Inside the Numbers

The rolling dead?

 

Avery Untitled 1By Avery Vise

avise@randallreilly.com

 

 

 

Over the past few years you probably have received some good business from fleets that are running their trucks and trailers longer than they had in the past. Of course, these companies must renew their fleets eventually.

But what if they don’t?

Conventional wisdom holds that once maintenance costs rise to a certain point and/or residual values drop to a certain point, fleets will buy new or newer trucks and start the cycle over. But the current market is hardly conventional.

“Equipment is becoming the new diesel fuel,” says Bob Costello, chief economist for the American Trucking Associations. He is referring to spikes in diesel prices that once shut down cash-strapped carriers.That still happens with sharp and prolonged surges as we saw in 2008, but those events aren’t common.

Instead, the key to these fleets’ demise is literally rolling down the road. Equipment age is still rising, and the smart thing would be to replace those trucks to avoid escalating maintenance costs, Costello says. But many carriers are in a bind.

Consider that a new on-highway tractor now costs around $125,000 — up from about $95,000 in 2006. And residual values are lower because the trucks are older.

Analysts see a wave of trucking failures due to aging equipment.

So instead of financing $50,000 or less as they did the last time, many fleets need to finance $100,000 – assuming they can even find a willing lender. Many carriers are selling two old trucks in order to afford one new one, Costello says.

New research from Randall-Reilly Market Intelligence suggests this trend may be underway already.

A survey of 218 for-hire executives conducted at the end of November found that nearly 16 percent of carriers, including 22 percent of those operating 100 or fewer trucks, reduced their fleet size in 2012 even though freight demand was modestly stronger.

To be clear, maintenance costs and the other financial factors associated with fleet renewal are not the only factor in downsizing, and perhaps not even the most important one.

Trucking executives consistently point to a lack of qualified drivers as their No. 1 challenge. Traditionally, this was an area where smaller carriers — the ones most likely to find fleet renewal problematic — performed better than larger ones. The difference between large and small on driver retention isn’t so clear anymore, however.

ATA saw a big jump in turnover at smaller carriers in the third quarter. But even here, older equipment may play a role, Costello says.

“We know that some drivers for small fleets are looking at equipment and are afraid of getting dinged on Compliance, Safety, Accountability program scores because of their equipment.”

Costello isn’t alone in this analysis. Donald Broughton, chief market strategist and senior transportation equity analyst for investment bank Avondale Partners, predicts a record number of carrier failures during the next recession due to what he calls “embedded debt” — the future financial burden created by failing to maintain reasonable equipment cycles.

“We’ve seen failure rates drop to all-time lows, but the residual values for used trucks are down 20 percent since the peak in April,” says Broughton.

Fleets operating aging trucks have truly dug themselves into a hole, argues John Larkin, managing director at Stifel Nicolaus.

Shippers increasingly see tight capacity and are trying to do more business with the better capitalized carriers they think will still be operating in the years to come, Larkin says. This diversion of freight makes the challenge that much harder for fleets trying to replace trucks.

“If the economy doesn’t turn around, I think we will see a slow movement toward these carriers going away,” Costello says.

And the trend might not be so gradual if there’s a recession, a clamp-down in financing or a strong surge in diesel prices.

 

Avery Vise is executive director, trucking research and analysis for Randall-Reilly Business Media and Information.

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