Mike Hamilton of AmeriQuest Transportation Services discusses the need for a more detailed approach when evaluating the age of vehicles in fleet financing.
Given the competitiveness of the trucking industry, it’s more important than ever for fleets to have the right mix of trucks in operation. To maximize profitability, this winning combination would include the right types of trucks for a given application as well as trucks of the proper age. Most fleets retire a certain percentage of their trucks annually and replace them with new vehicles.
For example, if a fleet has 1,000 trucks and is on a five-year trade cycle, it will be replacing 200 trucks each year. And while this kind of math may have worked in the past, it is no longer the best way to ensure a properly aged fleet — one that results in the lowest total cost of operation.
So what’s the alternative to using a set trade cycle to age your fleet? To begin with, you need to assess each vehicle individually. The actual age of the vehicle is one of the key pieces of information that needs to be considered, but you also need to look at other data to determine whether it makes more sense to keep the unit running or replace it.
The major items to consider are fuel, maintenance and repair costs. Regardless of the price for a gallon of fuel, it has become the highest cost item in operating a truck today. And a truck that is in for repairs between regularly scheduled maintenance intervals may be one that needs to be replaced sooner, rather than later.
But internal factors alone may not be the only considerations impacting your decision to replace a vehicle. For example, the cost of a new vehicle needs to be considered, along with the fuel efficiency it will provide. Not to mention, the cost of the money to pay for the new asset.
The last factor to consider when replacing a vehicle is the value of the truck in the secondary market — what are you going to be able to get for your used truck? Used truck values fluctuate, and in the last six months there has been a serious decrease — as much as $10,000 to $15,000 — in the value of used trucks because there are so many more trucks flooding the used truck market.
Let’s look at some examples of the benefits of doing an in-depth analysis on the vehicles in a fleet.
A fleet kept its trucks for approximately 12 years accumulating 1,200,000 to 1,300,000 miles on them. An analysis performed on the trucks included the price of a new truck, the price to get out of the old truck, the cost of funds, the specifications of the current and new vehicles, and the fuel economy of both old and new vehicles. The analysis found that the trade cycle should have been seven years and by making the switch, the fleet would save about $4 million a year.
In another case, a customer made his asset replacement decisions by following the lead of one of the largest fleets in the country that was trading its trucks every four years. However, when the data for the fleet was analyzed, it showed that trading the truck after three years made more sense and saved the fleet about $10 million.
The main point of reviewing the age of trucks in a fleet is to know what it will cost to replace a unit, and what it will cost to continue operating it. This analysis allows the fleet to make an informed decision about keeping a vehicle or replacing it.
It helps if the fleet manager is not locked into a new vehicle purchase budget and has flexible financing options available. Flexible fleet financing gives the ability to age trucks in a way that optimizes total cost of operation as opposed to simply replacing 20% of the trucks each year.
Because there are so many changes in the marketplace, it’s best to look at fleet age on a quarterly basis. For example, if the price of fuel drops from $3.50 a gallon to $1.75, that will make a difference in determining how long a fleet should operate a unit. It might be more cost-effective to operate it a little longer. On the other hand, if a much more fuel efficient truck hits the market, trading in an older truck early may be a better option.
The value of used equipment is decreasing now. The cost of new equipment is going up. Meanwhile, the cost of fuel is going down as the cost of maintenance trends upward. It’s enough to make your head spin and is exactly the reason why fleet managers need to consider all these factors together when making decisions about retiring or retaining their assets.
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