To grow or not to grow
Can equipment – specifically the inability of some carriers to invest in new tractors – fuel trucking’s next consolidation phase?
American Trucking Association’s chief economist Bob Costello believes it could and I agree with him.
The average age of a Class 8 truck in the US is now up to 7 years – the highest since such has data been collected. During the boom times of the previous decade, the average age was around 4-5 years. There aren’t up-to-date stats for the Canadian market but we too are running the oldest fleet in recent memory.
Carriers needing to update their fleets are finding themselves squeezed by a variety of factors.
1. The average price of a Class 8 truck today is about $125,000, thanks to the added cost of meeting the latest engine emissions regulations. That’s a sizeable increase from the average $95,000 sticker price back in 2006.
2. At the same time, the average 7-year old tractor may have a resale value of just $20,000, compared to $50,000 had it been only 5 years old. That means carriers looking to update their fleets need to finance $105,000 of the sticker price for each truck whereas before the recession, with lower prices for new trucks and better prices for used, they would only have to finance $45,000. As a result, many small carriers are turning in two trucks to purchase one.
3.A slow growing and still volatile economic rebound is making carriers nervous about large investments in new iron.
At the start of the recovery many carrier executives believed that keeping capacity tight would help place upward pressure on rates. The slow economic recovery, however, has thwarted that hope. The Canadian General Freight Index shows base rates dropping over the summer months, not increasing. At the same time, aging tractors pose a number of problems for carriers, resulting in nothing but grief from their drivers, their customers and their own maintenance department:
• Fleets unable to get out of their older trucks may have a hard time hanging on to their drivers as they get enticed by fleets able to put them in new iron.
• Our annual Shipper’s Choice survey shows that shippers place a priority on quality of equipment when selecting carriers. A carrier’s quality of equipment is rated higher in priority among shippers than its information technology capabilities, its problem solving abilities, its value-added services and its sustainable practices. It’s a similar situation for LTL trucking. In fact, shippers set a higher standard for quality equipment for their TL carriers than for any other mode other than airfreight.
• Older trucks are much more costly to maintain. On average, before a truck hits the 550,000 mile mark, maintenance costs work out to about 5 cents/mile. But above the 550,000 mile mark, maintenance costs rise to 15 cents/mile.
If freight volumes don’t bounce back strong in 2013 – and the projections for continued slow economic growth don’t suggest that they will – then carriers hanging on to older equipment will have to take a leap of faith. Those who won’t, or can’t, may find themselves in dire straits.
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Lou, you remind us all of worthy considerations when evaluating the alternatives as to replacing older equipment. However, replacing older equipment has little to do with growth (aka: increasing revenues and profits and enlarging market share), and much to do with “staying even’ (aka: containing expenses, keeping trucks and drivers on the road, satisfying present shipper-customers, etc.).
Yes, of course, as trucks age they also accumulate more engine hours and odometer miles, both of which are measures of wear and tear causing those older trucks to incur much higher repair and maintenance costs, and not only on a per-mile measurements, but – far more importantly – on percent of revenue measurements when repair and maintenance expenses are compared to each such truck’s revenue productivity, per week, or month, or whatever.
Savvy truck fleet operators, those who want to focus solely on “moving freight and generating profits doing so,” have largely elected to withdraw from the truck repair and maintenance business; they’ve studied and carefully adopted and followed sound “lifecycle equipment cost” minimization practices, which mandate that they “dump” older trucks before they become too expensive to both own and operate. Is really simple: older trucks are much like elderly employees, as they most all fail to “show up for work” every day of the week.
Well-financed fleet operators are not deferring their fleet equipment replacement decisions, but ill-financed fleet operators (aka “those lacking sufficient cash to make purchase down payments unheard of just years ago”) are the ones who would love to, but cannot, “buy new iron.”
Further, very few fleets of any financial status are making significant additions to their fleet capacities; that which most restrains them is that which (strangely) most too protects them; it’s the “driver shortage,” which – if ever solved industry wide – would fast cause almost everyone to contribute to the industry’s suicide, as every trucker would near immediately buy more trucks and hire more drivers and soon thereafter begin cutting base rates so to gather more freight but at increasing lower rates than even those now presently providing truckers with just marginal profits.
Smaller carriers with older equipment and little financial resources are already in or near dire straits, and most are also unable to make any “leap of faith,” other than into one’s own abyss.
1) A seven year old truck is worth less than a five year old truck but seeing as most trucks are finanaced over five years the seven year old truck would have been ran for two years with no payments which more than offsets the higher maintenance costs.
2) New truck pricing in Canada hasn’t gone up like you suggest. The numbers you quote are in US dollars. I just took delivery of two 2013 Peterbilt 389 heavy spec tractor which were $145,000 with five years full warrenty. The last new truck I bought was in September 2000. It was a haevy spec International and it cost $127,000. If you figure something for inflation it works out about the same. The only reason for this is our dollar was 0.67 US in 2000 and it is now more or less at par.
3) Used trucks are overvalued in most of Canada at the moment because a lot of people are scared of the new technology. Seven year old trucks in western Canada are worth just as much or more than they were two years ago.
4) I have ran my own company since 2000 and have had both new and used trucks and this I know for a fact: If you can’t afford to run a new truck you can’t afford a used one either.
Some of the arguments you forward in your article may be true in the USA but they don’t mean much to us in Canada as a whole.
Pacific West Transport