Fleets extend trade cycles; truck values and engines cited as cause

Sept. 1, 2002
A year ago, depressed used truck prices caused many carriers to extend tractor trade cycles, because they owed more on their trucks than they could sell

A year ago, depressed used truck prices caused many carriers to extend tractor trade cycles, because they owed more on their trucks than they could sell them for. Now, used truck prices have rebounded slightly, but the cause of the rebound — impending emission regulations for heavy diesel engines — is leading many carriers to extend tractor trade cycles. However one looks at the truckload segment of trucking, financially or operationally, carriers are not buying trucks as often as in the past.

Through the middle of 2001, many truckload carriers were buying new tractors every 30 to 36 months. This short trade cycle was based on a perceived need to keep new equipment as an attraction to drivers and as a way to control operating costs. Although the driver shortage is not as severe as it was before the freight market began to soften late in 2000, carriers still see new or nearly new tractors as a way to recruit and retain qualified drivers. Tractors are home to drivers at truckload carriers. The average driver spends 250 days a year on the road. Being away from home that much requires carriers to provide drivers an attractive, comfortable place to work and live while away from home two-thirds of the year, Frozen Food Express told shareholders in its annual report.

However, buying patterns seem to be based more on finances than on driver preferences. For instance, C R England of Salt Lake City, Utah, has been on a 36-month trade cycle for years and has no plans to change, says Todd England, vice-president of maintenance. England is one of the large carriers that has guaranteed buyback agreements with its tractor vendor. The value of that agreement has been renegotiated, and England has agreed to remain on a 36-month purchasing cycle. “We are looking at some options for trading at 42 or 48 months,” he says, “but the economic justification has yet to be made.”

Short cycles, low maintenance

Remaining on a short cycle helps keep maintenance costs low, England says. A secondary consideration is that new trucks help recruit drivers. Although the market for used trucks has improved, England does not see that as a factor, because the company is tied to its guaranteed buyback agreement. The only change in buying at England has been an acceleration of purchases through the third quarter of 2002. “We won't take any trucks in the fourth quarter, because we want some time to see how the new EGR engines perform,” he says. “That three-month buying pause will make a slight change in the way we schedule purchases in the future.”

Werner Enterprises in Omaha, Nebraska, one of the largest dry van carriers that has a large temperature-controlled division, is another fleet that does not plan to alter its basic purchasing patterns. The company is extremely concerned about the durability of engines built to meet the October 2002 emission standards, a recent quarterly report says. Noting that until recently, the company has not been able to test the new engines, and it has decided to speed up purchases prior to the effective date of the EPA regulations. Starting late in 2001, Werner began reducing its fleet average age. By the end of December 2001, average tractor age was reduced to 1.4 years, down from the company standard of 1.5 years. By the end of June 2002, a further reduction to 1.3 years was accomplished. To reach those goals, spending for equipment rose to $84.7 million in the first half of 2002 compared to $77.2 million for the first six months of 2001.

Werner, the quarterly report continued, intends to continue accelerated purchasing until October. By that time, it will have one of the youngest fleets in the industry. When the new emission rules become effective, Werner will stop buying new tractors and wait to resume purchasing until it is confident of the performance of the new engines. This strategy has been made easier by an increase in the value of used trucks, so Werner has been selling more trucks recently.

Frozen Food Express is taking both forks in the road with respect to avoiding the new EGR engines and altering tractor trade cycles. FFE has negotiated an agreement with its tractor vendor to keep trucks longer than its normal 36 months. The company says tractors will remain in service an additional six to 12 months, and that the vendor has agreed to extend warranties for the additional months of service.

Advance buying

FFE also is buying trucks in advance of the EPA regulation effective date. In addition, the company has also begun to purchase late model, low-mileage used trucks. The company says that buying used trucks, buying in advance of the October deadline, and extending its trade interval can help it avoid experimentation with new engine technology until its competitors have proved whether or not the new engines are reliable.

Some carriers are taking a middle path. They don't want to be the test bed for new technology, but they don't want to take on the additional cost of running extensive maintenance operations for older vehicles. Don Freymiller, president of Freymiller Trucking in Oklahoma City, Oklahoma, has been running tractors for 500,000 before trading. On the Freymiller traffic lanes, 500,000 miles takes about four years. “We may go longer than 500,000 miles, because I don't like these new engines,” he says.

One way that Freymiller plans to avoid EGR engines without accelerated purchasing or extending its trade cycle is to purchase low-mileage used trucks. The used truck market is full of almost new trucks that have been repossessed from independent contractors, he says. “We recently bought one used tractor with only 70,000 miles and another with 118,000,” Freymiller says. “We think we can keep those low-mileage trucks for an additional 400,000 to 500,000 miles without much trouble. We already have six used trucks. The one drawback to this plan is that used truck prices are going up, because so many people are attempting to stall new truck purchases.”

No maintenance burden

Used trucks should not add any burden to the company maintenance program, Freymiller says. The company is prepared to maintain a mixed fleet, because its shop is open to the public and already stocks parts for a wide range of equipment. “More than half our shop hours are spent on work for other companies,” he says.

With extended warranties from most chassis builders and component manufacturers, carriers that wanted short trade cycles could run tractors for 2½ to three years with little expenditure for maintenance other than scheduled vehicle inspections. Carriers usually aim for 120,000 miles or more per year per tractor as a fleet average. Exceeding that average only slightly puts 400,000 or more miles on a tractor in three years. The pattern for the past several years has been for the first owner to use up the warranty rather than keeping a truck for its entire service life.

Based on used truck values alone, T W Transport, a fleet with 160 tractors and 200 refrigerated trailers in Spokane, Washington, has extended its trade cycle two years for trailers and at least one year for tractors. “We were trading tractors at four years and trailers at six years,” says Dale Peterson, chief operating officer for T W Transport and its sister flatbed carrier, System Transport. “When we made the decision to extend trade cycles, we changed our engine specifications as well. We were using 11-liter engines, which did not lend themselves to extended, heavy use. For longer service life, we switched to the Caterpillar C15 or the Cummins ISX engines in Model 379 Peterbilt longnose tractors. Now our projected trade cycle is five to six years for tractors and eight years for trailers. We have warranty coverage out to one million miles, so we are leaning toward keeping tractors for six years.”

The previous shorter buying cycle was primarily to help attract drivers with new trucks, Peterson says. Giving drivers a longnose Peterbilt, regardless of age, has helped with driver recruiting, he says.

Peterson says that T W Transport has only 10 tractors scheduled for delivery in 2002 after October 1. As long as the customer does not have to pay the noncompliance penalty, the company will stick with Caterpillar as an engine vendor. “We are not overly concerned about buying new trucks right now, because we are projecting a slow winter in the Pacific Northwest,” he says.

Million-mile engines

When the first series of engines all with electronic fuel controls were introduced in 1993, the manufacturers claimed that those engines would run at least 800,000 to one million miles before overhaul. A few carriers have taken the engine builders at their word and attempted to keep trucks for one million miles. Heritage Dedicated Services in Waco, Texas, is one of those fleets. The cost of running trucks for 10 years or one million miles is not as high as some operators fear, says Ray Buckner, Heritage vice-president. Operating and maintenance cost goes up about three cents per mile after a tractor reaches its fifth birthday, but that higher cost is usually offset by the higher capital cost for the equipment in the first five years, he says.

Heritage has been running trucks on long cycles for quite a while, and in line with claims from manufacturers, engines are running a million miles before overhaul, Buckner says. One of the keys to keeping equipment for long cycles is to track vehicle condition and replace tractors according to condition, not mileage. However, such a long cycle requires an intensive preventive maintenance and inspection program. “We don't really want to perform engine overhauls,” he says. “We run high mileage, but we want to sell before overhaul if possible.”

Other fleets want only to stretch trade cycles far enough to let others test the EGR engines. For instance, Baldwin Distribution Services in Amarillo, Texas, began trading trucks early in 2001 and will skip purchasing tractors entirely in 2002. That will require tractors in the existing fleet to run at least an additional 18 months, says Dudley Baldwin, president. The shift will increase the trade cycle from 4½ years to six years.

Buying depends on used trucks

The longer trade cycle is open to modification, Baldwin says. “If used truck values go high enough and the EGR engines prove to be reliable, we could get back into the new truck market sooner,” he says. “The plan for now is to let the new engines go through about one year of fleet use before we begin buying. That would put us back in a buying mode by the third quarter 2003.”

Baldwin says he has heard few complaints from drivers about the plan to keep trucks longer. “We run 115 tractors, many of them the new Mack Vision conventional cab,” he says. “Our drivers like them. They don't have much to say about tractor age as long as we spend money on maintenance regularly and some paint every now and then.”

Used truck values and a tight credit market have convinced Arctic Express in Hilliard, Ohio, to extend its tractor cycles as well. Arctic has always traded tractors at four years in the past, but now has a substantial number of 5½-year trucks. Richard Durst, Arctic Express president, says that the company will hold on to those tractors for at least another 18 months to two years. “We've got two reasons for holding our present fleet,” he says. “The credit market is so tight that it is almost impossible to find financing except through one of the captive finance companies. The other reason is the new emission controls that take effect in October.

“We bought a bunch of essentially prototype engines once and got burned pretty bad. We will let someone else with deeper pockets be the pioneers for these EGR engines.”

N14 value may rise

Arctic's fleet is composed of Freightliners going back to the 1997 model year. The trucks are powered by Cummins N14-460s, and the engines regularly are running a million miles to overhaul. The engines are one reason for keeping trucks longer, Durst says. Cummins does not plan to certify the N14 series for the new emission rules. As a result, late model N14 engines may begin to look pretty attractive to some fleets, he says. “We don't look for the value of those engines to fall after Cummins discontinues the N14,” Durst says.

Traffic lanes run by Arctic Express lend themselves to keeping trucks longer, Durst says. Some lanes are so short that drivers are home almost every night. That gives the company an opportunity to track fleet condition and triage vehicles periodically, getting rid of the problems and putting the good trucks on routes that match vehicle capability.

Durst sees one possible advantage to the tight credit market that makes keeping trucks longer a reality. Tight credit and rising insurance costs have forced a significant number of fleets out of business lowering capacity to shippers substantially. The exodus of capital from refrigerated trucking has created a barrier to entry that has never been there before, he says. The result is that shippers are paying higher rates — even to the point of paying premiums to carriers that can reposition equipment to handle vital loads. “The credit and capacity crunch can't last forever,” Durst says. “Our goal is to get through the next two years of tough times. We want to be the last man standing.”

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