Looking at stable interest rates and willing lenders, many fleets are shortening equipment trade cycles
It wasn't so long ago that trucking faced a serious credit crunch -credit in general was in short supply and lenders weren't too impressed with the industry's overall financial performance or prospects.
Times certainly have changed. Today, lending institutions are flush with funds, and for-hire carriers have once again become attractive customers for those institutions. If you're looking for capital to acquire new vehicles, not only are funds readily available, but this may be a good time to reconsider the length of trade cycles and to refine your current relationships with lenders.
Fear of inflation led to widespread speculation that the Federal Reserve Board would push interest rates up to keep the U.S. economy from overheating. Last month, the Board did respond, but with a much smaller than expected rate hike. Still, the long-term forecast for interest rates "is on the upside, at least for the next three or four quarters," says Chris Brady, an analyst for Martin Labbe Assocs.
However, lending institutions are in good shape and credit should remain readily available, says Brady. As for the fleets, the Fed's small interest rate increases should have little or no effect on new equipment acquisition, he adds.
Supporting Brady's reading of the fleet market, John Pope, vp at Cargo Transporters Inc., Claremont, N.C., says, "The rising (interest) rates have no effect on our (equipment purchase) plans at this point. They'd have to be fairly significant to have any effect."
In fact, the truckload carrier is actually accelerating its trade cycle from over 48 months to 42 months or 450,000 miles. With 240 tractors in over-the-road operation, the fleet has decided to shorten that cycle both to increase residual value at trade time and to please drivers by keeping them in newer trucks.
Not only has Cargo Transporters shortened the cycle, but, says Pope, "We've also upgraded our specs to include the Eaton AutoShift (transmission) and Vorad (collision warning system)." The automated transmission makes their trucks more desirable to drivers and at the same time the fleet "hopes it will have a positive effect on residual value," he adds. "The jury is still out on the residual value of Vorad, but that's a safety issue. We're also looking forward to smart cruise control capability (for Vorad), and that should clearly affect the residual."
When it began accelerating capital acquisition with the shorter trade cycle, Cargo Transporters found the credit market so strong that it was also able to consolidate all of its equipment financing with one national banking institution. "We did it for better rate structures and because it made that part of our business easier to administer," says Pope. "But it was also an opportunity to strengthen our relationship with this lender. We're comfortable working together, and that's important."
With freight volumes strong and drivers difficult to hold on to, Cargo Transporters seems to be following a general trend among truckload carriers of all sizes when it comes to trade cycles.
Contract Freighters Inc. (CFI), Joplin, Mo., among the country's largest TL fleets with 2,000 tractors, had pushed its replacements out to four and five years, but is presently moving back to a three-year trade cycle. "It's best for our drivers and for us," says Herb Schmidt, senior vp-sales and marketing. "It's not a residual issue, and the equipment is certainly capable (of a five-year trade cycle), but it's more of a driver issue - and maintenance costs do go up in that fourth and fifth year," he says.
The availability of three-year "bumper-to-bumper warranties has made the decision to go to the three-year cycle easier for fleets," adds Angelo Iannello, CFI's vp-finance.
Even though credit is readily available these days, CFI continues to invest a good deal of time and effort in maintaining strong relationships with a core group of 10 to 12 banks. "We're always trying to refine those relationships," says Iannello.
"We encourage them to visit us in Joplin, and every year I go out to all our current and potential lenders. I visit 16 to 20 banks in a week's time, updating them on the company, telling them the CFI story. Bank customers don't usually pay them a visit, and I get to meet people at fairly high levels - bank presidents and CEOs who would not normally come see us at our office."
With all the bank mergers and acquisitions over the past few years, one new factor fleets may have to consider in their relationship with lenders is increased pressure on banks to improve profitability. "Banks are not just interested in loan volume any more," says Iannello. "They're looking for higher return on assets and refining customer-by-customer profitability." That means some lenders are offering preferential rates only to customers who are also giving them fee-based business for other services, or restricting the amount of capital going to those customers who aren't generating fees, he says.
Banks are interested in boosting their fee-based activity by expanding into nontraditional services, says Joe Barrow, CFO for M.S. Carriers, a Memphis-based contract and TL fleet operating 2,500 tractors. "We wouldn't normally think about (going to) banks when we want to do a stock offering, for example, but these days they want to be included," he says. "They want an opportunity to provide us with investment and other innovative services."
While M.S. Carriers is willing to consider banks for those services, it has steadfastly resisted linking fee-based activity to loans. "For the last five years, we've been up front (with lenders) that these are strictly lending deals," says Barrow.
As much as banks and other lenders might like to sell fleets other services, the law of supply and demand still applies, and if your fleet is on sound financial footing, funds for equipment acquisitions are abundant right now.
"I've been approached by banks trying (to link loans to fee-based services)," says Dean Cannon, president of Cannon Express, an Arkansas truckload carrier with 900 company-owned tractors. "But in the end, it really boils down to interest rates. We're very sensitive to interest rates, and it would be difficult for a bank to offer enhancements that raised the cost (of borrowing). Someone else will come along with a better rate, and it's all green."
Although it's not being driven by interest rates, Cannon will replace its entire 900-tractor fleet over the next 15 months, and the fleet had no difficulty attracting all the capital it needed at rates it found attractive, he says.
"We purchased the majority of our equipment in 1995 and '96. Then the manufacturers got backlogged, and we got behind the curve a bit on our equipment age," says Cannon. "So we'll replace the whole fleet over the next year or so, and then I expect we'll stick with a three-year trade cycle."
Given the current state of freight and capital availability, it sounds like a plan that's going to be repeated by many other for-hire carriers in the next year, especially truckload fleets.