THE FINAL DECISION IS ALL ABOUT FUNDING
When fleets begin pondering whether to buy a new truck, a used truck, or just keep operating their current equipment, it really comes down to a single, incontrovertible factor: Is the necessary funding available?
“It's really that simple,” explains Darry Stuart, president of consulting firm DWS Fleet Management Services and a 40-year truck maintenance veteran. “The whole decision of whether to purchase new equipment or even used equipment revolves around the availability of funding. If you have the cash, or financing from a bank, then you have the option to purchase new equipment; if you don't have either, you can't purchase anything and must maintain what you currently operate longer.”
Indeed, that very lack of funding, coupled with rocky economic conditions, forced many fleets to defer buying new equipment for the last several years, leaving many with older-than-planned trucks on hand.
Eric Starks, president of research firm FTR Associates, notes that there's been a significant increase in average Class 8 age. In 2000, the firm's data indicated the average age of a Class 8 truck hovered around 8.12 years; by 2010, it had jumped to over 9.43 years and is expected to pass the 9.5 mark by the end of this year.
However, credit availability jumped significantly for truckers over the last 12 months, boosted in part by rising freight demand and the ability to charge higher rates as trucking capacity remains limited. Data from the second-quarter Business Expectation Survey compiled by Transport Capital Partners (TCP), for example, found that 86% of the carriers polled say they now have access to reasonable credit.
That's helped drive much of the surge in new-truck orders and sales this year. As a result, FTR expects total North American Class 8 factory shipments to top 259,000 units this year and surpass 299,000 units in 2012 — a significant increase over the 153,969 units shipped in 2010.
Yet the same survey also discerned that only 53% of those fleets polled believe they are getting a rate of return on their investment adequate enough to justify reinvesting in equipment. Only 45% of smaller carriers, those defined as generating under $25 million in revenues, believe they are receiving adequate returns, compared to 57% of their larger counterparts.
It doesn't help matters that new trucks now cost more than ever, largely due to the series of stringent exhaust emissions reduction mandates that were put in place over the course of the last decade.
For example, to meet the first round of emissions regulations in 2002, anywhere from $1,800 to $3,000 was added to the base cost of a Class 8 truck. For 2007, an extra $5,000 to $10,000 got tacked on, followed by another $6,700 to $10,000 extra last year to meet the final round of emissions mandates.
Higher maintenance costs followed sticker price increases as well to cover all the extra emissions-related components, including all the new computer controls and wiring harnesses.
To counteract this, many fleets extended their ownership cycles to pay for that additional base sticker cost, moving from the 36-month trade cycles that were popular a decade ago to north of 60 months simply to gain time to pay off that additional investment.
“Production of new-truck sales bottomed in 2009, and most Class 8 fleets now utilize a 48- to 60-month trade cycle in order to optimize their net depreciation,” notes Richard Simons, president of Daimler Trucks Remarketing Corp.
“As a result, the incoming supply of Class 8 used trucks will be decreasing annually until 2014 to 2015 — a forecast that assumes, of course, that we do not fall prey to a double-dip recession,” he says. “The demand over the past 12 to 15 months coupled with tight supply has led to a rebound in used-truck values from 2009 lows.”
HIGHER PRICES, BETTER DEALS
Simons explains that such elevated values are good for the industry as they enable both fleets and owner-operators to trade existing trucks while purchasing equipment. “It helps shore up finance company advances and thus enables fleets to purchase more used trucks with minimal cash outlay,” he says.
Fleets seeking to buy used trucks are gravitating towards aerodynamic units with 14L or 15L engines. Most want their used iron sourced from the best fleets in the industry, inspected multiple times, extensively reconditioned and detailed, with solid after-the-sale extended warranties, and parts availability.
“There is equal demand for low-mileage sleepers and day cabs,” Simons adds. “This is a direct result of the average age of fleets, which are at peak levels, and all segments have building needs for replacement to minimize maintenance cost.”
Most fleets are now purchasing trucks with 500,000 to 600,000 mi. as long as the trucks are covered by a comprehensive warranty, says Simons, simply because low-mileage units with the right specs are extremely hard to find.
That's why DWS's Stuart notes that buying used trucks or simply extending the life of current equipment further has become a more attractive option for fleets.
“You can get much longer life from today's trucks if you maintain them properly,” he explains. “Engines can go 700,000 to 800,000 mi. without major concerns regarding engine failures. Transmissions can last just as long, as can rear differentials. The issue is that with older trucks you will have additional maintenance expense; there's no avoiding it.”