For truck fleets, it's the crunch time of all crunch times. Late last year, the recession that everyone in trucking had long known to be the true state of the U.S. economy was officially declared.
Government pronouncements aside, what matters is the recession the nation is still battling may last another 12 to 18 months and will likely rival if not surpass the deep 1980-'81 recession that hit trucking hard right as the industry was being deregulated. This time out the double whammy is a severe recession coupled with an unprecedented credit seize-up.
The drying up of business credit throughout our banking system, whether for equipment acquisition, technological investments or most direly of all, working capital, is a challenge the likes of which trucking has not faced since the industry took off after World War II.
For motor carriers and vocational operations alike, getting through 2009 successfully — if at all — will require fleet owners to fully accept that management practices that may have been “good enough” to get by on before are simply not good enough anymore. And to be sure, those who were already managing on a higher plane are likely to come through this rough patch not only intact, but well-positioned to prosper when business takes off again in 2010.
But even if a fleet can cut its costs to the bone and market its services properly, it won't get far without tapping the credit that is the lifeblood of American business.
For fleets, credit, of course, is essential for equipment acquisition, technology investments and, most important of all, working capital.
It's essential that fleet owners paint the sunniest picture possible of their financial situation for every sort of lender, especially in this gloomy environment.
Since those kinds of images are impossible to fake, real change must at least be in the offing for any fleet that is not already at or near the top of their game.
Following are discussions of five strategies to consider implementing in your fleet this year.
The first step for any fleet not running on all financial pistons must be to “straighten up and fly right,” as the jazzy Nat Cole/Irving Mills lyric so aptly put it.
“The credit crunch means that finally fleets will have to come across as well-managed businesses,” advises fleet consultant Duff Swain, president of Trincon.
“As it was back in the early '80s,” he continues, “lenders will only want to lend to those fleets that can show a strong credit profile.”
Swain says fleets must be able to present lenders with a “solid business plan that includes measurable goals and expected results. They must show they are credible financial managers and that they have a depth of management experience behind them.
“Look, truck and trailer makers will always come up with a way to finance equipment,” he contends. “But where it gets complicated is securing access to credit as a shield against slow receivables as well as to fund growth. That's why attaining an operating line of credit is the key — that is what fleets need to best manage the cash needs of their business.”
There's no magic trick to getting that operating line. According to Swain, fleets may have to get it the old-fashioned way — by earning it. “To gain that type of credit,” he advises, “takes a good relationship with a bank. And they must have confidence in the carrier's business plan and the management who are onboard to execute it.”
As Mike Lewis, president of PHH Arval, a fleet-management services provider, sees it, the “biggest thing any fleet can do is work closely with their lenders — they should really tighten up those relationships. Lending standards are very strict right now, so [already established] relationships are especially important. Still, those who will lend will study closely how fleets have handled their obligations up to this point.”
A realist, Trincon's Swain says many fleets will not be able to negotiate the one-two punch of a severe recession and the unprecedented credit crunch. “I do think we will see a wave of [carrier] failures [this year]. It had tapered off a bit in last year's third quarter thanks to the drop in fuel prices. But as soon as that factor levels off again, they [weak carriers] will have the same problem. And if anything, lenders will be far more critical in terms of scrutinizing how well managed the fleet is overall.”
More pointedly, Swain says that if a carrier “does not have a history of profitability and good operating ratios and no business plan — or no ability to implement one — they are not going to secure operating credit.”
On the bright side, Swain says those who fly right and ultimately carry on right through this storm will be in a “far better position when the economy comes back. Then there will be a shortage in capacity. And a driver shortage too,” he adds for the benefit of those enjoying a short memory.
While some will always argue cash is king, among them Americans who lived through the Great Depression, that adage rings especially true for truckers in these tight times.
Surprisingly, though, even with the credit crunch in full bore, a lender may still be the best hope for a fleet to keep crucial cash flowing.
Steven Goodale, vp-credit & national accounts for Daimler Truck Financial, the financing outfit that exclusively serves Freightliner and Western Star buyers, says understanding the distinction between a “captive” firm and other credit sources can make a critical difference for fleet customers.
“Traditional banking relationships tend to provide operating lines of credit to fleet companies,” he explains. “Captives like Daimler Financial are equipment lenders. There has been a tightening of credit in our view because of the [actions taken by] major banks.
“Last year we saw a spike in fuel prices, which placed a strain on banking facilities and on cash flow. As a result, we experienced an increase in requests for assistance for fleets.
“But it is not our expertise to do operating lines [of credit],” he continues. “However, over the last 12 months, we've been able to help by being flexible for fleet companies in their obligations to us.”
Goodale says that has meant taking such steps as extending terms with interest-only payments, re-writing terms and allowing skipped payments during seasonal times.
“All of these methods of flexibility give the fleets help with their cash flow,” he notes. It's important [for customers] to recognize cash flow problems early so that we do not lose the flexibility in finding solutions to a specific company's cash-flow challenges.”
Geoff Robinson, Daimler Truck Financial's director-sales, marketing & remarketing, points out that this assistance has extended to “utilizing existing collateral to put together deals for the trucking companies.
“On the sales side, as a captive finance company, we live and die by the success of trucking,” he continues. “We have a focus and a vested interest in the trucking industry. It is important for us to have dialogue with our customers so they know these options are open for them.”
Robinson stresses there is a “higher level of dialogue as the liquidity dries up. There is more awareness and interest in looking at different types of funding alternatives.” The upshot is he is seeing an increased level of both leasing and financing.
“In our dialogue, we ask if they can service the debt,” Goodale remarks. “New-truck sales volumes are off for the fleets so they need to extend their existing inventory out further. We need to sit down proactively with the operators and look at their business plans and help them get through these tough times.
“There is no margin for error,” he continues. “Guys have to stay on top of their game. We are seeing a lot of consolidation. Scale has its benefits.” He says extremely large fleets will benefit from their scale while small to midsize fleets are finding it more difficult to operate in the current economic conditions.
“This is the time to make relationships that last by helping our customers,” contends Goodale. “It is our goal to drive loyalty and to help [our brand partners]. We've implemented a proactive communication model in order to assist in early solutions as we need good communication with our customers to weather the storm.”
While the nearly automatic temptation for many fleet managers this year may be to extend trade cycles to avoid new vehicle purchases, John J. Flynn, president & CEO of Fleet Advantage, a finance lessor and management consultancy, suggests thinking long and hard about playing that angle.
While he says this advice is apropos for all fleets, he says it is particularly fitting to private fleets. “Each private fleet is unique, with dedicated routes, etc., and they tend to operate as expense centers — without the same profitability goal [as a for-hire carrier].
“That's why [when working with a client] we conduct a fleet audit first, a complete review of their operation, including mileage, fuel economy, maintenance and warranty studies, to come up with an optimization plan.
“What we find invariably,” he continues, “is that the ‘average' miles [being used to predicate decisions] is not accurate,” he continues. “From there, we'll design a lease that allows the fleet to replace vehicles any time after the first 36 months with 90 days' notice. In effect, we are leasing trucks by the mile. Because we can find the sweet spot in terms of each fleet's mileage, we can enable them to increase their efficiency.”
Flynn concedes the frozen credit market is a big problem for fleets, but says his firm and others had credit facilities in place ahead of the crunch. “Yes, the ability to raise capital is limited, which means the smartest thing for any company to do is de-leverage their balance sheets — get the debt off,” he contends. “And the best way to do this for truck fleets is to lease their equipment. That will increase their liquidity. Keep in mind too that as a lessor I am more comfortable owning the asset vs. loaning to others for them to hold that asset.”
Flynn says this financial angle also applies to fleets that opt for a full-service vs. a finance lease and stresses it is advantageous to all fleets, not just private ones.
As for his recommended 36-month initial period for leased trucks, Flynn points out that fleets typically “see a huge spike in operating costs when vehicles enter their fourth year.
“Think of it as the razor-blade theory in action, in that they ‘give' you the razor [for cheap] and you keep buying the blades,” he continues. “Truck OEMs are not making a lot on the front end, but there is a huge markup — up to 60% — on proprietary parts. The upshot is there's a sharp escalation in operating costs as a vehicle leaves warranty.”
What's more, says Flynn, the earlier a truck is traded out, the higher its resale value can be. And on top of that, there are tires and fuel to consider. “When you take in new equipment, you get a fresh set of tires — that's $2,000 worth of ‘free' tires. Consider fuel also. From 1990 to 2003, we saw a steady improvement of 2 to 3% in mpg from newer trucks. That was disrupted by the arrival of emissions, but we expect that advantage to return.”
He says yet another advantage to this early-bird trading is driver satisfaction and the resulting benefits that help lower costs. “If drivers are happier, there are less accidents and less downtime.”
Finally, Flynn says riding closely on mileage often reveals that a fleet may be running as high as a 10% surplus in vehicles.
“The biggest trend we are seeing now for both private and for-hire carriers is outsourcing,” relates Mike Lewis, president of PHH Arval, a fleet-management services provider. “Private fleets are especially keen on considering not only full-service leasing, but also à la carte outsourced options, such as managed maintenance and fuel-service programs.
“We picked up on this trend back in the first quarter of '08 based on stats we follow regularly,” he explains. “We see it as driven by the need for quality information.
“Information is so important to managing a truck fleet,” Lewis continues, “but often access to that information is limited without an outsourced provider in the loop. These firms can often see and analyze cost areas more easily than a fleet can — and can do so even on an asset-by-asset basis.”
Lewis suggests fleets also consider asset-based lending to free up cash and increase liquidity.
And he advises fleets seeking a line of operating credit this year, especially, to not overlook a valuable if seemingly unorthodox form of collateral. “If you have $100,000 in receivables on your books,” he explains, “you can use that as collateral to attain a loan for working capital. Remember, lenders can consider any collateral.”
Paul Rauseo, managing director of management consulting firm George S. May International Co., says that in good times or bad, a fleet would be well served by first setting up what he calls a “planned profit model” that draws attention to expenses — and then seeks solutions to fulfill it, or more correctly stated perhaps, to balance it.
“A planned profit model is a simple equation that ensures you act today but plan for tomorrow,” Rauseo states. It is expressed in a simple albeit mind-jarring equation to bottom-line thinkers: Revenue - Profit = Expenses.
“The equation is a basic assessment of the three major components of any business — expenses, revenues and what's left over,” he says.
Rauseo says the model historically used places profit, not expenses, as the “outcome” number and that many times ends up negative or lower than expected. “But with profit as a fixed input variable, the amount is decided on and controlled in advance,” he explains.
He says when businesses set profit as the result, they don't see how much money they've generated, or lost, until the end of an accounting period is reached.
“The model is simple,” he adds, “but it can be the critical factor in determining whether or not a business is profitable.”
Rauseo says the “answer to a credit or a cash crunch is to those questions [that will balance the equation] first.” He points out that as every fleet is different, how it views expenses will differ.
“Take a look at your fleet and what it needs or is expected to accomplish besides hauling freight,” he advises. “For example, how much of an issue is public safety or company image?”
Essentially, the profit model he recommends using can't be managed without understanding what requirements will be expected of the fleet.
Rauseo says using the planned profit model correctly can reveal what a profit margin will be within half a percent. “From there, fleets can put money where it is needed on a daily, weekly or monthly basis instead of by the year” to achieve maximum results. “The best possible way to manage is by the hour — as we can measure hauling by the hour too.
“You don't want to get lost in the [management process],” he suggests. “But you need to look at the ‘why’ behind it and then find ways to manage the profit model successfully.
“Once you have done that,” Rauseo continues, “dealing with the credit crunch becomes more manageable, and pursuing options such as factoring, asset-based management and tapping outside equity partners can be considered” to get a fleet through this recession and position it well for the upturn.
“It's really about being more forward-thinking,” he adds. “My general advice to any fleet, especially this year, is to look at every expense — decide to keep it or not; to outsource it or not. And I do mean every expense — from health care to cellphones. Managers are often shocked to find what's been in their budgets for years.”