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Getting “back to normal”

April 18, 2011
“Our industry has taken many punches. In addition to the economic downturn, we’ve had to weather a series of regulatory changes that magnified the ups and downs of our already cyclical business.” –Kyle Treadway, president of Kenworth Sales Co., Salt Lake ...

Our industry has taken many punches. In addition to the economic downturn, we’ve had to weather a series of regulatory changes that magnified the ups and downs of our already cyclical business.” –Kyle Treadway, president of Kenworth Sales Co., Salt Lake City, UT, and chairman of the American Truck Dealers (ATD) association

“Normal” is a term very much in flux these days within trucking circles. Many experts I’ve talked to say that after the cataclysmic downturn of the past few years, trucking won’t necessarily return to “normal” but rather to a “new normal” where the time span between this industry’s historic ups and downs gets shorter, more intense, and makes survival for fleets that much more challenging.

Still, despite all that, confidence in the short term is blooming – and no sector of the industry exemplifies that more than truck dealerships right now.

Kyle Treadway, (at right) president of Kenworth Sales Co., Salt Lake City, UT, and chairman of the American Truck Dealers (ATD) association, pointed to some of the factors bolstering the confidence among dealers during the group’s 48th annual convention in Phoenix, AZ, this past week.

In particular, Treadway highlighted five sectors of commercial truck retailing that indicate an economic recovery is underway for 2011.

Freight volumes are rising. “Freight rates are pushing upward with more industry leading fleets announcing rate increases, giving our customers breathing room and the ability to generate profits,” Treadway said. “Experts now tell us that the manufacturing sector has emerged as our recovery’s leader. That’s good news for [dealers] because that means more freight.” He noted too that the TransCore North American Freight Index for February increased 65% over the prior year, while the American Trucking Associations (ATA) Freight Tonnage Index has improved now for 15 straight months to reach pre-recession levels.

Used-truck demand is boosting prices. Treadway said the decline of truck sales over the past three years has resulted in about 70,000 fewer Class 3- 8 trucks sold in the U.S. and Canada, while the average equipment age continued to rise in the first quarter of 2011, according to R.L. Polk. A buyer’s definition of what’s an ‘acceptable’ piece of used equipment has changed, he said. With used trucks in demand and harder to find, the average retail price for used trucks has climbed as much as 20% in 2010, he said.

Parts and service business is improving. “At the same time, we saw our parts and service business volume gradually improve. The volume was erratic—two good weeks of higher shop capacity, followed by a poor one—but with each month the good weeks improved and became more consistent,” Treadway said. “Our customers’ extended replacement cycles finally met the reality of deferred maintenance.”

Truck rental and leasing defies seasonal declines. “The next sign of improved fortunes came in the rental and leasing arena,” he said. “Many dealers saw rental utilization rates defy seasonal declines and hover month-after-month at 90% or higher.” Treadway said customers like the flexibility that leasing and rentals provide because of the uncertain economy. “If a ‘double-dip’ recession materialized, they could quickly downsize and minimize their exposure,” he said.

New-truck orders are increasing. Treadway said orders for new trucks were up in the first quarter 2011, and manufacturers and suppliers began recalling furloughed workers, expanding and adding shifts. “Some dealers are cautiously recalling workers, resurrecting technician apprentice programs, adding swing shifts and increasing stock levels,” he said.

Data gathered by ACT Research Co. backs up Treadway’s outlook, as the numbers continue to reflect improved demand across all segments of the heavy-duty commercial vehicle market.

“Fundamentals, including pent-up demand resulting from deferred replacement, tight freight-carrying capacity, improved fleet financial performance and some easing in credit availability, will combine to support an up cycle for the market,” said Sam Kahan, ACT’s chief economist, in a recent market update released by the firm.

“Class 8 net orders continue at a strong pace, and after a slight pause in January, commercial trailer orders have returned to a solid growth trajectory,” he added.

“While some growing pains are occurring as the industry ramps up to meet the widespread increase in demand, the commercial vehicle market will continue at a solid pace,” noted Kahan. “Our outlook for 2011 is real U.S. GDP [gross domestic product] to grow 3% on a year-over-year basis. While this is slightly less than previously thought, it is in line with most forecasters.”

Indeed, ACT’s numbers show that net orders within North American markets shot up to 29,200 units last month from 24,300 in February.

“March finished off a second consecutive quarter of elevated Class 8 demand,” said Kenny Vieth, ACT’s president and senior analyst, stressing that preliminary net order figures are subject to revision within roughly plus or minus 5%.

Vieth added that the number of orders in March translates into annual demand of over 300,000 new Class 8 units and noted that industry backlogs, which fell just short of 100,000 units in February, likely rose by another 8,000 to 10,000 units in March.

ACT’s numbers dovetail – if not exceed – projections by truck makers themselves. Ron Huibers, senior vice president-sales and marketing for Volvo Trucks North America (VTNA), recently noted at the 2011 Mid America Trucking Show that his company believes Class 8 sales should top 220,000 units this year.

Both of Paccar Corp.’struck manufacturing subsidiaries are also predicting strong growth in medium- and heavy-duty truck sales this year compared to 2010.

Bill Kozek, general manager for Kenworth Truck Co. believes total industry Class 8 sales will exceed 200,000 units this year, a big jump from the 125,000 sold in 2010, as “cautious optimism” among fleet customers spurs them to finally replace aging vehicles.

Bill Jackson, general manager for Peterbilt Motors Co., is projecting total industry Class 8 sales will top 210,000 units this year, with medium-duty sales reaching 50,000 units. To meet demand, Peterbilt has added a second shift to its Denton, TX, production facility and is ramping up its build rate to 100 heavy-duty trucks per day.

Overall, ACT’s Vieth noted that net orders this March were up 159% over the same month last year, representing the largest monthly order intake since May 2006. The question now facing OEMs is whether they can ramp up their production lines fast enough to meet demand.

“With the uptrend firmly established, the question for 2011 now is the industry’s ability to meet demand, instead of whether demand would rise to expectations,” Vieth said. “History shows that production always chases demand at the beginning of the cycle. Unlike orders, the industry needs to work in unison to raise production.”

Still, truck dealers at least aren’t looking at all of this through rose colored glasses. ATD’s Treadway for one is urging dealers to keep both feet firmly planted on the ground and remain aware of the risks that could jeopardize all this good news.

“The economic recovery is not a sure thing, and could be easily derailed by volatile fuel prices, an unpredictable regulatory environment, international political upheaval and global disasters,” Treadway cautioned. “We need to rebuild inventories, shore up our cash flow, review wage rates and sell some trucks.”

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