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Suppose you bought a 2012 Chevrolet Suburban at the start of 2013 for $32,800 with 23,400 miles. Two years later, you sell the Suburban for $18,000, with 135,000 miles. Sound like a good deal for a limousine fleet operator?
For Houston operator Erich Reindl, such deals are standard operating procedure in keeping sedans and SUVs stocked in his 37-vehicle chauffeured fleet. He buys newer pre-owned vehicles when they come available based on price, not whether he needs them that moment. Reindl calls it a flip-and-hold strategy.
“We usually have one or two cars sitting at the office here,” says Reindl, who started Avanti Transportation in 1994 and adopted his cash-only strategy in 2006. “They can afford to sit for a few months until we sell one. I’m flipping cars all the time now. You can get a better deal on cars when you are not in a hurry to buy something. You have a better negotiation standpoint.”
Reindl still buys all of his vans and mini-buses new, but like many operators, works out a formula for pre-owned versus new fleet vehicles to ensure minimal overhead and maximum profits.
Finding A Fleet Formula
Operators will tell you there is no right or wrong approach to vehicle purchasing, since the profit-purchase business model at limousine and bus companies run the full gamut depending on local market factors. A chauffeured company heavy on corporate and VIP clients who want the newest and best vehicles must always buy new, especially if it turns the fleet over every two to three years to keep a current fleet image.
However, for small- to medium-sized operations in second-tier or lower population centers with less discriminating clienteles, pre-owned fleet vehicles can provide the financial wiggle room for revenue and sales growth.
“I let someone else take the depreciation hit,” says Jeff Wright, owner of Pinnacle Car Services in the northwest Arkansas town of Rogers. He runs a 23-vehicle fleet about 65-70% pre-owned. Wright buys sedans and SUVs with about 50,000 miles and keeps them several years.
“We’ve run those vehicles until they no longer represent the quality they should. I sell them for pennies on the dollar, but I can usually run them about one to two years after they are paid off in full.”
With his larger vehicles, such as mini-coaches, stretch limousines and shuttles, Wright buys his models new. “I see it’s better to buy that equipment new and get the full warranty because I’m putting fewer miles on vehicles,” says Wright, who just bought two 29-passenger mini-coaches from International.
Wright breaks out his P&L based on vehicle type, not individual units. He looks at overall sales volume per type category to assess profitability. “For 10 years, we’ve been growing market sales and share and still running a profitable company,” says Wright, who worked in corporate management positions for Sam’s Club/Wal-Mart in nearby Bentonville before starting Pinnacle in 2005. “If you are growing top line sales, you are making best decisions for customers all the time. I look at sales volume daily and run spreadsheets to track it week by week, month by month against the previous year.”
Profiting Per Vehicle
At Rose Chauffeured Transportation in Charlotte, N.C., owner and founder H.A. Thompson has seen phenomenal growth in his charter bus division since starting it in 2008. His two-pronged strategy involves buying used Van Hool buses and then breaking each out as its own profit unit. Rose has paid $150,000 to $250,000 per bus, compared to new bus prices that can reach $650,000. As a result, Rose has grown from one to 18 charter buses in just seven years.
“There is an abundance of used motorcoaches which drives the prices down,” Thompson says. “In no way should any limo operator venturing into motorcoaches even think about new motorcoaches unless they are flush with cash or have lucrative (service) contracts.” A new $600,000 motorcoach should be earning about $30,000 per month in revenue to be profitable, which can be accomplished through contracted daily commuter service, he adds.
When a limousine operation buys its first motorcoach, it should be ready to buy its second a few months later, based on strong cash flow from the first, Thompson says. “When you move 100 people, you better have two motorcoaches available. You also need to be careful about breakdowns.”
Overall, the 56-vehicle Rose fleet is 36 vehicles are pre-owned and 20 new. For example, the company recently bought a one-year-old Suburban with 17,000 miles from Enterprise Rental Car that cost about $10,000 to $12,000 less than new sticker price.
Rose operations manager Tom Holden cautions that vehicle purchasing varies from large to small markets, with travel distances, client volume and brand preferences as major factors determining whether a vehicle should be bought new or pre-owned.
“We spent the last 15 months drilling down and categorizing our business in multiple departments, including independent contract, local farm-out, and farm-out out of town,” Holden says. “We’ve dissected the numbers down to the penny in our books.”
This simplifies fleet decisions: If a vehicle hits profit benchmarks, you keep it. If it doesn’t, get rid of it. Thompson and Holden are strong proponents of dissecting P&Ls down to per-vehicle.
“We look at all costs, line item by line item, so we know exactly to the penny how much money we make or lose,” Holden says. “It is shocking evidence. Some departments make a lot more than you think.”
Holden calculates that a Cadillac XTS livery sedan costs about $1.37 per mile to operate in their market. Multiply that by miles driven, add in your desired profit margin, and that gives you a baseline rate.