% 56.3% 46.7% 34.5% 26.3% 19.2% 15.2% 11.6% 10.2% 8.0% 7.0% 7.1% n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

100.0% 100.0% 98.8% 97.9% 99.8% 99.5% 98.4% 94.8% 92.0% 85.2% 79.3% 71.0% 66.8% 59.2% 49.4% 42.2% 34.1% 28.7% 23.7% 19.0% 14.2% 10.5% 8.3% 7.0% 5.5% 5.9% 4.1% 3.8% 4.1% n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

100.0% 100.0% 100.0% 99.9% 99.8% 99.2% 98.5% 96.6% 96.0% 94.0% 90.5% 85.6% 75.8% 68.3% 56.5% 48.9% 39.9% 35.0% 27.8% 22.2% 18.4% 14.3% 12.0% 10.0% 8.2% 6.0% 4.8% 4.0% 3.3% 2.8% 2.5% 2.2% 2.2% 2.4% n.a. n.a. n.a.

100.0% 100.0% 98.1% 96.7% 95.7% 95.3% 94.3% 93.9% 92.7% 91.0% 87.5% 85.9% 79.1% 72.8% 62.8% 51.7% 42.5% 34.2% 28.1% 23.4% 19.6% 15.9% 12.8% 10.9% 8.3% 7.2% 6.1% 5.3% 3.9% 3.3% 2.9% 2.5% 2.1% 2.0% 1.7% 1.8% 2.0%

Recognizing the huge market share success of the Japanese vehicle companies, by the 1980s every company was focusing on improving the quality of their vehicles. And here we are today with the highest quality of vehicles in the entire history of the sector.

Measuring quality today There are many ways to measure this 12

improvement. You read about them almost daily, J.D. Power being the most public. But there are many others that track quality. We have two measures: the first are survival rates and the second is the average expected useful life of a vehicle. We have data going back into the 1970s and back then it took between 15 and 18 years to remove 90 per cent of the

CANADIAN EQUIPMENT FINANCE | Summer 2019 | canadianequipmentfinance.com

vehicles bought in any one year, with large variances by brand. (Note: we believe that when 90 per cent of vehicles have been removed from the roads that they are essentially gone since the final owners hold their vehicles until they die or are collectors). As a statement of how much quality has improved, it now takes 27 years to remove 95 per cent of the vehicles bought in any particular year and remember those are vehicles that were bought 27 years ago i.e. 1991 models. We believe it will now take upwards of 35 years for 95 per cent of vehicles bought today to disappear, so about double the timeframe of the 1970s. In the chart (left) I point to the survival rate for 15-year old vehicles. In the year 2000 only about a quarter of vehicles survived 15 years of ownership. Last year over 50 per cent were still on the road after 15 years: more than double. Indeed, survival rates for almost all model years have increased, especially older vehicles. Another database we track is the average odometer reading when a vehicle is scrapped. In the 1970s the average odometer reading of a vehicle that was scrapped was, give or take, about 150,000 kilometres (km). But by last year it was approaching 300,000 km: about double. Now what does this have to do with the financing of vehicles? I believe there are at least five very significant impacts. Or better put, opportunities created in the vehicle finance sector related to better quality. First, higher quality means a lower cost for buying and owning a vehicle. For upwards of two decades the Statistics Canada consumer price index or CPI for new vehicles has been in and around one per cent per year in Canada. The general inflation rate has been a point or two higher over this period. With any good, like vehicles, when prices are moderate or decline relative to other goods in the economy consumers buy more and that is exactly what has happened. We now buy about 2 million vehicles a year when for the longest time a market of about 1.5 million vehicles per year were considered a peak. Those extra vehicles represented a lot of opportunity for the finance

Transportation

New and Used Vehicle Sales in Canada - 000’s of Units Year

New Sales

Per Cent New

Used Sales

Per Cent Used

Total Sales

Total Units in Operation (UIO)

Sales as a Per Cent of UIO

1995 2000 2010 2018 2023 F

1,130 1,549 1,557 1,985 2,031

30.4% 43.2% 35.0% 39.5% 35.8%

2,591 2,035 2,886 3,036 3,642

69.6% 56.8% 65.0% 60.5% 64.2%

3,721 3,584 4,444 5,021 5,673

15,725 17,101 22,001 27,256 30,094

23.7% 21.0% 20.2% 18.4% 18.9%

sector, not only for new vehicle sales but for used vehicle sales as well. Second is the growth of personal-use vehicle leasing by consumers. The profit margin on a leased vehicle is largely dependent on correctly forecasting its residual value. If done right, a finance company can make a lot of money, but if it is wrong it can be a disaster. And there have been a number of multi-milliondollar mistakes related to not correctly forecasting residuals. Now go back to the average expected life of a vehicle. In the 1970s the first owner of a vehicle typically drove it for four years and used up 70,000 to 80,000 km. The vehicle only lasted 150,000 km, so the second owner was in essence only buying an additional 70,000 to 80,000 km of use. The residual value of that vehicle was somewhere between 10 per cent and 30 per cent of its original MSRP (manufacturer’s suggested retail price) and thus the monthly payment for a lease did not go down that much versus a loan, but more importantly the residual value was very volatile due to poor quality. The lessor did not know whether the residual was going to be 10 per cent or 30 per cent: it essentially was a guess. Thus, there was a very high risk to leasing and it didn’t offer much of a monthly payment advantage. Consequently, there was little to no leasing of personal use vehicles. Today that same consumer may drive a little more, say 80,000 to 100,000 km during the first four years, but the vehicle will last 250,000 km to 300,000 km, so the second owner is buying at

least 150,000 km and upwards of 200,000 km of additional use. Because of this, the residual value of a four-year-old vehicle in now in the 40 per cent to 60 per cent per range: with outliers above and below this level. Higher residuals mean much lower monthly payments, thus making it easier to sell a vehicle. But, almost as important, because of high quality there is less volatility in residual values, and thus much lower risk for the finance company in a lease product today than there was a couple decades ago. With lower monthly payments and stable residual values we now have a vibrant leasing market. And at the root of it is the much higher quality of vehicles. Third, higher quality vehicles have resulted in much longer ownership periods. In Canada the average ownership period for vehicles (if bought new) is now between six and eight years depending on a number of factors. Why? There isn’t much that goes wrong with a younger vehicle so why change? And this is at the root of these longer amortization periods (amps) that have invaded the sector. I believe amps are very closely tied to ownership periods. In addition, since vehicles hold their quality so well there is more equity in a vehicle as it depreciates and thus less “default risk” for the finance company as a loan or lease matures. Thus, the growth in amortization periods. Fourth, higher-quality used vehicles. To get one first you manufacture a highquality new vehicle and then let someone drive it and eventually trade it in and

it is checked out, spiffed up and put on the lot with a flashy sign. There was a day and age when many consumers avoided the used vehicle sector because, as they say, “You are buying someone else’s problems”. This issue hasn’t been eliminated with high-quality vehicles, but it certainly has been lowered. So, buying a used vehicle is much safer today than only a decade ago. And remember, vehicles last twice as long, so there is now at least one extra owner during the life of a vehicle.

There is now at least one extra owner during the life of a vehicle.

In Canada there are now three or four owners through the life of a vehicle, versus two or three owners a couple of decades ago. And because survival rates are so high there are a very large number of older used vehicles on the road at more affordable prices. This has resulted in Canada having one of the fastest growing ownership rates in the world. Ownership of vehicles in Canada has increased from two-thirds of the driving population at the turn of the century to 88 per cent last year. That means there are an additional 10 million vehicles on the road. The used vehicle market at the turn of the century was typically between

canadianequipmentfinance.com | Summer 2019 | CANADIAN EQUIPMENT FINANCE

Transportation 1.5 and 1.8 million units. Last year it broke 3 million units for the first time and is heading towards 3.5 million units although this might take a few years. As a result, the high quality of new vehicles has led to a dynamic and rapidly growing used vehicle market and one of the biggest opportunities today in the finance sector is financing of used vehicles, especially younger and middleaged used vehicles. Fifth, the growth in sub-prime and near-prime financing is largely the result of better-quality vehicles. As ownership levels increase a finance company also has to reach deeper and deeper into consumer credit scores. The very wealthy consumers have ownership levels above 100 per cent with more than one vehicle per person and very low credit risks. Lower-income individuals have much lower ownership levels primarily because of their higher credit risks. So, the last five to 15 per cent of consumers who choose to own a vehicle can only do so with sub-prime lending. As ownership levels go up so does the demand for subprime lending. Since I believe the quality of vehicles will continue to increase then ownership levels in Canada will continue to grow. And this means that all five of these finance opportunities should continue to grow.

The Canadian Light New Vehicle Sector - Fleet vs. Retail New Light Vehicles Sales

What’s down the road? Looking down the road look for more leasing; no fall back in amortization periods. While I am not sure they will grow but I’m quite sure they will not go back to the classic 48- or 60-month periods. There also will be continued growth in the sub-prime category and rapid growth in the used vehicle markets and thus continued growth in the financing of used vehicles. And finally, the overall market for new vehicles should remain in the 1.9 to 2.1 million range for quite some time. There now appears to be little doubt that the new vehicle market has peaked and will be soft this year and next and possibly a third year. But the fundamentals of demand are still fairly strong, so I don’t see any chance of a free-falling market. We bought about two million vehicles the last three years and 14

Year

Total (Units)

Fleet (Units)

Per Cent that are Fleet

Retail Sales (Units)

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

1,285,788 1,266,481 1,204,348 1,164,677 1,224,949 1,130,211 1,173,090 1,387,950 1,389,128 1,501,099 1,549,441 1,570,629 1,703,246 1,593,506 1,534,415 1,583,291 1,614,701 1,653,362 1,635,986 1,460,581 1,557,121 1,585,519 1,675,675 1,744,567 1,851,373 1,898,996 1,948,895 2,038,798 1,984,992

252,916 286,863 268,044 276,821 296,908 266,177 276,758 263,518 241,824 281,510 291,440 297,196 314,319 277,575 278,212 280,405 285,082 263,842 236,966 181,896 249,840 254,237 273,234 271,759 291,508 337,910 350,667 349,593 362,244

19.7% 22.7% 22.3% 23.8% 24.2% 23.6% 23.6% 19.0% 17.4% 18.8% 18.8% 18.9% 18.5% 17.4% 18.1% 17.7% 17.7% 16.0% 14.5% 12.5% 16.0% 16.0% 16.3% 15.6% 15.7% 17.8% 18.0% 17.1% 18.2%

1,032,872 979,618 936,304 887,856 928,041 864,034 896,332 1,124,432 1,147,304 1,219,589 1,258,001 1,273,433 1,388,927 1,315,931 1,256,203 1,302,886 1,329,619 1,389,520 1,399,020 1,278,685 1,307,281 1,331,282 1,402,441 1,472,808 1,559,865 1,561,086 1,598,228 1,689,205 1,622,748

The fundamentals of new vehicle demand are still fairly strong.

I expect that to fall back by about 50,000 to 75,000 vehicles this year. In a couple of years, we could fall below 1.9 million vehicles per year, but it should be shortterm. And remember for close to 20 years our cyclical high was between 1.4 and 1.6 million vehicles: nobody should complain about a 1.9 million market.

CANADIAN EQUIPMENT FINANCE | Summer 2019 | canadianequipmentfinance.com

That being said, the used vehicle market is poised for very rapid growth. The upcycle in the new vehicle market is now about eight to nine years old so a lot of middle-aged vehicles are heading to the market. At the same time, fleet sales have been robust, and they come back on a one to three-year cycle and leasing is now back above 30 per cent and these vehicles typically come back on a threeto-four-year cycle. There should then be plenty of supply to feed the demand for used vehicles. Dennis DesRosiers is president, DesRosiers Automotive Consultants Inc. (DAC), (www.desrosiers.ca), which is the only consulting and market research company in Canada that works exclusively in the automotive sector. Our business stretches across all aspects of the automotive industry from parts manufacturers to dealers.

Transportation

Automotive

Consumers leave financing to the experts: for now By Kevin Deveau

iven the new and exciting innovations introduced and managed by artificial intelligence (AI) in cars and other modes of transportation, itâ€™s becoming more and more clear that the automotive industry is experiencing a tremendous shift in how people use their cars: and how they purchase them. There are several ways consumers can currently obtain financing for a car. The consumer can go directly to a dealership, to a bank or credit union or they can complete their purchase online. However, with all the new technologies and systems that have been introduced and disrupted the way people purchase their goods and services in other industries, many consumers wonder if a shift is coming to the automotive industry? To better understand the future channel usage versus current, FICO commissioned our second annual Global Consumer Survey of Vehicle Finance Perceptions. It explored what type of lenders are being considered by consumers, how people are acquiring loans and how consumers would prefer to get their next loans. The survey also sought to identify gaps in how the ecosystem of providers are interacting with consumers. Key findings indicate that when it comes to auto financing, Canadians are most comfortable leaving it to the experts. In fact, more Canadians sought financing for their most recent automotive purchases directly from the dealerships than any other participating country (66 per cent versus 56 per cent global average). In addition, Canadians were the least willing to seek financing

online (nine per cent versus 16 per cent global average). Several reasons could account for this, but among the top are: 1. One stop shopping and convenience remains a top factor for the consumer. 2. People tend to trust someone they can interact with directly. 3. Consumers believe they might get a better deal if they go to the dealership.

Seeking choices and advice However, even though most consumers went to the dealerships, the survey showed that they are beginning to consider the online route for their next loans with 17 per cent of Canadians and 27 per cent of global participants considering using online application processes the next time they shop for a car. In accordance with the trends seen from last yearâ€™s survey results, consumers continue to take a proactive approach to financing auto purchases. The survey showed that 73 per cent of Canadian respondents initiated the

financing discussions when purchasing vehicles, with 27 per cent responding to offers from companies. While still relatively low, these numbers show that Canadian consumers are responding to financing offers more than most other countries, only being surpassed by Germany. Overall, the survey indicates that despite the amount of consumer decisions being made online, Canadians still want direction and personal experiences when it comes to automotive financing. More than any other market, Canadian consumers trust dealerships to make them offers; in most cases, they donâ€™t feel the need to shop around.

Change down the road? There are signs pointing to a potential change coming to the automotive financing industry. Almost half of global consumers would consider instant financing to avoid time and paperwork. With the growing number of consumers who would consider applying online for their next car loan or lease, and as people are willing to initiate a purchase if

canadianequipmentfinance.com | Summer 2019 | CANADIAN EQUIPMENT FINANCE

Transportation offered a promotion, it shows that given the right circumstances, consumers would move away from dealership financing. This means there is a huge opportunity—and an obligation—for financing providers to streamline their online processes to ensure they can provide the right offers to customers in the most convenient way. The more dealerships, banks and other financing providers that can directly target consumers, the more likely the consumer is to engage and to utilize their services.

more and more digital with features that can provide a wealth of data, spanning from directions to parking and even repair diagnostics/alerts when the car needs maintenance. Massive strides have also been made in other areas, such as personalization that allows consumers to customize their vehicles to fit their needs and lifestyles. AI can be leveraged further to improve the customer relationship and keep organizations in-tune with their customers. For example, it has been incorporated into FICO’s technology that

Where does AI fit in?

is currently being used in dealerships to structure deals that maximize profitability, fit the risk parameters of the lender and satisfy the buyer. This new technology is replacing the manual process used by credit analysts,

Even though AI is not being used prominently in the purchasing portion at this time, it remains extremely important to the advancement of the automotive financing industry. Cars are becoming

which was time-consuming and often inconsistent. Instead, it bases all deals on credit policies set by its risk managers, who can update the policies in real time without IT staff and quickly generates up to 10 different deal structures. The new AI-driven tool benefits dealerships by providing increased loan approval rates, reduced annual losses, enabling faster loan negotiations and greater transparency. It also benefits the consumer by offering consistent decisions, better approval rates and realtime flexibility. Ultimately, it allows the maximum number of customers to walk out the door with deals in hand. In the future, it is more likely that banks and dealerships will also utilize AI to initiate a personalized discussion based on observed behaviour signals and creditworthiness. This will target consumers more directly so that only those that are actively in the market for a vehicle receive engagement. Consumers are also more likely to gravitate towards purchasing vehicles online, as future generations become more and more comfortable with conducting most of their transactions online. The automotive financing industry is constantly evolving, and AI is just the next step in a long history of innovation: and it’s a step towards a more efficient and convenient future. Kevin Deveau is vice president and managing director of FICO Canada.

Do you want to reach executives who make key decisions about financing and leasing for their companies? Sign up NOW for a free subscription to Canadian Equipment Finance magazine.

Visit our website at www.canadianequipmentfinance.com and learn more about the magazine Canadian Equipment Finance is a Lloydmedia, Inc publication. Lloydmedia also publishes Payments Business magazine, DM magazine and Contact Management magazine.

CANADIAN EQUIPMENT FINANCE | Summer 2019 | canadianequipmentfinance.com

Transportation

Trucking

By Brendan Read

anada’s trucking fleet, both forhire and private, is unlikely to grow in the next few years. According to the Private Motor Truck Council of Canada (PMTC) (www.pmtc.ca) the split is roughly 50/50 between for-hire and private class 8 trucks on the road, with private fleets accounting for 70 per cent of smaller urban delivery vehicles. Financing options and preferences, between owned and leased, will likely remain the same, at 50/50. But under the hood there are changes rolling, in fleet makeup, powertrain and technology, driven by economic and environmental transformation. To grasp the wheel on them Canadian Equipment Finance recently interviewed PMTC president Mike Millian. He literally has a handsPMTC president Mike Millian. on understanding of the industry through having been a driver, trainer and fleet manager. Here are his insights: Excess fleet, of trucks, tractors and trailers. The truck-to-load ratio is 3:1 on open load boards, where it should ideally be 1.5:1 or 1.25:1, allowing for demand spikes and for maintenance and repairs. The excess supply occurred as a result of a quickly growing economy, both in Canada and the U.S.. It also took place in conjunction with the electronic logging device (ELD) mandate in the U.S. in December 2017. In Canada federal ELD regulations were posted in The Canada Gazette Part II on June 12, 2019 with a compliance date of June 12, 2021 [see box].

Bill o’Neill

Canada’s truck fleet on cusp of change The initial decline in capacity was a result of some noncompliant fleets having a harder time “hiding drive hours” with ELDs, as well as from the surge in the economy, which created a supply shortage of trucks, resulting in increased rates for shippers and higher pay for drivers. The freight demand has since declined and fleets have adjusted, leaving with an excess of trucks again and decreasing freight rates. As a result, it will be unlikely there will be many large truck purchases in the near future. But the excess of trucks is mostly in the for-hire sector, as the private fleets are able to closely match supply with demand through tight internal coordination as well as short term rental or usage of third-party providers for peak periods. Driver shortages. It is becoming an issue in Canada with Baby Boomers retiring and far fewer of those under 30 years old joining the industry. Consequently, the average age of trucker is now over 50 years old and these drivers want to do shorter, local runs and be closer to family. As a result, companies have to recruit lesser-skilled-and-experienced drivers and spend more time and resources training them. E-commerce to change fleet composition. The e-commerce boom is leading to smaller loads, creating less demand for large tractor-trailer trucks and more need for smaller trucks. Retailers that would have large trucks sent to stores that customers have typically shopped at now send them to local distribution centres that then dispatch smaller vehicles to customers’ premises i.e. “last mile”. But this new fleet could also be commercial vans or Uber-like cars, minivans or SUVs.

Driver-assisted, not autonomous trucks. So-called self-driving or autonomous trucks are not proven nor are they practical for where they share the road with other vehicles and interface with other users (cyclists, pedestrians). The guidance systems work well only in controlled environments like off-road, such as forestry, mining and oilfields. But their effectiveness is limited in poor weather, markings, detours and where signals are weak. Instead these technologies have roles in assisting drivers, such as adaptive cruise control and forward collison mitigation systems, just to name a few. Advanced safety systems, coupled with well-trained professional drivers, will be the safest vehicles on the road and have the best chance of improving road safety. “I prefer to call these technologies driver-assisted,” said Millian. “They should and would function like similar technologies in aircraft. The drivers, like the pilots, are ultimately in control. They monitor the controls and systems and are at the ready to take over when needed and in emergencies. As we are on highways however, with multiple other road users, drivers will be in control in many more situations on the ground than when a pilot is in the air.” Electric trucks have their place. Zerooperating-emission battery-electric powertrains have found a role in Canada in last mile and drayage where weights are constant to avoid severe battery drainage and where fleets return to their yard nightly, allowing for consistent charging locations and times. These vehicles are also quieter as well as cleaner, making them more acceptable in neighbourhoods. The batteries have held up in cold Canadian winters.

canadianequipmentfinance.com | Summer 2019 | CANADIAN EQUIPMENT FINANCE

Transportation But electric powertrains are not yet practical for longer-distance trucks. They lack the range and the infrastructure e.g. the charging stations not there. Electric trucks are also heavier, which may force some operators to carry lighter payload, hence earn less, to keep within weight limits. The same issue exists with loweremission natural gas powertrains as they

have heavy insulated fuel tanks, unlike diesel or gasoline or propane-fuelled powertrains. “All vehicle power options have their place,” said Millian. “The diesel truck will remain dominant particularly for longer hauls, over the road, for the foreseeable future, in my view. There is no substitute that can yet match its

efficiency. But if governments want operators to use electric or natural gas trucks, they should give operators a break on weight limits for use of greener vehicles. The fuelling network and charging infrastructure also needs to be created for long haul applications.”

ELDs now required in Canada ELECTRONIC LOGGING DEVICES FOR ELECTRONIC LOGGING FOR COMMERCIAL MOTORDEVICES VEHICLES COMMERCIAL MOTOR VEHICLES WHAT ARE ELECTRONIC LOGGING DEVICES? WHAT ARE ELECTRONIC A tamper-resistant device LOGGING synced with aDEVICES? vehicle’s engine

A tamper-resistant device that logs when and for how long synced with a vehicle vehicle’sisengine a commercial in use that logs when and for how long a commercial vehicle is in use

BENEFITS:

1. Improves compliance with

BENEFITS: legal amount of driving hours 1. Improves compliance with 2. Reduces risk of legal amount of fatiguedriving hours related collisions 2. Reduces risk of fatigue3. Makes easy to verify relateditcollisions driver records 3. Makes it easy to verify 4. Eliminates need for most driver records old paper logs 4. Eliminates need for most 5. Promotes old paper fair logscompetition between motor carriers 5. Promotes fair competition between motor carriers

Canadian federally regulated commercial vehicles will have to be equipped with electronic logging devices (ELDs) by June 12, 2021, Minister of Transport Marc Garneau announced June 13. ELDs are tamper-resistant devices that are integrated into commercial vehicle engines, explained Transport Canada in a press release. They are intended to ensure that commercial drivers drive within their daily limit and accurately log their working hours. The devices track when and how long drivers have been at the wheel, and ensure they are complying with the Government of Canada’s Commercial Vehicle Drivers Hours of Service Regulations. The use of the devices also reduces administrative burdens, added Transport Canada, such as eliminating the need for paper daily logs and reducing the time enforcement officers need to verify regulatory compliance. Additionally, these new devices are aligned with U.S. road safety regulations. 18

CANADIAN EQUIPMENT FINANCE | Summer 2019 | canadianequipmentfinance.com

ALIGNMENT:

Canadian standards align ALIGNMENT: closely with U.S. regulations so standards align Canadian and U.S. operators closely with use U.S. their regulations so can legally logging Canadian and U.S. operators device in both countries can legally use their logging device in both countries

INTRODUCTION:

2017 – Transport Canada INTRODUCTION: proposes mandatory use 2017 – Transport Canada of logging devices proposes mandatory (Canada Gazette, Pt. use I) of logging devices (CanadaTransport Gazette,Canada Pt. I) 2019 finalizes rules for use of 2019 Transport Canada logging devices (Canada finalizes rules Gazette, Pt. II)for use of logging devices (Canada Gazette, Pt. II) 2021 – Transport Canada requires new logging devices 2021 Transport Canada for use– in all commercial requiresvehicles new logging devices motor for use in all commercial motor vehicles

Transport Canada said it conducted extensive consultations with industry to ensure the implementation of the devices are feasible. As a result of these consultations, a third-party certification process will be put in place to ensure that the electronic logging devices will be accurate and reliable. “These new mandatory logging devices in commercial vehicles will improve safety for drivers and for all Canadians,” said Transport Minister Garneau in a statement. “Collaboration with stakeholders and partners was key to putting these regulations in place. I thank my provincial and territorial colleagues in helping to develop this technical standard and look forward to them introducing this requirement for operators within their jurisdictions. We know that fatigue increases the risks of accidents and that is why we are taking action across all modes of transportation.”

Transportation

Strong growth signals rail investments By Brendan Read

igh demand, accelerated by a strong economy and resulting impressive revenue growth have signalled to Canada’s major railways to invest more in their rolling stock, both locomotives and railcars. Here is a snapshot of the nationwide carriers:

Canadian National Railway (CN) CN recorded $14.32 billion in revenues in 2018: a 10 per cent increase over its 2017 results of $13.04 billion, according to its annual report. Rail freight comprised approximately $13.55 billion, up from $12.29 billion in the year previous. Carloadings increased four per cent in 2018 to approximately 5.98 million from 5.74 million in 2017. To sustain existing and future demand CN spent approximately $500 million on equipment capital expenditures in 2018. This includes the acquisition of 500 new centerbeam cars and 65 new highhorsepower diesel-electric locomotives. At the same time, the company’s equipment rental expenses increased by $49 million, or 12 per cent, in 2018 over 2017 said the annual report. Higher leased locomotive costs and railcar hire expenses drove the hike. For 2019 CN has planned to spend $800 million on equipment capital expenditures, “allowing the Company to tap growth opportunities and improve the quality of the fleet, and in order to handle expected traffic increase and improve operational efficiency”. This includes expecting to take delivery of 140 new high-horsepower locomotives and 500 new grain hopper cars.

Canadian Pacific Railway (CP) CP recorded $7.32 billion in revenues in 2018: an approximately 12 per cent increase from $6.55 billion in 2017, according to its annual report. Carloadings grew to about 2.74 million from 2.63 million over the same period. To support its business CP spent $401 million on rolling stock in 2018. This includes approximately $218 million in its existing locomotive fleet. It is largely comprised of modern, fuel-efficient, high-hauling capacity and reliable ACmotored diesel-electric locomotives. The railway has 818 of these locomotives, of which 34 of leased. But CP said it “does not foresee the need to acquire new locomotives for the next several years”. The railway had 243 of its 1,423 locomotives in storage as of December 31, 2018. In 2018 CP also invested approximately $183 million freight cars and containers, mainly converting leases to ownership. The railway is also renewing its depleted assets, including acquiring new covered hopper cars for grain haulage. At the same time CP saw its equipment rental costs shrink by eight per cent or $12 million to $130 million in 2018 from $142 million in 2017. This decrease, said the railway, “was primarily due to the purchase or return of leased freight cars and lower usage of pooled intermodal containers reducing rental expenses by $7 million and a $4 million increase in receipts from other railways’ use of CP equipment”. As of December 31, 2018, it had 35,805 freight cars (13,721 leased), and 8,918 containers (294 leased). In 2019 CP plans to invest

Rail

approximately 30 per cent of a planned $1.6 billion capital programme on rolling stock, including freight cars and locomotive improvements. The railway will have 1,900 new high-capacity hopper cars by the end of 2019. (Note: both CN and CP also have U.S. operations where their fleets are used, including on cross-border trains.)

VIA Rail Canada VIA Rail reported that its revenues climbed 11.9 per cent in 2018, reaching $392.6 million from $365.7 million in 2017, with the passenger component having grown to $369 million from $342.6 million in the same period. Ridership increased by eight per cent over this period, to approximately 4.75 million from 4.39 million. Based on these results, and with financial support from the federal government, which owns the intercity passenger rail carrier, VIA has embarked on a fleet modernization programme. In December 2018 VIA awarded a $989 million contract to Siemens Canada build 32 new more efficient, comfortable, accessible and lower-emissions trainsets for its Quebec City-Windsor Corridor. Delivery is expected in 2022. More trains may be ordered in the future should the federal government approve VIA’s proposed High Frequency Rail project, linking Quebec City with Montreal and Toronto. VIA Rail is also renovating its longdistance rolling stock fleet. The work is being split between outside vendors, including Bombardier, Cad Railway Industries, Rail GD and internally.

canadianequipmentfinance.com | Summer 2019 | CANADIAN EQUIPMENT FINANCE

Transportation

Rail

More rapid transit down the tracks By Brendan Read

ovement is now underway for further expansions of, and added service on, the rail transit networks in two of Canada’s largest urban areas over the next 10 to 12 years. And that bodes well for commuters, communities: and suppliers.

Greater Toronto Hamilton Area Ontario Premier Doug Ford announced April 10 plans to build a new automated rapid transit line, extend Toronto’s subway system and add to an underconstruction LRT, totalling over 40 km. The projects include: ◉◉ A new Ontario Line from Ontario Place/Exhibition through the downtown to the Ontario Science Centre, which will build on the longproposed Relief Line subway. It is to be open by 2027; ◉◉ Line 1 subway from Finch to Richmond Hill and is planned to open next; ◉◉ Line 2 subway from Kennedy to north of Scarborough Town Centre, to be open before 2030. It will replace the mostly above-ground connecting RT (Line 3) light metro from Kennedy that uses railcars of the same type as the automated TransLink Mark 1 vehicles (see following story), but operated by staff; and ◉◉ Extension of the under-construction Eglinton Crosstown LRT (Line 5), which is scheduled to open between Mount Dennis and Kennedy in 2021, to Renforth Drive by 2031. The province said it is committed to establishing connectivity with Toronto Pearson International Airport in future phases of this project. The projects are estimated to cost $28.5 billion, of which the provincial government has committed $11.2 billion in funding, with the balance from other 20

governments and potentially the private sector. The provincial government also stated its support for extending the Line 4 subway east from Don Mills to where it will meet the extended Line 2 in Scarborough but has not committed a timeline or funding. The province is also taking over responsibility of new subway infrastructure from the City of Toronto and managed by the Toronto Transit Commission (TTC) and handing them over to Metrolinx, the provincial agency that plans and coordinates the area’s transportation. This move it said will get subways built faster. There has been no word yet on how many new railcars that the system expansions will require. The railcar designs and technology for the Ontario Line are to be determined. “We will design, procure and construct the four lines in the most efficient way practicable,” said Ontario Ministry of Transportation spokesperson Bob Nichols. “We will invite the market to offer subway systems and technologies that are current, proven and appropriate.”

Metro Vancouver There will be new railcars on the tracks of TransLink’s growing SkyTrain light metro network. The British Columbia provincial government announced May 23 that $1.47 billion will be spent to purchase approximately 200 new railcars for the Expo and Millennium lines. They will replace 150 Mark 1 railcars, which are nearing the end of their life cycle and to expand the fleet for longer and more frequent trains. There will also be a new vehicle storage facility, along with upgrades to the vehicle operations and maintenance centre and improvements to the mainline power, train control and operating systems. The provincial government is contributing $579 million while

CANADIAN EQUIPMENT FINANCE | Summer 2019 | canadianequipmentfinance.com

TransLink is investing $397.68 million. The federal government is financing the $493.32 million balance. SkyTrain, which is fully automated, first opened in December 1985 and has been expanded since then. The next new section, a 6 km extension of the Millennium Line from VCC-Clark to Arbutus and billed as the Broadway Subway, is expected to open in 2025. The SkyTrain network includes the Canada Line, which connects downtown Vancouver to Richmond and Vancouver International Airport (YVR). Opened in 2009 it has proven to be exceptionally popular. To provide more capacity 24 new railcars are being built by Hyundai Rotem, which constructed the original fleet.The Canada Line is physically separate from the Expo and Millennium lines. The railcar investments came amidst record ridership for TransLink with 437.4 million annual boardings in 2018, a 7.1 per cent increase over that recorded in 2017. SkyTrain (including Canada Line) boardings alone increased by 5.7 per cent to 160 million. More railcars will be needed in the future. Planning is underway to extend SkyTrain 16 km to Langley and for a further 7 km of the Broadway Subway from Arbutus to the University of British Columbia’s Point Grey campus. There have also been calls to extend SkyTrain from downtown Vancouver to the North Shore and from Coquitlam to Port Coquitlam. “Ridership is exploding, and our region is growing,” said TransLink Mayors’ Council chair Jonathan X. Coté, in an April 25 statement on the TransLink ridership growth. “If we are going to cure congestion, we need to invest in both new transportation infrastructure and service expansion to make commutes quicker and easier now, and into the future.”

your Business

Leasing equipment? By Bruce Allingham

ave you ever thought about leasing your equipment? Do you know what questions to ask? There are many things to consider when choosing between leasing and financing equipment. These include upfront costs, cash flow, maintenance costs and of course tax implications. You should ask your accountant which choice is better for you. In many situations your dealer or broker may not have even given you an option to lease, and it could be costing you money.

Factors to consider When looking at leasing, before anything else, check with your accountant to determine if it is an operating lease or a finance/capital lease. The one you choose may be affected by some of the new accounting rules, as each lease is accounted for differently in your financials. Your accountant can help guide you through this process and assess which is best for you. There are several factors that need to be considered when putting together a lease. The first, and the most important, is where to set the residual value at. The residual is the end-value of your lease at maturity, or the amount you will have to pay if you want to keep the asset you have leased. It is important for many reasons. If you set the residual too high, and at lease end your asset is worth less, this will put you in a “negative equity” position. This means you will need to come up with some extra cash if you are obligated to buy out the asset at the end of the lease term. If you don’t have the cash you will need to get financing for this amount, which may be difficult because most financial institutions don’t like to lend money against an asset that is not worth the amount they are lending. Take the time to do some research in determining where you set your residual.

Be conservative and be sure your residual is less than what you estimate the value to be at lease end. This should give you some equity, which you could use as a down payment on your next piece of equipment: and also make it easier to sell. Next, you need to pick the length of term for your lease. Try to set your lease terms in conjunction with the projects you have ongoing and lined up or contracts you have in place. This will enable you to utilize your equipment to its maximum potential. There is nothing worse than making payments on an asset that is sitting idle. Leasing can also give you some flexibility if your business plans change. You may be able to negotiate an early buyout if a project ends, or you could extend or rewrite the lease if you need for an extended period of time. Finally, there is the big question around interest rates. I would like to say who cares but I know it is everyone’s favourite question. Interest rates are most likely going to be higher on a lease, but a lease payment could actually be less (remember the residual), which could help your bottom line. If you are comparing lease quotes there are several things you should know. You need to be aware of all the fees you are being charged. Registration fees and/or monthly administration fees are usually added to most leases. Don’t be afraid to ask. You need to know what the interest rates are. A 0.25 per cent rate change on a $100,000 lease over 48 months, with a 35 per cent residual, creates roughly a $15 difference—up or down—in your monthly lease payments. Also take note of the residuals being quoted. The best way to compare lease quotes is simply add up all the payments, plus the residual and any other costs that may be in the lease. The total you get gives you the answer. If you are comparing a lease payment against a finance payment the same thing applies, except you should ask your accountant about cash flow and possible tax advantages to you and your business.

Other leasing need to knows There are a few other things you may not know about leasing: ◉◉ You can lease a used asset, whereas most people think you can only lease new products. You may benefit here with lower prices and payments; ◉◉ If you get to the end of your lease and don’t have the cash to pay the residual out, some leasing companies will rewrite the lease for the residual amount, and if not, there may be other leasing companies out there that would pay out the existing lease and start a new lease with you. This will significantly reduce your payments at that point; and ◉◉ You can also get a lease with a maintenance component linked to it, which would give a more straight-line or consistent cost to the lease. Remember, leasing preserves capital and provides flexibility. Because leases have a residual value this means you are never completely amortizing the asset (paying it off fully), which can reduce your cash flow, giving you extra cash at the end of the month, or additional profit. A little added bonus is that when you finance a deal all of the taxes are calculated up front and included, while leases are based on the capital costs before taxes with the tax included as part of the monthly payment. So, the next time you are looking to acquire an asset, at least take the time to consider leasing the product and make sure whoever you are dealing with shows you this option. This is just a snapshot of the things you need to know and the questions you should be asking if you are thinking about leasing your next piece of equipment. Be sure to discuss it with your accountant to see if it makes sense. It may just save you some money! Bruce Allingham is the national sales manager at First West Leasing Ltd. (http://firstwestcu.ca/first-west-leasing), managing a growing portfolio of over $180 million. With more than 20 years’ experience in leasing and fleet management, he is always searching for new business development opportunities helping clients achieve their goals.

canadianequipmentfinance.com | Summer 2019 | CANADIAN EQUIPMENT FINANCE

Management Strategy

Leveraging technology to go green By Travis Melchior

oing green is becoming a directive more than a movement, especially here

in Canada. The Canada’s Changing Climate Report (CCCR), released April 2, 2019 by Environment and Climate Change Canada, states that we are experiencing overall warming at twice the global average. Average precipitation is projected to increase across most of Canada, and extreme high temperatures will increase in frequency and intensity.

Changing how businesses operate The importance of making changes to the way companies do business cannot be overstated. Improving fuel efficiency and finding alternative power sources are imperative for helping minimize the ecological impact of transportation. But there are simpler ways that businesses can make a large impact on green initiatives, while also improving profit margins and operating more efficiently. New technology plays a big role in changing the way businesses operate. Advancements in end-to-end financing software automate many of the manual tasks that used to burn valuable time and cost lessors a lot of money. Two of the most impactful developments in software technology, which also affect the environment, are the introduction of electronic document management systems (EDMS) and the growing use of e-signatures. In the U.S. it has long been estimated that the average office worker uses 10,000 sheets of standard printer paper each year1. In our industry, that number goes up dramatically as many of us rely on large document packages to sign leases and loans and keep track of physical assets. Think about how many pages your company uses in order to sign a new customer or renew equipment finance agreements. Multiply that by how many 22

applications you receive, document packages you present and the customers you serve that stack of paper grows fast. The 2016 census report from Statistics Canada indicated that the number of people who reported full-time employment in business, finance and administrative occupations in 2015 was just over 1.6 million. If we assume even one million of those people were using 10,000 standard printer pages a year, as in the U.S. that is 10 billion sheets of paper used in one year or about 100,000 tons of paper. When one ton of paper takes 12-24 trees to produce2, that results in 1.2-2.4 million trees harvested each year for standard office paper alone. Imagine the impact if half of those people leverage new technology by moving to EDMS and e-signatures in order to process all their paperwork instead of printing it all out? One global e-signature software provider stated on a blog that its network saved over 436 acres’ worth of forest in 2016 alone3. At 100-200 trees per acre, that amounts to over 43,000 trees were saved in one year. Many equipment financing companies utilize multiple systems to manually keep track of proposals, origination agreements, insurance and credit reports and other customer documentation. Crossing multiple systems opens up the risk of data entry errors, while redundant data entry processes cause businesses to lose valuable time. Employing EDMS that are part of an end-to-end solution allow lessors to enter customer information one time. That information populates across multiple documents in a package without having to key it in for each instance. The solutions save time and money and helps protect the environment all at once.

Transportation equipment leasing benefits Using EDMS and e-signatures have strong particular benefits in the commercial transportation sector. These

CANADIAN EQUIPMENT FINANCE | Summer 2019 | canadianequipmentfinance.com

lessees often operate on the road. That makes it challenging to send, sign and receive paper documents. Lessors will wait days, even weeks, to get back those wet-ink copies. Being able to generate document packages at the click of a button, sign agreements remotely and turn contracts around within hours makes it easier for these customers to do business with you. You are sure to stay in your customer’s mind for future purchases. The environment is not the only one that profits with more efficient technology. One final way EDMS can improve business operations is by being able to track garaging locations on an individual asset basis. Assets move all the time; for example, equipment that is purchased in the U.S. and then follows a customer into Canada. Assets for a single customer could be garaged in multiple provinces at once. For every example of garaging location changes new tax and insurance rates need to be applied. By utilizing an end-to-end asset-based system to manage customer information you can track and update those changes more efficiently without risking manual errors. Time saved is money made. Our climate is changing. The effects of these changes are not going to go away by reducing emissions alone. But technology’s impact on our changing environment is inspiring. By leveraging new technology, equipment finance companies, especially within the transportation sector, can help spread optimism through more efficient operations and environmentally friendly processes. Following the “green directive” is easier than you think. The smallest changes create the biggest impacts. Travis Melchior is sales executive, Canada for LTi Technology Solutions (www.LTiSolutions.com). 1 K.J. McCorry, “The Cost of Managing Paper: A Great Incentive to Go Paperless!”, InformIT, September 16, 2009. 2 Conservatree http://conservatree.org/learn/EnviroIssues/TreeStats.shtml 3 Robin Joy, “Celebrate Earth Day & Switch From Paper to Pixels”, DocuSign, blog, April 22, 2014.

Reach marketers & financial executives Our magazines are must-reads for key executives in core corporate competencies.

Can you help our readers: • Create a strong financial structure and healthy economic ecosystem to ensure capital and cash flow keep their engines running? • Determine who their customers should be, how they can reach them most effectively, and how they can turn data-driven marketing into profitable sales? • Build efficient and effective financial systems to enhance payments and billings between their companies and their customers and vendors? • Convert all the data and information they collect from every contact point into tangible benefits that increase revenue and reduce costs? • Equip their companies with the tools, technology, systems and hardware needed to manage their operations, to create new services or products, and deliver them to their market? • Manage their customers with smoothly functioning support departments that are properly staffed and equipped to solve problems, foster loyalty and retain customers? • Make any or every step in that chain better, faster, cheaper, and more profitable?

We can help you tap into the ecosystem at the points that will drive your campaigns. To advertise or get more information and media kits:

Mark Henry 905-201-6600 ext 223 | 1-800-668-1838 | mark@dmn.ca Visit our websites:

DM Magazine, www.dmn.ca Contact Management magazine, www.contactmanagement.ca

Payments Business magazine, www.paymentsbusiness.ca Canadian Equipment Finance magazine, www.canadianequipmentfinance.com