In 1999, the U.S. trucking industry bought 269,000 new Class 8 vehicles. Last year, purchases of new heavy-duty trucks and tractors dropped to 211,000. The forecast for 2001 is 112,000 units. Although sales of lighter commercial vehicles have been less volatile, fleets are trimming purchases there as well. Sales of Class 2-7 trucks for the first four months of 2001 are down 16% compared to 2000, and forecasts recently revised downward show that portion of the U.S. truck market ending the year off 14% from 2000.
“The Class 8 tractor market has been hit the hardest, but overall, there's softness in every market right now,” says industry economist Martin Labbe of MLB Assoc.
The reasons for the dramatic falloff in new truck purchases are both industry-specific and tied to general economic conditions.
Looking at the big picture, growth in industrial production — the single most important economic indicator of freight volume — began slowing in the second half of 2000 and actually fell into negative numbers for the first half of this year. Translation: After years of growing volumes, shippers have significantly less freight to move.
The downturn is particularly painful because the strong freight market of the 1990s prompted almost all TL carriers to move to three-year trade cycles as a strategy for attracting scarce drivers and holding down operating costs by avoiding extensive maintenance expenses. OEMs helped encourage the shorter trade cycle by offering their best customers high guaranteed residuals on trades, keeping used-truck prices high overall.
But overcapacity due to weakened freight demand, combined with large numbers of high-quality, late-model trucks entering the used-truck market, has collapsed the value of those trucks. Fleets counting on high residuals to support their three-year trade cycles now find themselves with tractors worth up to 50% less than anticipated. Compounding the problem, many truck makers also hold large inventories of used tractors taken back at high residual values that now must be sold in a weak used-truck market.
The sudden and persistent spike in fuel costs is further squeezing for-hire carrier margins, as is a substantial increase in insurance costs, making it even more difficult for them to fund new truck purchases.
“We don't have a recession, but carriers are suffering substantially,” says Labbe. “The big issue for fleets is really traffic. If the economy stays soft, they'll stay away in droves.”
“Over-the-road fleets have to balance quality, durability, parts availability, support, image, reputation and driver preference against a new truck's purchase price, operating costs and residual values,” says a high-ranking marketing executive at a major truck OEM. “With their margins being squeezed and no sure rate relief, they can stretch out from 36 months on their relatively late-model trucks to 48 or even 60 months and still keep reasonable operating efficiencies.”
Such a major change in business strategy won't be undertaken lightly, however. Another truck OEM chief also sees a transition to longer trade cycles, but “it will begin slowly, with fleets staggering new purchases to gradually extend their cycles.”
TL carrier Gainey Corp. “was fully prepared to extend (trade cycles) by a year,” says vp-finance Larry Carrier. “We were able to negotiate reasonable deals on trades, though, so we've largely stayed with our current cycle.” Gainey does have some subsidiaries, however, that have extended trade cycles. “Operating costs do go up, but not as quickly as the market value of used equipment has declined,” says Carrier.
SPEND IT NOW OR LATER
“Operating costs for a four-year-old truck aren't that different from a two-year-old one,” says Labbe. “But it's the cost of downtime that can really bite (a TL carrier), keeping fleets from making a strong move to extended cycles or used trucks. Low residuals will keep them in some trucks a little longer, but if traffic comes back, the fleets will be back onboard with their original trade cycles.”
At issue is more than the hard costs associated with increased maintenance and repairs, according to Herb Schmidt, president of truckload giant CFI. “We're not extending trade cycles,” he says. “We've tried it before. It might be a tiny bit cheaper to drive it out to four years, but you lose it on soft costs like driver retention.”
While the drop in freight has eased the overall driver shortage, “quality and service are more important than ever in keeping the business you have, and that means you still need quality drivers,” says Schmidt. “Drivers love the three-year trade, so our feeling is spend it now or spend it later.”
Given the strong truck sales of 1997 through 1999, the pressure of oversupply in the used-truck market won't subside until after 2003, says the OEM marketing executive. However, as fleets adjust depreciation schedules to reflect the current reality of used-truck values, they can return to purchase decisions based on the other criteria that normally go into that equation, he says. That is, of course, when the economy picks up and freight movement begins to grow again.
Predictions vary on when those volumes will come back to levels that will allow for-hire carriers to begin buying new trucks.
“This summer is the critical time,” says the OEM chief executive. “Fleets have delayed purchases, and now they have to make a decision in the next 60 to 90 days. We won't see a boom in the third and fourth quarters, but we should see a little more action as long as the economy remains fairly stable.” A combination of “fleets running trucks a little longer until market values get closer to book values and a little stronger freight market is what it will take,” he says. “I don't doubt one bit that 2002 will better than this year.”
Labbe also sees some freight increases in the second half of the year. “Automotive (freight) is already picking up, and there never was any falloff in reefer freight,” he says. Current indicators do show “significant deviations from a year ago, but not from the last month or two, so we're probably skipping across the bottom right now.”
However, Herb Schmidt, who says he is generally an optimist, believes “we won't see a strong economic recovery until energy prices are brought under control, since freight volumes are driven by spendable income. We may see spurts of freight with inventory adjustments, but I don't think we'll see real growth until the second quarter of next year.”
Looking beyond for-hire carriers, the picture is a bit brighter. Strong housing starts and federally funded road projects have kept construction fleets in the new-truck market, and other vocational operations such as refuse and regional distribution have also continued to look for new equipment. Private fleet operations, too, remain less volatile in their new-truck purchasing activities.
LESS THAN HEAVY
While vocational and private fleet purchasing involves heavy-duty vehicles, much of it centers around lighter units. “That area doesn't have the excess capacity of Class 8,” says Labbe. “The demand for distribution services remains relatively high. Strong housing starts keep that market strong, and refuse fleets need dependable chassis to keep those expensive bodies on the road; they need new trucks to avoid downtime.”
While the service side of the economy remains strong, the failure of dot-com companies has contributed to a slowdown in the market for the smaller trucks they needed for their distribution networks, says the marketing chief at one medium-duty truck maker. “Fleet leasing and rental businesses — major buyers of light and medium-duty trucks — are also the first to see declines when there are economic troubles,” he points out.
Energy costs may prevent “a big bounce-back, but we see our market strengthening in the second half,” he says. Although he had originally hoped to see the year end with overall market sales off by 10%, he now expects that falloff to hit 14%, somewhat above current sales levels.
Like it or not, the trucking industry is a cyclical one. The current down cycle is a deep one, especially for for-hire carriers and the manufacturers who build their vehicles. Depending on who you talk to, early indications are that the upturn in this cycle has already begun or will begin soon. And when fleets start to clearly sense an upswing, they will be back buying the new trucks they need to ride that rising curve.
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