While politicians talk of recession, much of trucking already feels a depression. Nowhere is this more evident than in the value of used trucks.
In 1999, North American manufacturers churned out 309,000 heavy trucks and couldn't build them fast enough. Buyers waited for months for truck orders to be built. Then a slowdown in freight volume altered the demand landscape. Owner-operators and small carriers began to fail, and the driver shortage at large carriers eased as fewer trucks were required to handle the smaller pool of freight. The same buyers who had scrambled to truck dealers doors begging to buy new tractors in 1999 began to cancel orders in 2000 and 2001 as heavy truck sales volume dropped to barely 170,000 units projected for the entire year in North America. Meanwhile, manufacturers have scaled up production capacity enough to build 380,000 tractors in a single year.
Years of record sales coupled with aggressive marketing have flooded the truckload sector with almost new tractors. Truck builders have argued that carriers need new tractors to attract drivers. To propel these sales, trucking marketing departments developed the concept of guaranteed buybacks: the builders promised to purchase used trucks for a specified percentage of the original price at the end of an agreed term, usually 30 to 36 months. While this idea kept nearly new trucks on the road and kept production lines running, it also generated a huge supply of late model used trucks.
Too Few Buyers
Through 2000 and early 2001, soft freight demand has kept those used trucks from selling. Small fleets and owner-operators, the usual buyers of low mileage used trucks, could not soak up the excess. As a result, used truck values plummeted. However, carriers with guaranteed buyback contracts insisted that the contracts be honored.
The guaranteed buyback contracts were great for larger carriers. They were able to run fleets of nearly new tractors at almost no risk. Extended warranties eliminated most maintenance costs except for the most basic inspections along with oil and filter changes. With trade-in value set from the moment equipment was placed in service, carriers with guaranteed buybacks were, in effect, renting their power at a fixed cost per mile, says John Jacobson, president of TransAm Trucking in Olathe, Kansas. TransAm buys roughly 250 trucks a year for replacement.
The guaranteed buybacks were said to be in the range of 50% for a three-year-old tractor. Apparently no two of the agreements were exactly the same. Manufacturers agreed to different deals with different customers based on things such as buying history and purchase volumes. The result, however, is just about the same across the board. Manufacturers agreed to pay roughly 50% for tractors at the end of three years. Under current market conditions, those tractors are worth only 25% of their original purchase price.
No one is sure whether guaranteed buybacks will be available in the future. However, many fleets still have a substantial number of tractors under current contract. As these fleets and their vendors work through these contracts, used truck inventory will continue to rise. By the end of 2001, the inventory of unsold used trucks is projected to be 87,000 units. That unsold inventory will rise to 126,000 in 2002 and 171,000 by the end of 2003. At the end of 2004, the inventory of used trucks available to a second user is projected to reach 209,000. This will be almost as many used trucks in inventory as projections for new trucks that will be built in 2005.
Slow Export Sales
Cab configuration of used trucks will slow the sales in vocational or export markets. Most of the used trucks have conventional cabs with integral sleeper berths, a configuration that is almost impossible to convert for vocational applications such as mounting a dump body. In addition, long nose conventional cabs sell poorly in export markets.
Oversupply is not the only problem caused by the used truck glut. More buyers might be found if financing were more easily available. With the used truck market so bloated with inventory, finance companies have tightened credit or left the business altogether. This has happened, because delinquency on loans is much higher. More defaults lead to increased collection costs and an unprecedented rise in equipment repossession. One company that specializes in truck financing estimates the repossession rate at 25% to 28%. In the face of soft freight demand, many drivers have turned in tractors voluntarily. Several estimates suggest that up to 35,000 owner-operators and 3,700 fleets with five or more trucks have gone out of business. This number of small fleets is significant, because the American Trucking Associations says that more than 500,000 trucking companies operate in the US and that 72% of them operate six or fewer trucks.
Credit Dries Up
Until recently, finance companies liked lending money for trucks. It was seen as a stable business, and trucks were viewed as a liquid asset. Unlike commodities such as computers, which are almost obsolete after a year, a year-old truck was thought to have real value. Used trucks still have value, but not as much as most lenders originally assumed, and they are having a hard time establishing the true value of equipment.
Low prices for used trucks are bad news for many carriers. In its most recent annual report, Frozen Food Express Industries explains that declining used truck values have a direct effect on balance sheets. Carriers depreciate the value of tractors based on their expected residual value at trade-in. If that residual is lower than expected, monthly depreciation must rise sharply, which raises operating expenses and lowers a company's profit. Carriers that continue to depreciate equipment without accounting for reduced value must show a loss on sale of equipment on their balance sheet when tractors are traded.
New truck sales have dropped almost as fast as the value of used trucks. In 2000, Class 8 truck sales declined 19.6% from 1999 with the result that 51,000 fewer tractors were sold. The sales decline is projected to be 36% for 2001, a drop in sales of another 75,000 to 80,000 trucks. A slight recovery may start in 2002, but sales are not projected to reach the level of 2000 until at least 2005, when perhaps as many as 213,000 trucks may be sold.
Slow Recovery
A sales rebound could be slow to materialize, because many carriers are holding on to trucks longer in a soft freight market. Jacobson says that TransAm began keeping trucks longer almost two years ago. Never on one of the extremely short trade cycles seen at some carriers, TransAm stretched its replacement cycle to 48 months as freight volume fell. “We haven't had any change in operation and haven't seen any significant increase in maintenance cost from moving our trade cycle out to 48 months,” he says.
Stevens Transport in Dallas also has extended its trade interval from 42 to 48 months. The change allows Stevens to continue to grow by about 150 tractors annually without making big expenditures in a soft freight market. To maintain its fleet, Stevens purchases roughly 300 tractors annually, says Mike Richey, executive vice-president.
The biggest truck builders have been hardest hit by the decline in new truck sales and by the collapse of used truck values. Both Freightliner Corporation, parent company of Freightliner, Sterling, and Western Star Trucks, and Volvo Trucks North America have set up operations to sell as many used trucks as possible. The Freightliner program is a venture between Freightliner and Mercedes-Benz Credit Corporation.
Expanded Sales Networks
To speed the sale of used trucks, Freightliner is expanding its SelecTrucks sales network. These sales centers will be expanded from a network of 36 locations in mid-2001 to almost 60 facilities in early 2002.
Freightliner and Mercedes-Benz Credit have a new financing operation called FASTruck. Intended for first-time owner-operators and others that do not fit a typical borrowing profile, FASTruck matches credit terms with buyers. It works from a network of sales centers and concentrates on selling repossessed vehicles and those returned from leases. Freightliner wants to move these vehicles quickly, so it will target buyers who are willing to purchase vehicles as-is instead of looking for the extra value added to a used truck sold through the Freightliner SelecTrucks network. These special sales centers are intended to keep used trucks away from auctions, which have a tendency to lower the resale value of all used trucks. In addition, Freightliner supports higher loan amounts for small fleets and owner-operators. Mercedes-Benz Credit has modified financing guidelines to allow trucks sales at lower down payments.
One Freightliner program is called Power to Succeed. Designed for first-time owner-operators, it includes a preventive maintenance package and a suite of other business services aimed at helping owner-operators start a successful business. The program includes down payment of $999, a 24-month, 200,000-mile warranty on major vehicle components, 12-month, 100,000-mile coverage on other components, 10 new tires, a set of new Alliance batteries, a set of relined Meritor brake shoes, a preventive maintenance program that includes six PM services, an education program for first time buyers, and a comprehensive set of business services.
Reconfiguring Used Trucks
Another Freightliner program involves reconfiguring used trucks for better sale. For example, Freightliner is converting FLD120 tractors with sleepers to day cabs. Other possible configuration changes are shortening the wheelbase or converting raised roof sleepers to mid-roof sleepers.
Volvo Trucks North America and Volvo Commercial Finance also have a used truck program for dealers and customers. Called Generation2, the Volvo program recognizes that many carriers and owner-operators owe more on their fleets than the current market value of the vehicles. Intended to help support the resale value of Volvo VN tractors, the program offers fleets an opportunity to upgrade older equipment to newer, more fuel efficient equipment.
Generation2 shares the financial risks of used truck sales with Volvo dealers. In addition to supporting the resale value of Volvo trucks, the program is designed to help dealers establish long-term relationship with customers and to help dealers move used truck inventory. Volvo shoulders a large share of the financial burden from these sales. Dealers assume minimum risk while gaining an opportunity for increased cash flow and profit.
Warranties for Used Trucks
The program sells low mileage VN tractors covered by a comprehensive warranty for materials, workmanship, and progressive damage for six months or 60,000 miles. Extended warranties are available, including two-year, 200,000-mile coverage for Volvo engines.
Volvo Commercial Finance will lend up to 200% of the National Automobile Dealers Association stated value of tractors with no down payment from qualified buyers. Introductory interest rates are projected at lower than the prime rate. In addition, fleets and owner-operators are eligible for parts and service discounts through Volvo's Fleet Force card program at participating dealers. Generation2 offers low insurance costs from Spectrum insurance. The program provides a national inventory database that can be searched over the Internet.
In another move aimed at improving used truck sales, Volvo Trucks North America has purchased 100% of Arrow Truck Sales. Volvo initially purchased 50% of Arrow in December 1998. Arrow Truck Sales operates from its headquarters in Kansas City and has branches throughout the US and Canada.
Small Carriers Buy Used
Small carriers are reacting much as the truck builders had hoped by taking advantage of the used truck buying programs. However, at least one small carrier says that the used truck glut is a problem of the manufacturer's own making. More than a little greed went into the new truck sales programs, he says. As a result, the excess of used trucks should have been easily predictable.
Tom Stone, president of Shenandoah Motor Express in Versailles, Ohio, views this as a buyer's market. “We started buying used trucks instead of new tractors more than a year ago,” he says. “We've got it down to a science now so that we can pick out precisely the tractors that fit our needs. We pay $40,000 to $50,000 for trucks that are less than two years old with less than 200,000 miles. In our operation, that makes a lot more sense than paying $93,000 for a new tractor. We finance these trucks for three to four years depending on their mileage and sell them before they reach 600,000 miles. That does not involve extending our life cycles. At an average of 95,000 miles a year, a two-year-old truck still has plenty of life for our operation, and we have paid roughly half of the price of a new truck.”
