Carriers will continue to be very conservative when it comes to replacing equipment over the next twelve months, according to the Transport Capital Partners’ (TCP) Fourth Quarter 2012 Business Expectations Survey released yesterday. Sixty-percent of smaller carriers (under $25 million in revenue) and 45% of larger carriers indicated they were going to replace under 10% of their tractors in 2013.

Over half of the carriers surveyed reported they are not getting an adequate rate of return to invest in newer, more expensive equipment.  A slight majority of the larger carriers (51%) reported that they are getting enough returns to justify reinvesting in equipment, compared with only 40% of the smaller carriers.

In other words, carriers, especially smaller carriers, will be relying on older equipment with higher maintenance costs and more exposure to poor CSA road inspections, “Fleets will be setting themselves up for problems [by stretching out trade cycles],” Lana Batts, TCP partner, told Fleet Owner, “but if you don’t have the money to buy new equipment, you don’t have it. Besides, the economy is in such a sideways position that nobody knows what is going to happen, so why take the risk?

“Why would I replace trucks that are adequate or add capacity when I have no clarity about the future?” she asked. “Trucking companies that just don’t have the balance sheet to allow them to raise the capital are in an especially tough spot. [A 65-year-old fleet owner is going to be very reluctant to personally guarantee such big loans. Truck costs have increased dramatically, but rates haven’t.]”

According to Batts, carriers have already replaced the oldest trucks, but there are still lots of fleets running six-year-old tractors. “The average age of the U.S. tractor fleet just keeps getting older and older,” she noted, “and trailers are unbelievably old.”

The survey also found that almost half of carriers do not plan to add any capacity in the coming year, the highest percentage since this question was initially asked in August of 2010. Smaller carriers were less likely than larger carriers to add capacity. Just 43% of smaller carriers said they would add some capacity compared to 60% of larger fleets.

“Capacity additions have been constrained for some time and linked to shippers’ desire to add dedicated capacity to assure service,” noted Richard Mikes, TCP partner. “Overwhelmingly, new orders have been for replacements, particularly with increased maintenance costs and breakdowns experienced with post-2007 EPA engines by carriers. We believe as profit margins improve that there will be significant demand for new fleet assets to replace the aging equipment in today’s fleets.”

“Well-managed carriers with adequate profit margins will continue to grow and gain market share,” said Steven Dutro, TCP partner. “Carriers with declining profits and aging fleets should consider if, and when, they should reinvest in their business, or if the time has come for an exit.”    

In an October 2012 webcast, produced by Fleet Owner and sponsored by Ryder, Ernst & Young shared insights from a recent study of their own about the total cost of ownership of trucks old and new. Since maintenance costs increase exponentially as vehicles age, trucks and trailers should be replaced before they age too much so that accelerating maintenance costs and acquisition costs can be kept in balance, they concluded.

 Noting that the study involved a “deep dive” into maintenance costs, Suchet Singh, senior manager of E&Y’s Strategic Direction practice reported that, “Year one and year seven see the highest average increase in maintenance costs and year six the smallest,” adding that “managing fleet age is critical to managing costs because maintenance cost per mile increases more rapidly as vehicles age.”  

If that is indeed the case, all those six-year-old trucks out there right now will be running out of the sweet spot and into the expensive maintenance zone before very long, not good news for cash-strapped carriers in uncertain economic times.