Motor carriers that extended trade cycles during the recession are awakening to a harsh reality as they begin to look at rejuvenating their aging fleets. The latest emissions-related technologies brought on by US Environmental Protection Agency (EPA) emissions standards have driven the cost of a new Class 8 tractor well north of $100,000 and it has suddenly become much more difficult to finance new tractors for fleets that have little capital and only older trucks to trade in.
Steve Russell, chairman and CEO of Celadon Transport, paints a grim picture for cash-strapped fleets. When Truck News visited him at his Indianapolis office, Russell grabbed a pen and paper and scribbled out the new trade-in formula as such: In 2006, he pointed out, a new truck cost $95,000 and a three-year-old truck was worth $50,000, so a company looking to upgrade would require a loan of $45,000, which was easy to obtain. Today, a new truck costs $125,000 and a three-year-old truck is worth $50,000, so the company requires a $75,000 loan and very few financial institutions will write it.
Worse, many fleets extended their trade cycles during the downturn and are now running trucks that are seven years old, not three. Those seven-year-old trucks are worth maybe $20,000 and a $100,000 loan is required to trade up into a new tractor.
Meanwhile, the maintenance costs on a seven-year-old truck are 18 cents a mile compared to five cents a mile on a two-year-old truck that’s covered under warranty, Russell added.
It’s a vicious cycle that has required many small fleets to resort to doing two-for-one or three-for-one swaps, where they’re exchanging several older tractors for one new one and downsizing their capacity in the process.
Very quickly a 180-truck fleet becomes a 100-truck fleet and Russell said this was true of several struggling trucking firms Celadon has acquired in recent months.
This is a reality that’s not just true south of the border either. Rob Penner, executive vice-president and chief operating officer with Bison Transport, told Truck News he sees the same phenomenon playing out in Canada.
“We’re absolutely seeing that,” he said of desperate two-for-one trade-ins. “And I think anybody who is looking at the (proposed) deals coming across our desks is seeing that scenario. There are a lot of trucking companies that appear to be doing reasonably well that are totally undercapitalized and when they have to get through refreshing their fleet, they’re looking into that strategy where it’s three-for-two or two-for-one. They’re looking for investors and partners and they’re looking to sell their business or a portion of their business for exactly those reasons.”
On the other end of the spectrum, large, well financed companies are rejuvenating their fleets with abandon. Bison itself has spent $95 million on new equipment over the past 18 months, replacing 515 EPA07 generation tractors with the newer EPA2010 technology. Penner said Bison will be buying another 100 or more tractors by the end of the year and it has also purchased 625 new trailers in recent months.
Challenger Motor Freight, another of Canada’s largest carriers, will have replaced nearly a third of its fleet by the end of the year, taking delivery of more than 400 new tractors in the process. By the end of the year, Challenger’s oldest highway tractor will be of an EPA2010 vintage, said president and CEO Dan Einwechter in a recent interview with Truck News. Challenger also has recently refreshed most of its trailer fleet, buying 1,000 new trailers to replace 1,400 aging units.
Asked how a carrier can afford to replenish its equipment in the new era of high purchase prices, Einwechter said simply: “You have got to be financially prudent enough that the financial institutions are willing to finance you. You have to have the right formula.”
Challenger, like many fleets, began extending life cycles during the downturn but its size, reputation and access to capital has helped it get its trade cycles back to normal.
“So many of us wouldn’t keep a truck more than four years,” Einwechter said. “Why? There are varying reasons for that; some say it’s very scientific and other say it’s not scientific. The bottom line is, we just did it. We were doing it to attract drivers. Then the downturn hit and guess what happened? Trucks didn’t have the miles on them you thought they would have after four years, people were reticent to go out and make capital decisions because nobody knew what the hell was going to happen. So the four-year-old truck became five, became six, became seven (years old).”
Einwechter said as the older trucks steadily depreciated in value, few carriers were setting funds aside to replace them when business picked back up.
“As the old trucks were depreciating, a lot of carriers weren’t putting money away because they had no money to put away,” he explained. And that’s where many small fleets find themselves today, operating older equipment than ever before without access to the funds required to modernize.
Class 8 truck sales, year-to-date, have been significantly stronger than in 2011, but have come to a grinding halt over the past few months, partly due to this same set of circumstances.
Kenny Vieth, president and senior analyst with industry forecaster ACT Research, feels much of the slowdown in new truck order activity can be attributed to skittish small fleet owners who are unwilling or unable to finance new tractors at nearly $100,000 a pop.
“Smaller truckers who have to borrow to buy are most likely driving older trucks with relatively low values,” Vieth asserted in ACT’s most recent State of the Industry report. “Those truckers need to borrow $90,000-$100,000 to finance a new truck, but their confidence has been shaken by a number of events in early 2012, including economic concerns, a 9.5% jump in fuel prices through Q1, and inconsistent freight early in the year.”
Bob Costello, chief economist with the American Trucking Associations (ATA), said via Twitter that the high cost of equipment is “the new diesel” and could drive fleets out of business.
There is also, among small fleets, a lingering distrust of the latest EPA-mandated emissions-related technologies such as exhaust gas recirculation (EGR), diesel particulate filters (DPFs) and selective catalytic reduction (SCR), even though the latter has improved fuel economy by about 5% and is a big part of what’s motivating the larger fleets to upgrade to newer equipment.
Earlier EPA mandates in 2002 and 2007 had the opposite effect, however, not only driving up purchase prices but also degrading performance and fuel efficiency.
Small fleet owners like Bill Cameron, owner of four-truck firm Parks Transportation, said he’s not prepared to invest in the new equipment as long as he can refurbish older tractors and keep their maintenance costs in check.
“I avoid them like the plague,” he said of the newer generation trucks. “My own truck is a 2001…this truck has a rebuilt engine, transmission and front differential. It will continue to be rebuilt, one component at a time until it becomes impractical.”
Cameron said owner/operators and small fleet managers he’s spoken with share the same concerns and are looking for non-traditional options such as buying glider kits from the OEMs or having older tractors refurbished.
“A friend of mine has eight trucks hauling freight to the west and cattle back (to Ontario),” Cameron said. “His trucks range from 1999 to 2007. The older trucks are being rebuilt as needed, the 2006 and 2007 are for sale. We all seem to be of the opinion that extra maintenance on older, mechanic-friendly equipment is far preferable to payments on high-tech, unreliable new iron.”
But not all small fleets share that outlook. With older tractors come higher repairs costs, increased downtime and an inability to recruit and retain drivers.
This is especially true among carriers that run into the US, where a driver’s own CSA (Compliance Safety Accountability) score can be negatively impacted by running older or poorly maintained equipment. Trucking jobs are abundant and drivers are more likely to gravitate towards fleets that are operating newer equipment.
Apps Transport Group, a 50-truck city cartage fleet based in Brampton, Ont., is one small fleet that has undertaken an aggressive fleet renewal strategy. It replaced a third of its fleet with 17 new Peterbilt Model 386s, even though the premium tractors carried a higher purchase price than many other options. Interestingly, as part of its rejuvenation, Apps traded in some of its newest EPA07 tractors and held onto several of its older, more reliable units.
Still, Rob McDonald, president of Apps Transport, admitted financing new equipment is a struggle for smaller operations.
“There are several ways to finance new equipment,” McDonald said. “The OEMs provide one source and I think they’re going to have to look at being a little more flexible in light of the realities of the economy and the value of the trade-ins. It is going to be more of a burden on fleets but I think anybody whose balance sheet isn’t in terrible shape shouldn’t have issues financing through the OEMs as the economy shows more promise for the future. Every case is individual but for sure, we have to be more creative and so do the people on the lending side.”
Bison’s Penner said financial institutions, particularly in Canada, seem less willing to lend to small businesses, exacerbating the challenges related to refreshing their fleets.
“The banks are being more cautious than ever,” Penner said. “If you look at Canada versus the US, Canadian small businesses seem to be at a significant disadvantage because of the banking system.”
There are several ways motor carriers can refresh their fleets and get back onto a more predictable trade-in cycle.
One option that’s growing in popularity, according to ATA’s Costello, is full-service leasing. This allows fleets to run fuel-efficient, new-generation equipment without the high up-front cost and also enables them to better predict their ongoing operating costs. Another option worth exploring is financing new equipment through a captive lender, said Todd Hubbard, president of Paccar Financial.
“During the recent difficult recession, many businesses saw their financing institutions tighten their access to credit,” Hubbard acknowledged. “For fleet operators and truck owners, that meant a costly delay in their plans to acquire new equipment to replace aging units due to higher maintenance and operating costs.”
Hubbard said working with the finance arm of the OEM that produces the equipment provides several benefits, including a better understanding of the trucking industry and a heightened willingness to work with fleets facing unusual circumstances.
“The growth and prosperity of any business is dependent upon cash flow, and you can likely increase your ability to generate cash flow by financing or leasing with the right captive financing source,” Hubbard said. “To determine the right financing source, business owners should ask themselves, ‘Can my current lender help me purchase new trucks with technology that will help reduce my operating expenses while still providing me capital for growth opportunities and other needs’?”
Regardless of the financing source, fleets that have put off replacing older vehicles still face an uphill battle.
Whether they’re willing to take on debt or downsize their fleet to modernize their equipment will depend largely on how confident they are in the economy and the short- and long-term prospects of the industry.
Asked what fleet managers need to get their trade-in cycles back on track, Einwechter said confidence – not cash – is king.
“They need to be somebody who has some financial comfort but also the belief that the economy is going to do the right thing to warrant doing it,” he said.
As for Einwechter’s level of confidence? “I repeatedly tell my people, in good times or bad, somebody is going to haul freight so it might as well be us.”