North American Class 8 truck order activity started off 2012 great gangbusters, leading to overly optimistic projections from the OEMs and a subsequent downgrading by OEs and industry forecasters alike. There has been an unmistakable cooling of new order activity, which has prompted me to examine in detail the challenges involved in refreshing the fleet in the wake of a devastating recession that threw traditional trade cycles to the wind.
You’ll find a full feature on this issue in the August issues of Truck News and Truck West, but I thought I’d open it up for discussion in advance with the posting of this blog.
I’ve found two things when conducting my research. A) That new trucks have never been more expensive – duh! And B), that the great divide between those who can afford them and those who cannot is widening.
Those of you who regularly read my blog and my Hooked Up newsletter will have seen these numbers, but I’ll present them once again. According to Steve Russell, head of Celadon Trucking, the trade-in formula has been rewritten.
When I visited Steve at his Indianapolis office this spring, he grabbed a pen and paper and scribbled out the new trade-in formula as such: In 2006, 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. This has required many small fleets to resort to two-for-one and three-for-one trade-ins, which was the case with a couple struggling firms Celadon has acquired early this year.
(As an interesting side note, Steve’s offer to rescue struggling Canadian fleet owners from their financial despair – dubbed Steve Russell’s “one-time multiplier plan” by a cheeky Mike McCarron @AceMcc via Twitter – has seemingly gone unheeded. He told me in the days following the report that he’d heard from two Canadian firms but I’ve yet to see any deals announced).
Back to my original point. It’s not just Steve Russell making these observations. On Twitter, Bob Costello, chief economist for the ATA recently suggested: ‘I think equipment costs – new tractor prices and maintenance costs of older tractors – is the new diesel. It could drive fleets out of biz.’
And in its latest State of the Industry report, head analyst at ACT Research Kenny Vieth observed: “Smaller truckers who have to borrow to buy are most likely driving older trucks with relatively low values. 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.”
So, that all begs the question, is the same true here in Canada? Cue Rob Penner, COO of Bison Transport. He told me “We’re absolutely seeing that.” He was speaking of the three-for-two or two-for-one trade-ins smaller fleets are making in a desperate effort to refresh their fleets. Rob said that many such fleets are looking to sell off all or part of their business or to take on partners because they’re otherwise unable to renew their aging fleets.
What we have here is a dilemma. It’s not just that small fleets can’t afford to buy new tractors, some simply won’t. There’s a lingering distrust among many small fleet owners about emissions-related technologies like EGR, DPFs and SCR. (Ironically, fears about SCR are unfounded and are in fact one of the main reasons large fleets are aggressively replacing equipment. They’re looking to replace EPA07 generation trucks with EPA2010 technology using SCR, which provides fuel savings of about 5%. Apps Transport, one small fleet that has bucked the trend and this year replaced a third of its fleet with 17 new Pete 386s actually traded in some of its newest EPA07 tractors and held onto the older, more reliable units in the deal).
I don’t mean to imply it was only small fleets that extended life-cycles during the recession. The larger guys did it too. “So many of us wouldn’t keep a truck more than four years,” Challenger’s Dan Einwechter told me. “Why? There are varying reasons for that; some say it’s very scientific and others 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).”
The difference is, the large fleets are better positioned to get themselves back into their regular trade cycles. They have scale to use as leverage when negotiating deals. If need be, they have facilities to borrow against. In some cases, they have their own retail outlets to move used equipment and maximize their return on it. They have options that simply don’t exist for many small carriers. And these big guys are refreshing their fleets with great abandon. (Witness Challenger, 400 new tractors and 1,000 new trailers this year and Bison, 515 new tractors and 625 trailers).
I wrote previously that we may have seen the end of the trucking tycoon. I now think the challenges facing small trucking companies are even more significant than I did at that time. Running older trucks means they’ll be at a disadvantage when recruiting drivers and if their repair and maintenance costs spiral out of control, they could find themselves in a helpless spot and maybe even calling up Steve Russell in Indy. Rob McDonald, president of Apps, told me the OEMs will have to get more creative in making new trucks affordable to small fleets facing these difficult realities.
It seems that many – not all, I hasten to add – small fleets that have extended truck life-cycles during the hard years will have some important decisions to make in the months and years ahead. I asked Dan Einwechter what it’s going to take for some of those fleet owners to get their previous life cycles back on track and he 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.”
Please discuss.