by Sean Kilcarr
With old trucks getting older and new trucks getting more expensive, the market has changed
Old trucks are getting older, yet new trucks keep getting costlier. What’s a fleet to do, especially when freight rates still remain flat, making the money required for equipment reinvestment strategies extremely hard, if not impossible, to acquire?
The strategy many fleets settled on in recent times revolved around keeping trucks longer and buying late-model/low-mileage equipment when possible. This allowed them to avoid mandatory emissions control systems that have pushed new-truck sticker prices up an additional $30,000 over the last six years or so.
That works as long as the supply of late-model/low-mileage equipment remains robust. Now, however, that’s changing, according to Eric Starks, president of research firm FTR Associates. “There’s been a tightening of supply in the used Class 8 market especially, with a growing amount of older, higher mileage equipment and a falloff in the late-model/low-mileage units everyone wants,” he says.
“Those prime late-model/low-mileage units are just not there anymore because for several years new-truck production fell to record lows,” Starks explains. “And those are the years that would nominally provide the type of used trucks the market is looking for right now.”
Data compiled by used-truck dealer chain Arrow Truck Sales shows that by 2011, the used-truck pipeline started drawing on the Great Recession years of low Class 8 new-truck production and shipment volumes. As a result, availability of highly prized three- to four-year-old trucks with 300,000 to 400,000 mi. on the odometer dropped 35% in 2011 compared to 2010, followed by another 20% decline in 2012.
This year Arrow projects that availability of late-model/low-mileage tractors should fall another 11%, as that’s when the used-truck market will be relying on the supply of Class 8 trucks built in 2009.
Still, when it comes to the used-truck market, it’s not all bad, stresses Kenny Vieth, president and senior analyst for ACT Research. During a speech at the National Private Truck Council’s annual meeting this year, Vieth explained that used-truck valuations are still high, hovering in the $50,000 range on average. Yet there are so many old trucks in the nation’s fleet right now that those levels may not hold.
On top of that, the average mileage for a truck at trade-in is about 575,000 mi.; thus, Vieth predicts a fall-off in trades between 2014 and 2016.
“If there is a reason to go out and buy new trucks, this is it: improved fuel economy,” he says. “Trucks have jumped from delivering about 6 mpg to 8 mpg and that is huge. For a truck that operates over 100,000 mi. per year, it can mean an annual fuel savings of 4,200 gals.”
According to data from ACT, that may be one reason why order cancellation rates are the lowest they have been in two and one-half years, with the truck order backlog now stretched out to about four months.
Still, finding the money to buy new Class 8s sporting better fuel economy seems to be a growing stumbling block.
Derek Leathers, president and COO of TL carrier Werner Enterprises, said that isn’t going away anytime soon. Speaking at the ALK Technology Summit in May, Leathers said that while Werner’s average tractor age now stands at 2.3 years, the company had to invest some $650 million in new equipment over the last three years to reach that mark.
By contrast, as a whole the truckload industry average tractor age is now 6.6 or 6.7 years, up from 5.5 years less than a decade ago, he pointed out.
“To claw back from 6.6 years to get to 5.5 years, the industry would have to spend $24 billion within a 24-month window,” Leathers emphasized. “I don’t know where that money comes from. Banks are not lined up to lend money to an industry whose return on assets at this point is still very unimpressive.”
Saddled with aging trucks, significantly higher prices for new replacement vehicles, and banks unwilling to fund fleet capital requirements means that “fleets are slowly shrinking” in his view.
“They’re trading two or three old trucks for [every] new one,” Leathers noted. “And because they can’t afford new trucks, the cost of maintenance [for the older trucks] puts them in a death spiral.”
That’s the key issue when relying on excessively older equipment, says FTR’s Starks. “Those higher maintenance costs for older equipment simply make it tough to make money,” he explains.
For such reasons, Jake Civitts, director of used equipment for Paccar Financial Corp. (PFC), stresses that fleets and independent operators alike need to do their homework when it comes to analyzing a used truck’s history before taking ownership.
“With the Federal Motor Carrier Safety Administration’s Compliance, Safety, Accountability program requiring truck operators to be much more vigilant about the safety of the equipment they operate, the days of buying used trucks nearly sight unseen are over,” he cautions.
STILL A DEAL
That being said, and despite the almost certain longer-term potential for higher maintenance costs, used trucks can remain a good deal in several ways if buyers play their cards right, Civitts notes.
First, buying used trucks can often allow independent operators and fleets the opportunity to go after business that may not provide standard operating margins, he explains.
Second, financing used trucks usually provides an owner with a much lower monthly payment than financing new trucks, according to Civitts.
With state and federal roadside inspectors looking closely at equipment, particularly for mechanical conditions that would likely cause an accident or breakdown, he emphasizes that fleets and single operators need to be much more vigilant about inspecting equipment and checking maintenance records when it comes to acquiring used iron today.
“If you’re not fully comfortable with the idea of buying a truck from someone without inspecting it first, then don’t,” he says. As a result, he recommends conducting a full inspection before buying, paying particular attention to the truck’s brake systems, coupling devices, exhaust systems, frames, fuel systems, lamps, electrical systems and batteries, steering mechanisms and kingpins, suspensions, tires, wheels, rims and hubs.
“Use the same pre- and post-trip inspection sheets you or your drivers use and look for conditions that could affect your safety score if you were operating the truck that same day,” Civitts adds. “If possible, ask to see recent inspection reports or maintenance records associated with the truck.”
Since mileage is on the rise, the key metric used-truck buyers need to focus on in today’s market is value. Based on data points gleaned from PFC’s used-truck centers, Civitts says four key specs help drive the value of a used truck, making it more attractive and productive and lowering its operating cost:
- Transmission. A convertible 9- to 13-spd. transmission, a manual 13-spd. transmission, or a manual 18-spd. transmission is most appealing. According to Civitts, manual transmissions that offer shorter shifting ranges provide more operational flexibility and can add as much as $4,000 to the value of the truck.
- Interior. Lower quality interiors may seem cost-effective, but they can show considerable wear. Used-truck buyers should look for premium interiors because they not only look good, but also hold more value and can make for a more comfortable and productive working environment.
- Fifth wheel. An air-slide fifth wheel will offer you more flexibility for your operation by making it easier for your truck to haul different trailers with varying weight characteristics.
- Aerodynamic fairings. “They make a truck much more fuel-efficient, lowering operating costs,” Civitts says. “Plus, your trucks become eligible for EPA SmartWay certification, which may be required by your customers.”
You also need to pay close attention to the type of engine and emissions control system in a used truck as well, he stresses. “If the truck is equipped with a diesel particulate filter, check its current condition and whether it has been cleaned at regular intervals,” Civitts notes. “Even if you won’t be operating your used truck in California, consider choosing used trucks that meet California Air Resources Board requirements over ones that don’t.”
Until recently, the model year was the main factor in establishing the value of a used truck and that made sense as truck components were fairly similar from year to year, Civitts says. Thus, the older the truck, the greater its maintenance needs, he explains, so a newer used truck was almost always worth more than an older one. But that’s not always true anymore.
“That’s changed in the last few years, as mileage has become the most important indicator of a used truck’s value,” Civitts points out. “Thanks to new emissions equipment, different model-year trucks are not quite comparable. Today, the first question you should ask about a used truck is, ‘What’s the mileage?’”
Obviously, the most desirable, highest value used trucks will have 300,000 to 400,000 mi. on them, while lower value but still desirable trucks will show 400,000 to 500,000 mi. on the odometer. It’s really up to the fleet as to what it is comfortable with both from an equipment and financial standpoint.
Telematics may transform trucking’s view of trailers
Technology is changing the way the industry views trailers, from deployment to useful life. “We view remote asset management as becoming more critical to the operational and financial success of trucking companies,” explains Henry Popplewell, general manager and senior vice president for trailer telematics provider SkyBitz.
“Through remote asset tracking, trailers are deployed where they need to be and available assets are quickly identified, which helps lower costs by eliminating out-of-route miles, and fewer miles driven translate into fuel savings,” he points out.
“Enabling visibility of trailers, shipping containers, and cargo while on the move…improves customer satisfaction, just-in-time logistics, and dispatch operations,” Popplewell adds. “In effect, trailer tracking and remote asset management makes the truck and fleet smarter.”
Those are just some of the reasons why global consulting firm Frost & Sullivan believes the next five years will see immense change and growth within the commercial semi-trailer market in North America.
“The proliferation of advanced semi-trailer technologies will be driven by three crucial factors: strengthening of the regulatory environment, rising fuel prices, and an aging trailer population,” notes Wallace Lau, a research analyst with the firm. “Fleets are looking towards advanced trailer technologies to enhance and optimize fleet productivity through the usage of telematics, safety systems, trailer aerodynamics, and chassis systems.”
SkyBitz’s Popplewell adds that telematics can play a role in the trailer maintenance arena, pointing out that his firm’s system can provide tire pressure monitoring for lowering maintenance costs. “This helps lower tire cost per mile and avoid costly blowouts or run flats,” he explains.
The ability to retrofit such technology onto existing trailers is also expected to become a hot topic. Frost & Sullivan’s Lau says that due to the recessionary environment over the past four years, fleets have postponed new equipment purchases—extending the average age of semi-trailers to almost 8.5 years compared to under 6 years before the recession hit.
“In turn, this has created a backlog of demand for replacement, as fleets now need new equipment and advanced technology,” he stresses. He adds that the North American semi-trailer market saw strong demand in 2012 with about 248,000 units produced, a 31,000-unit increase from 2011.
Frost & Sullivan also projects that advanced trailer technologies, everything from aerodynamic devices to safety and telematics systems, will help boost total market revenues for such items from $2.04 billion in 2011 to some $3 billion by 2018.
“Yet with increasing competition, all of these technologies have and continue to compete for the purchase dollars of fleet managers, which leads to certain segments growing at the expense of others,” Lau cautions.
The second big trend Popplewell sees is that trucking and logistics companies and shippers will look at the delivery of data seamlessly, including data gleaned from trailers.
“Shippers will want access to the same set of information that the logistics or trucking company has today,” Popplewell notes. “Integrating all the various sources of data into logistics enterprise resource planning systems will create a seamless and more impactful experience.”
In order to maximize the potential of remote asset management, trucking companies must move beyond simply collecting data on resource visibility to using it to optimize operational planning and processes.