THE 02 ENGINE DECISION: High Stakes At Risk

April 1, 2002
For all their lucky charms and bluff assertions, professional gamblers are loathe to place bets on things they know nothing about. That kind of sport is strictly for amateurs. Fleet managers now faced with taking their best shots at equipment decisions being forced on them by the government's '02 engine-emissions mandate will likewise want to leverage all the information they can to best influence

For all their lucky charms and bluff assertions, professional gamblers are loathe to place bets on things they know nothing about. That kind of sport is strictly for amateurs.

Fleet managers now faced with taking their best shots at equipment decisions being forced on them by the government's '02 engine-emissions mandate will likewise want to leverage all the information they can to best influence the outcome of their choices.

It may be springtime outside but it's high time for many fleets to determine what they are going to do about equipment buying plans and vehicle trade cycles in light of the arrival — like it or not — early this autumn of new and largely unproven heavy-duty engines that must meet the strictest yet emission standards mandated by the Environmental Protection Agency (EPA).

Come October 1, new trucks will have to be equipped with engines that comply with the EPA's ‘02 emission requirements or manufacturers party to the consent decree issued by a federal court back in 1998 will likely incur penalties.

As everyone in the trucking industry should be painfully aware of by now, that decree sped up by two years the implementation of much stricter emissions regs. That in turn forced engine makers to quickly place their own bets on which unproven-in-trucking technologies to pursue to meet the mandate.

The upshot is with only months to go, few fleets have even seen an '02-compliant engine much less gotten to tear one down after real-world service or even just take one for a spin.

The negatives already associated with the '02 engines — even before they hit the market — are considerable. First, it's expected the new technology engine makers will deploy to get down to the requisite EPA emission limits will add $3,000 to $5,000 to the cost of a new vehicle. What's more, engine makers concede fuel efficiency will likely be compromised and maintenance schedules may have to be modified.

Bad as that news is, what is most disconcerting to new truck buyers is the simple fact they don't know how these new engines will perform, that is, how much they will break down.

And these will be new engines. Most engine makers have elected to use cooled exhaust-gas recirculation (EGR) to meet the '02 regs. EGR is not new but its use on heavy-duty diesels is. Truck OEMs are only now getting these engines for testing. Reliability in the real world remains to be seen.

Adding to the uncertainty, Caterpillar has declared it won't meet the October '02 deadline. Cat says it has a better idea than cooled EGR but won't have its Advanced Combustion Emissions Reduction Technology (ACERT) program in place until sometime next year. According to Cat, ACERT will be integrated with the HEUI fuel system on all its midrange and heavy-duty engines and in full production by Oct. '03.

Yet another wrinkle out there consists of the diesels from manufacturers not party to the infamous consent decree. Their engines won't have to meet the new regs until '04. But fleets may not want to bet on switching to these powerplants since they are either relatively unfamiliar engines from Europe or smaller-bore diesels that may not be suited to heavy-duty service. And most fleets don't like running a mixture of different engines even for a year if they can help it.

With all the uncertainty surrounding the engines of October, it's no wonder that even industry leaders whose purchasing power wields a lot of influence with OEMs are nervous about running trucks with EGR engines.

What is somewhat surprising is that it wasn't until a few months ago that a name-brand fleet owner publicly blasted EPA and announced intentions to both pre-buy vehicles with current engines and buy used trucks — to avoid '02 engines.

Perhaps that's because fleets have at least half-hoped EPA or Congress would step in and somehow ease off on the '02 regs at the eleventh hour. That is highly unlikely because neither the Bush Administration nor the Republicans in Congress can afford right now to expend political capital on appearing soft on the environment.

In any case, Don Schneider, president & CEO of Schneider National, stated back in February at a seminar hosted by the Heavy Duty Manufacturers Assn. that his giant truckload fleet will do all it can to avoid buying '02 engines.

“Our primary concern isn't [reports of increased] fuel costs as much as vehicle downtime,” Schneider explained. Unsuccessful efforts to acquire '02 engines for fleet testing have led the carrier to be concerned about “dealing with things that haven't been engineered properly,” he said.

“The wisest thing would be for EPA to back off [on the new emissions levels] until we have reliably tested engines,” Schneider continued. If that doesn't happen, he said “we could extend the life of our [current] vehicles by two or three years.” Schneider also stated that the carrier has secured commitments from truck OEMs to enable it to “pre-buy” trucks before the new regs come into play.

But most fleets aren't so financially secure or flexible to effectively hedge their bets by not buying new for six months or a year, let alone for two or three years.

Instead they must figure the best bet — or combination of bets — given the dynamics of their individual operation. Like professional gamblers, they must weigh all the information they can get a hold of, put their money down and take their chances, knowing they did all they could going in to affect the outcome.

From speaking to fleet owners, truck lessors and industry consultants, it is clear there are just seven bets to place:

  • Pre-buy: arrange to purchase as much new equipment as possible before the Oct. 1 deadline kicks in.

  • Extend life: stretch the trade cycle of existing equipment long enough to see how the '02 engines work out in “pioneering” fleets.

  • Buy new: bite the bullet and stick with existing replacement plans.

  • Buy new but switch: order engines not affected by the Oct. '02 rule.

  • Buy used: supplement the fleet with the best available used trucks.

  • Go outside: switch to full-service leasing or owner-operators to off-load the burden.

  • Combination: mix up a solution of two or more of the straight bets.

Of course, there wouldn't be a story if there weren't flaws in each of these bets.

The problem with pre-buying is two-fold. First, a fleet must have the capital or other financial resources to accelerate their purchasing program. Secondly, if a pre-buy is not arranged very soon, fleets will run out of OEM “build slots.” Truck builders-and the component makers that supply them-can't just ramp up production at the drop of a hat.

The vp of maintenance & equipment for one of the nation's largest tank-truck carriers says he will be pre-buying some vehicles six months early to help avoid Oct. '02 engines. “This whole mess was such bad news we made our pre-buying deal last fall,” he relates, “when truck pricing was very competitive and interest rates were low.

“The way we figure it,” he continues, “the '02 engines will add about $4,000 to the cost of the trucks. Then we'll lose another $4,000 to $5,000 on decreased fuel efficiency. That puts us $10,000 in the hole. And that's without figuring in the uncertainty of engine performance. Yes, those engines will be under warranty. But any downtime they pile up won't.”

At first blush, extending vehicle life is an obvious solution. But fleets must carefully factor the financial impact that monkeying with a well-established trade cycle may have.

According to Robert Hirsch, president of the Truckload Carriers Assn. (TCA), what truckload fleets do in the face of the Oct. ‘02 mandate will be determined by their individual financial circumstances and where their equipment happens to be in its lifecycle.

While not speaking for TCA members, Hirsch says “my sense is that most truckload carriers would prefer to defer purchasing ‘02 engines and instead extend equipment life for the time being.”

Fleet consultant Richard Bell, a Little Rock, AR-based CPA and attorney, expects many fleets will opt to extend vehicle life for one simple reason. “Most,” he says,” are not buying [now] because they can't afford to.”

Bell does note that one of his clients, a 48-state truckload reefer fleet that uses Cat engines, is staying on its regular 30-month trade cycle. “We were told it would be business as usual and placed the order,” he adds.

If pre-buying and delaying replacements aren't feasible, than buying new may be hard to avoid. Buying new but with different engines is a consideration for those fleets that are more comfortable adjusting to unfamiliar engines than to unfamiliar engine technology.

Whether or not buying used is a safe bet depends on the kind of fleet operation. Truckload fleets that chew through equipment rapidly will most desperately need fresh wheels. But that means the best late-model equipment spec'd to their needs will be in the highest demand. And it doesn't take a management guru to figure that top-notch TL operations already considering buying used (most notably Schneider) will also hold onto their best stuff.

According to management consultant Chris Brady, president of Manhasset, NY-based Commercial Motor Vehicle Consulting, what fleets will do to counter Oct. '02 will be determined by their business model.

“Fleets that buy new do so because their operating environment requires them to,” Brady explains. “The cost structure of long-haul fleets requires the fuel economy, low maintenance and driver satisfaction that new trucks deliver. But a fleet that operates regionally or only runs up to, say, 90,000 miles a year may be able to switch to used trucks for the time being.”

Brady points out too that a large fleet — of any type — may find it too “disruptive” to either buy used or extend trade cycles.

In fact, he says no evidence points to a large pre-buy under way either. “Everyone would love to take delivery of their trucks by Sept. 30,” he says, “but the reality is we have only seen truck orders increase in the last two months [January and February].

“What's more the case than Oct. '02,” Brady continues, “is that the economy has been in the crapper, making it hard for fleets to qualify for the financing needed for massive pre-buying. For example, a fleet might qualify to buy 10 new trucks but not the 20 it would need to completely avoid '02 engines this year.”

Summing up, Brady predicts that going used will be the least likely action taken. “A lot of fleets will get by with extended trade cycles and pre-buying what they can,” he figures.

While pre-buying, buying used and extending trades will work for some, other fleets will have little choice but to buy at least some trucks with '02 engines, if not this year then next.

Darry Stuart, whose Wrentham, MA.-based firm, DWS Fleet Management, provides management services to fleets, points out the different solutions two of his clients have arrived at.

“One fleet, which does direct-store deliveries, has elected to pre-buy trucks to get the best pricing and to avoid having to deal with the new engines for awhile,” says Stuart. “But another client, which needs to replace 500 trucks, is buying half of those early and the rest next year. That's simply because they can't get that many built all at once — nor could they get that many into service all at once.”

As for why he doesn't advocate extending trade cycles for a truckload operation instead of buying new, Stuart points out the danger of “exposure” that can occur when a truck kept an extra year starts to run past 500,000 miles. “If you keep the truck that long, you may end up repairing or overhauling the engine at a cost twice that of the premium attached to an '02 engine.”

Going outside — turning to a leasing company for all or some new power units — may work for some fleets. But like OEMs, lessors can't conjure trucks out of thin air. They too need to know as soon as possible if a fleet wants to do business with them. On the other hand, a fleet may not want to dispose of all or even a sizable chunk of its in-house vehicle-management operations just to avoid dealing with '02 engines.

Offering a lessor's perspective on Oct. '02 is Chad Johnson, vp-maintenance for Ruan Transportation Management Systems.

“At the March Technology & Maintenance Council meeting in Fort Lauderdale, many fleets discussed pre-buying or other ways to avoid the ‘02 engines like the plague,” says Johnson.

“As a leasing company, we have an obligation to provide trucks to our customers,” he continues. “So what we're trying to do is persuade new and prospective customers to get the deal done in the next 30 days so we can get ‘pre-buy’ build slots reserved at the OEMs.”

As it is for any fleet, the biggest problem for Ruan is the uncertainty of how the '02 engines will perform. “We have been talking with them,” says Johnson, “but no engine maker has been completely up front about what we can expect. It's more like a work in progress.”

While he's not panicking, Johnson does consider the '02 engine issue to be the “most significant change” in trucking since deregulation. “It is a big deal,” he stresses. “And for our fleet, the only thing we can see so far is dollar signs. All we know for sure is there will be a decrease in fuel economy and an increase in the price of the trucks.”

Johnson says dealing with the new engines may require Ruan to adjust oil-change intervals. “I am not comfortable with what I am hearing about the performance of these engines,” he states. “We will have to use oil analysis to determine their drains.”

Even given all that, Johnson says Ruan is not looking to make a huge pre-buy. “The thing is you can't replace everything you have early because of financial considerations. We replace trucks based on a schedule determined by the need to meet lease requirements.”

And finally, there's the combination bet. It's highly probable that most over-the-road fleets, especially those with high-mileage operations, will manage their way through the Oct. '02 confusion by taking action on several fronts.

Perhaps they will pre-buy what they can and then extend the life of their best units. They may buy some '02s to find out how bad (or good) they are, or buy a few new trucks with different engines. They may even turn to leasing or owner-operators to supplement the fleet with trucks they don't have to take care of. But whatever they do, they will have to decide on a course of action soon — or have one thrust on them.

Not waiting for that to happen is Herb Schmidt, president of Joplin, MO-based Contract Freighters Inc.. He reports the international truckload carrier has already formulated its own response to the Oct. '02 challenge.

“We won't buy used or buy new after October 1,” says Schmidt, “at least not until we can analyze all the additional costs of the '02 engines. Our need to meet our service commitments means we can't afford to buy those engines. It's not an option.

“We are pre-buying trucks while we can,” he continues. “After that we will do what we need to do until we know the bugs are out of those engines. That may mean extending our trade cycle beyond its current 36 months as well as leasing more owner-operators.”

Schmidt says CFI currently fields 1,650 company and 350 owner-operator trucks. “The engine uncertainty could be a short-term boon to owner-operators,” he allows.

But CFI has ruled out switching to Caterpillar engines as quick fix. “We don't use Cats at this time,” says Schmidt. “The fact they are willing to pay fines is only a temporary patch; they will eventually have to comply and prove the performance of their engines like everyone else.

“Besides,” he adds, “we wouldn't consider doing anything that differently — given that this issue works itself out in a reasonable amount of time.”

While CFI would add owner-operators instead of buying used tractors, Schmidt points out that “there's a lot of good equipment out there that will get sucked up very quickly.”

CFI may elect not to adjust its trade cycle at all because that could impact driver recruitment. “We have experimented with four- and five-year cycles,” says Schmidt. “Although that didn't impact turnover much, it did make it harder to recruit drivers on the front end.”

Schmidt says it's a “crying shame” the '02 technology won't be tested in real-life situations before fleets must use it. “I don't know who to point the finger at,” he wraps up. “But at least this is an issue of a level playing field. It affects everyone the same. As a result, rates may go up. And some people may go out of business.”

One in the bag…

At presstime, Cummins Inc. revealed that EPA has informed the company its ISX diesel “meets all applicable standards and requirements” of the Oct. '02 emissions standards.

That word came in a letter to Tina Vujovich, Cummins' vp-environmental policy & product strategy, in which EPA officials said the agency had reviewed the company's certification application for the heavy-duty ISX and expected to issue a formal emissions certificate “no later than March 29.”

The ISX uses cooled exhaust-gas recirculation (EGR) to bring engine NOx emissions into Oct. '02 compliance. The EPA action suggests the agency will likely certify other engines using cooled EGR. Detroit Diesel, Mack and Volvo have also applied for ‘02 certification of engines that use cooled EGR.

Caterpillar, the lone engine maker that must meet the emissions limits by Oct. '02 that's not planning to use cooled EGR, told FLEET OWNER at presstime it will continue to supply truck engines past the deadline.

Steve Brown, director of marketing for Cat's on-highway engine dept., said the manufacturer will have a “bridge” engine for Oct. '02 certified with a non-compliance penalty. This engine will produce lower emissions than current ones but will not be fully compliant with the new regs. Brown said Cat will not transfer the cost of the non-compliance penalties it incurs with the bridge engine to customers. “We will price the engines competitively,” he stated.

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