A seller's market

When it comes to used trucks this year, timing will be everything. Fleets bringing in new trucks in 2011 can expect to be rewarded for having managed to wait this long to trade out aging power units by the very sweet spot that is now the secondary-truck market. Used trucks are clearly a seller's market right now thanks to a low inventory of the most sought vehicles and eager buyers who have to accept

When it comes to used trucks this year, timing will be everything. Fleets bringing in new trucks in 2011 can expect to be rewarded for having managed to wait this long to trade out aging power units by the very sweet spot that is now the secondary-truck market.

Used trucks are clearly a seller's market right now thanks to a low inventory of the most sought vehicles and eager buyers who have to accept that bargains on the most wanted trucks won't appear again until new-truck sales truly take off. And by any best guesstimate, new-truck sales will not climb enough to impact the dynamics of the secondary market until at least sometime next year.

That makes the sweet spot to sell trucks into look fairly wide from today's vantage point. But sellers shouldn't needlessly tarry as there's no guarantee when their window of opportunity will start sliding down. Experts report that used-truck values started to climb last year and prices have remained stable at 2010 levels so far this year. To be sure, used trucks are not fetching what they did before buyers became concerned about the higher cost of running EPA '07-compliant engines and were sidelined like other fleets by the Great Recession.

According to Steve Clough, president of Arrow Truck Sales, used-truck prices have been “generally rising since the first quarter of 2010. The increase so far this year has been at a slower pace than last year. The main exception to the growth in pricing is construction-related equipment. That segment has not recovered like the other segments, so pricing is up,” he points out, “but not as much [as for on-highway trucks] as demand is still spotty.”

“We began to see used-truck values improve in mid-2010,” says Ernie Bendele, vice president of used-truck operations for Rush Enterprises. “That's when demand increased from buyers hoping to delay integrating emissions-compliant trucks into their operation, compounded by an undersupply of used trucks due to depressed new-truck sales for several years.

“Used-truck values remained stable through the remainder of 2010,” he adds. “And we expect this [price trend] will continue until increases in new-truck sales are realized — which will drive a larger supply of used trucks into the market.”

“With tightening demand, values have inched up on used trucks in the 2002 to 2006 model-year range and basically have held firm since June of 2010,” reports Terry Williams, editor of Penton's Truck Blue Book (TBB). “The 2006 model-year trucks also did not have the failure issues with the [later EPA '07-compliant] engines and the costly repairs often necessary.”

“Throughout the industry, customers are now becoming more confident in purchasing used trucks,” observes Jack Mitchell, vice president-remarketing for Penske Truck Leasing. “Their fleets have aged so much and maintenance costs have gotten so high after companies have held on to trucks longer during the economic downturn.

“But now,” he continues, “is an ideal time to purchase newer used equipment. Fleet managers are still finding that purchasing brand-new 2010 trucks is a bit too expensive, resulting in a robust used commercial truck sales market that should remain strong going into 2012.”

NOW VS. THEN

Yes, if this is a good year for used-truck values, 2010 was even better. But that was then. “Last year,” relates Arrow's Clough, “many large fleets were in the market buying used equipment, primarily because of the low prices and the abundance of matched units available with specs those fleets liked. Today, you see very little of that because prices have increased so much plus there are not nearly as many matched units available.”

Of course, those “lot” buyers helped deplete the overall inventory of over-the-road trucks as well. “Some traditionally new-truck buyers are still buying some used trucks,” Clough notes. “I interpret that as either a desire to be conservative with their tied-up capital, or their uncertainty about either the new [EPA ‘10] engine technology or the economic recovery. Otherwise, the buyers of used equipment are the same.”

“Mileage is a key if not the great value-add for a used on-highway tractor — regional or long-haul — and I believe the single greatest item a fleet should use at this stage to determine when to trade a tractor,” TBB's Williams advises.

Clough observes that “timing means a lot” in terms of when to sell. He says 2009 was “a difficult time to trade most any truck if you had to trade based on the [used truck] values in place then. So, yes, the market values of used equipment can be a major determining factor on when a fleet trades out trucks.”

As for where new-truck purchases are happening, Rush's Bendele says the dealer chain is “seeing the most activity in the oil and gas sector and with some larger fleets.” He points out that mid- to small-sized fleets and owner-operators “remain hesitant to make new-truck purchases, primarily due to the higher price associated with the newer [engine emissions] technology. Obviously,” he adds, “the most important factor [in buying new] is the financial position of the fleet. But, generally, the primary factor driving most to trade is an effort to reduce the average age of their fleet.”

Pricing is up and stable, making for a buyer's market that looks to be in place into sometime next year. Sellers may not be able to drive used prices much higher, but they can exert other leverage on buyers as long as it's their market to steer.

“Because demand for equipment is exceeding supply,” points out TBB's Williams, “buyers are willing to look the other way on a few items, perhaps accepting an engine with a bit less horsepower or without a few options.

“In today's used market, mileage gives value as no other item will,” he contends. “Truck Blue Book considers standard mileage to be 125,000 to 150,000 a year for on-highway trucks. But for vocational trucks, it is a wild card because it can vary so greatly. Still, for work trucks it should not exceed the on-highway standard.

“Given the high degree of vertical component integration in late-model trucks including Eaton having, I think, some 85% of the transmission market, after mileage the greatest value-add could well be the dealer and/or dealer network a fleet or its driver will do business with,” says Williams. He notes that the desire to buy a “like” or group of “like” used trucks is a key market dynamic these days.

GREEN SELLS

Williams also points out that regional or local day cabs remain strong in value. “Simply switching from box bolt-on sleepers to integrated sleepers took them out of the traditional supply chain,” he notes.

And if anyone thinks the secondary market doesn't at all change with the times, think again. “Auxiliary power units [APUs] and wide-base single tires, such as Michelin's X-One, are now points of pricing discussion for used dealers as fleets have moved to those products in greater numbers to help tame fuel costs and meet local regulations,” Williams remarks.

He says that once an APU is three or more years old, the concern is “has it worn out because dealers have seen a lot of engine failures. Now this discussion is switching to battery life as APU suppliers move more to battery-based systems.

“For wide-base tires,” Williams continues, “there is no denying the fuel-efficiency benefit. The issue is one of perhaps training the secondary market as it tends to be slower to adopt new technology. I have heard automated mechanical transmissions [AMTs] are increasing in sales,” he adds, “but that has not carried over to a significant value bump on the used-dealer market.”

But Arrow's Clough sees automated and automatic transmissions “more in demand for used-truck buyers than ever. And with higher fuel prices, that trend certainly will continue.”

However, getting used trucks with those boxes this year let alone next may be another thing altogether. “Penske is not selling late-model trucks with automated transmissions because they're still valuable vehicles in our commercial truck rental fleet,” advises Mitchell. “Our automated transmission trucks are generally five to seven years old [at this point] and they're perfectly good pieces of equipment.”

Turning to perhaps the biggest value bugaboo now starting to really face used-truck sellers and dealers — the newer EPA-compliant engines — TBB's Williams notes that he will “propose to my advisory council that they should assign more value to an [EPA-compliant '07 or ‘10] engine that has had a failure, but has been fixed with updated technology vs. an engine that has not failed.”

Penske's Mitchell says used-truck buyers will consider numerous vehicles before making a purchase decision. He says, though, that in the end Penske has found that “mileage generally wins out over particular models.” Keeping that maxim in mind, he suggests fleet managers “should pursue companies that can sell trucks that match the rest of their fleets, like Penske does.

“Last year, customers sought out trucks with fewer than 200,000 mi.,” Mitchell points out. “Now, with inventory tightening, customers are seeking trucks with fewer than 300,000 mi. Those with tighter budgets have requested late-model equipment with fewer than 400,000 mi.”

Eyeing the used market from a buyer's perspective, TBB's Williams urges fleets selling trucks this year to bear in mind that “financing remains an issue” for used buyers. “But the bigger issue I am hearing,” he adds, “remains getting enough inventory” for them to have trucks to buy.

That's a problem fleets can fix — and then benefit from.

Prep for the tire-kickers

Tires are a leading cost for all truck operators, including, of course, anyone interested in buying a fleet's traded out trucks. That's why Don Baldwin, product marketing manager for Michelin Americas Truck Tires, suggests keeping the rubber on the road very much in mind when preparing to sell trucks into the secondary market.

“Tires are an important part of the valuation of a truck, and the seller should always consider that when getting the truck ready to trade. The tires and their condition is part of calculating the Truck Blue Book value,” he states.

Baldwin says exactly what a given used-truck buyer will expect about the tires on a truck will “depend somewhat on where and to whom the truck will be sold.” In general, though, he advises that tires “need to be in good shape with about 9/32nds to 10/32nds of tread remaining. Some buyers may stipulate that the tires need to have 50% tread life left as the rule of thumb, since starting tread depths vary by tread pattern and wheel position.

“If tires have been retreaded, truck buyers will typically accept retreads as long as they are in new or near-new condition,” he continues. “And the preferred number of retreads for the casing is one.”

Being able to disclose that basic tire maintenance was completed regularly will also help at time of sale. “Information such as tire care or retreading records should be kept with the maintenance records for the truck, but whether that information is required will depend on the buyer and what they require the seller to provide,” Baldwin notes.

He also points out that some fleets get very strategic about their tires when it is time to trade out trucks. “Many fleets will change the tires on a truck they are about to trade. Fleets will often put new retreaded tires in the drive position to enhance the value of the truck.

“Most sellers, including smaller fleets, know that the condition of the tires will affect the value of the vehicle,” Baldwin continues. “Putting tires in poor condition on a truck to be sold with the idea of retaining the better tires for other fleet vehicles may be ‘penny wise, but dollar foolish.’”

Remaining warranty on tires may also interest the used-truck buyer. Baldwin says, for example, that Michelin's limited warranty for workmanship and materials is “good for whoever owns the tire, not just the original purchaser.”

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