Eye on Costs
January 18, 2013
by Sean Kilcarr and David Cullen
It should come as no surprise to anyone in trucking that equipment costs a lot more today than it did ten or even five years ago. Driven in the past by federal emissions control limits mandated by the Environmental Protection Agency, the potential for even more sticker price hikes, caused this time by new fuel economy regulations, remain on the horizon.
Keith Klein, executive vice president & COO of Transport America, notes that the base price of the Class 8 tractors used in his company’s fleet increased $25,000 between 2004 and 2010. Andy Stopka, vice president-maintenance for NationaLease, notes that the cost of vehicles has risen almost 50% in the past decade.
As a result, truckers large and small are intensifying their cost-control efforts to help mitigate such steep upfront price tag hikes and also to reduce lifecycle costs.
“Almost without exception, and even though initial price is always a factor, most fleets say they base their purchasing on total cost of ownership (TCO),” says Steve Gilligan, Navistar’s vice president-product marketing.
TCO includes initial price, operating costs, and resale value but also the cost of financing and its availability, he explains.
“Those factors can change based on the size of the purchase, the type of specs chosen, and the fleet’s historic relationship with the OEM,” Gilligan notes. “And there’s no OEM that can provide the lowest TCO for the variables of every given fleet every time. If one of us had a lock on this, the others would be out of business.”
Gilligan adds that all OEMs are probably correct in their spec recommendations if a trucker takes advantage of all the recommendations made—but not every one does.
“It’s also important to have a strong relationship with the OEM and your dealer so sales personnel have the opportunity to develop a proposal that meets the trucker’s needs—and there may be something new available that will positively affect their operating costs,” he adds. “But ultimately, the buyer has to decide what will work best in his operation.”
That decision is going to become that much more critical over the next five years, points out NationaLease’s Stopka, as new fuel economy standards developed jointly by the EPA and National Highway Traffic Safety Administration will require heavy trucks manufactured between 2014 and 2018 to reduce fuel consumption between 7% and 20%, while cutting emissions by 270 metric tons.
While the EPA predicts that the resulting fuel savings will more than compensate truck operators for the higher costs of trucks equipped to meet the new standards, Stopka says the question truck-makers face is how to achieve such an ambitious objective in a realistic, cost-effective manner.
“With other factors driving up the cost of running a trucking company—the cost of new equipment has risen almost 50% in the past 10 years, for example—everyone is searching for ways to improve efficiency, increase mpg, and boost profitability,” he explains.
Stopka believes there are several basic ways carriers can accomplish those goals:
*Increase efficiency of truck utilization. This can range from identifying the optimal fleet composition to standardizing specifications for increased fuel economy.
*Making maintenance facilities more efficient. With the goal of getting trucks in and out of the shop as quickly as possible and back on the road earning money, truckers are turning to programs such as vendor managed inventory systems and continually educating technicians on the latest technology.
*Taking advantage of extended warranties. Extended warranties let truckers enjoy the benefits of a standard warranty over a longer period of time following new equipment purchases, with the end result the optimization of equipment performance.
*Using technology designed to increase mpg. More trucking firms are adding features to their trucks such as wind deflectors, side skirts, and even aerodynamic wheel covers designed to cut fuel consumption by several percent.
*Choosing wide-based tires. Payload for trucks using wide-based tires used in a tractor-trailer combination can improve by some 1,000 lbs., which to a fuel hauler can mean a much higher profit margin. These tires also expose more of the brake drum, enabling brakes to stay cooler and last longer.
Global consulting firm Frost & Sullivan projects that, in keeping with this efficiency thinking, commercial vehicle engines are going to shrink in size.
According to a recent report by the firm, the average displacement for Class 8 truck engines in the U.S. is going to shrink anywhere from 2 to 3% by 2018 as OEMs and truckers alike seek ways to improve fuel economy and payload capacity simultaneously for tractor-trailers.
Sandeep Kar, global director of commercial vehicle research for Frost & Sullivan, stresses that the power density of Class 8 engines will actually increase significantly—some 6 to 8%—over the next five years even as they shrink in size, providing in many cases an opportunity, in his words, for truckers “to have their cake and eat it too.”
“What we’re finding is that criteria such as TCO are becoming more important to fleets in the face of rising fuel prices,” Kar explains. “The upfront purchase price and total lifecycle costs of smaller engines are lower, while fuel economy is better.”
The key, however, is that power isn’t necessarily lost in the transition to smaller engines anymore, he explains, meaning truckers don’t necessarily have to sacrifice performance to gain a better TCO position. And it’s the ability to retain power density that’s getting more fleets to consider downsizing their truck engines, he says.
Based on its research, Frost & Sullivan projects that average Class 8 truck engine displacement will fall to between 13.4L and 13.7L by 2018, down from an average range of 13.7L to 14.1L back in 2011. Conversely, average horsepower will climb to between 425 and 540 by 2018, compared to a range of 400 to 520 back in 2011. Torque will also jump as well, increasing to between 1,300 and 1,750 lbs.-ft. on average compared to between the 1,250 and 1,650 lbs.-ft. average in 2011.
As a result of all those and other factors, Frost & Sullivan predicts that by 2018 the makeup of the Class 8 engine market will be very different from 2011. The firm sees 14L to 16L engine market share shrinking down to 42% from 56% in the Class 8 market, and 12L to 14L models jumping to 40% market share from 35%, followed by a steep market share rise for 11L to 12L engines to 15% from 3%.
That doesn’t come as a surprise to Bill Kozek, general manager of Peterbilt Motors Co. and vice president of its parent firm Paccar.
“The more fuel-efficient choice of a 13L engine is now getting the same value on the used market as a 15L, and today’s 13L can do everything that a 15L does but is lighter in weight,” he says. “Truckers can control how efficiently they operate by spec’ing trucks for saving on operating costs as well as for residual value.”
Preston Feight, assistant general manager-sales & marketing for Kenworth Truck Co., agrees with Kozek’s view on engine downsizing.
“Key areas, although all specs are important, to look at closely include fuel-saving specs, bearing in mind fuel is the largest truck ownership cost,” he explains.
“Customer usage—the operating specifics—is the variable driving specs, so we offer a range of products to meet their needs,” Feight explains. “We are seeing some movement from 15L to 13L engines, with choice depending on how much weight savings the truck customer needs. Our 13L covers the vast majority of 80,000-lb. over-the-road tractor applications.”
By 2018, Frost & Sullivan also expects 11L and smaller engines will be used more widely by fleets, especially those operating “Baby 8” or natural gas-powered trucks, and thus claim 2% share of the Class 8 engine market in 2018.
Yet Kar stresses that the long haul Class 8 segment will continue to remain dominated by 14L to 16L engines as those models offer the best power rating and optimized performance metrics.
“Sales of those larger displacement engines will be aided by a strong used-truck market, where 15L engines in particular are attracting higher valuations,” Kar notes.
That being said, though, he points out that length of hauls will continue to shrink in the future and that will aid in the proliferation of downsized engines in the Class 8 segment.
Focusing on TCO—a metric that includes not only initial purchase price and residual value, but also “hard” costs such as fuel and maintenance and “soft” costs such as optional safety and driver-comfort features—will be the major strategic initiative truckers will need to focus on to truly control equipment costs, notes T.J. Reed, director of product marketing for Freightliner Trucks.
“[Truckers] may start out looking to get the lowest truck purchase price, but they tend to end up [buying] on the total cost of truck ownership,” he explains. “As an OEM, we work to present truck buyers with real-world examples with bona-fide results of how various spec choices and modular packages will deliver the lowest TCO in a given trucking operation.”
Reed says concerns over fuel costs are a “huge factor currently” that drive truckers to examine TCO when they spec and purchase trucks. He points out that to address this, Freightliner has developed modular fuel-efficient spec packages that might include aerodynamic devices, a specific transmission and other equipment that when integrated together delivers a 5% to 6% mpg improvement.
“Spec trade-offs must be weighed individually as every operation is different,” Reed says. “For example, if a [business] is seeking maximum fuel efficiency, a lot of questions need to be considered, such as operating speed, whether it runs coast-to-coast or regionally, and the terrain encountered, to determine which specs and options will pay back the most over time.”
Residual value is another key factor in building a low TCO truck, though Reed cautions that spec’ing with an eye on the return gained at resale will result in a higher upfront price for a new truck.
David McKenna, director of powertrain sales & marketing for Mack Trucks, adds that length of ownership offers another wrinkle fleets need to consider in their long-term equipment cost-control plans.
“Typically, the trucker who accumulates a very high number of miles annually and trades in trucks in 30 months usually considers capital costs first and operating expenses a close second,” he says. “The only time that a customer [of this description] will agree to pay a premium for a truck is when that model is demonstrably better than that of the competition.”
McKenna notes that a fleet operating trucks about 100,000 mi. per year will look more closely at the operating costs as these costs will be amortized over a longer period of time.
One thing Frank Bio, Volvo Trucks’ product manager, points to is the correct use of metrics on the front end in order to achieve the desired TCO savings.
“For example, a [trucker] may not be using the right figures to measure fuel economy, such as including the fuel consumed by idling,” he says. “When it gets down to a ‘commodity buy,’ the truck buyer is not fully considering operating costs—and will not get the full value of all the OEM can do to help.”
On another track, he notes that fleets often also do not see the full cost of accidents and so may miss out on how they can mitigate accident costs via safety options.
“Getting the lowest TCO comes down to really focusing on what the specific customer needs and matching that with products and services from our portfolio,” Bio explains.
“Smart managers are collaborating with partner companies that have deep and diverse expertise in all aspects of transportation,” adds NationaLease’s Stopka. When it comes to improving a fleet’s overall mpg, a partner can make knowledgeable recommendations regarding fleet specs, equipment choices and route optimization, even if leasing and rental options may make good business sense, he says.
“In the best partnerships, all eyes stay on the bottom line with the ultimate goal of putting the most fuel- and cost-efficient truck on the road,” Stopka explains.
Controlling trailer costs: new vs. used
When it comes to trailers, Jeff Weber, vice president-sales & marketing for Ervin Equipment, says one way to control costs is for fleets to re-examine whether to buy new or used models.
“Naturally, there are strong benefits to purchasing both new and used trailers,” he explains. “Overall, new trailers offer the longest life as well as the luxury of having a trailer that has the exact specifications to fit an operator’s needs. But they also carry the highest outright cost and require a significant amount of time to manufacture.”
Used trailers, by contrast, often have near immediate availability; since they are less expensive, carriers can purchase more trailers with less capital.
“Realistically speaking, truck owners are not always able to afford a brand-new fleet of trailers,” Weber notes. “In these cases, they often wait for another company to trade in its fleet after the typical five to seven years of use. This way, the companies taking on second ownership can keep capital expenditures low and still have a product with plenty of life remaining.”
Of course, as trailers age, working parts become worn after years of use, which drives up the cost of ownership. Weber says that used trailers should last up to 10 years and as long as 15, depending on how they have been maintained.
“Many fleet managers only want to keep a trailer until it reaches the 10-year mark as after that, the cost of ownership is bound to rise,” he explains. “Most don’t want the burden of costly repairs, especially on a trailer that’s a decade old.”
When a trailer starts pushing beyond a manager’s limits for continued use, tire life can come into play as well, says Weber.
U.S. Dept. of Transportation (DOT) regulations specify the minimum requirement for tread depth on a trailer is 2/32 in., though most long-haul trailers should have a tread depth more in the range of 6/32 in. if snow is a concern, or 4/32 in. in the rain, he points out.
Before putting any money into new tires, though, look closely at how much longer that trailer should conceivably be kept in the fleet, notes Weber. Still, an older trailer—even one at the 10-year point—can still serve several purposes, he emphasizes.
“Often, aged trailers get demoted from over-the-road transport to use for cartage and warehousing purposes,” Weber explains. “Although these trailers still need to be DOT-approved, a new trailer is not necessary for companies looking to cart products shorter distances from the factory to a warehousing facility. During this phase of the trailer’s life, it generally travels less than 100 mi. at once or stays within a company’s site.”