The Dangers of Letting Fuel Economy Dictate Your Trade Cycles

by Patrick Gaskins

Patrick Gaskins, CTP, is senior vice president of Financial Services of AmeriQuest Transportation Services. He has nearly 20 years of experience as a financial services professional in the transportation industry. Prior to joining AmeriQuest, he held financial services positions with First Fleet and GE Capital.



AmeriQuest’s Patrick Gaskins explains the many factors that impact asset lifecycle analysis, including fuel costs, and recommends a more frequent examination of trade cycles when it comes to evaluating assets.

When you talk about asset trade cycles, fuel efficiency is typically one of the top considerations. As a result of recent gains in fuel economy, many fleets have started to base their trade cycles on fuel economy alone. And while fuel is the number one expense, it is not wise to set trade cycles based solely on that one factor. Fuel economy is only one of many factors that impact asset lifecycle analysis.

Other factors that should be considered when determining the proper trade cycle for fleet equipment include acquisition costs of new assets, interest rates, maintenance and repair costs, resale values, technological improvements, fuel costs, warranty programs and utilization.

For example, if interest rates skyrocket to 18%, fuel economy, maintenance and repair costs, and all other factors become less important. An 18% interest rate will greatly increase the cost of entry for new equipment, and the savings generated from all of the other factors must outweigh this increased cost to make replacing an old tractor cost-effective. This holds true for all of the various factors. Most recently, we have seen diesel prices fall, diminishing the push for alternative fuel vehicles. The low cost of fuel, in some cases, can weigh the equation towards a longer trade cycle because it diminishes the effect of an increase in fuel economy.

Consider this example as well: A manufacturer comes out with a truck that gets 12 miles to the gallon. Your initial reaction would be to replace every tractor in your fleet. But if all fleets did this, there would be a glut of trucks in the used truck market, which would seriously depress used truck values and have a negative impact on the cost benefit equation. This clearly shows why all of the various factors must be considered when evaluating trade cycles and individual tractor replacements.

Technological advancements targeted at improving fuel economy are not regulated solely to the tractor. The trailer plays a key rule in a vehicle’s fuel economy as well. In fact, the asset that will most likely have the greatest impact on fuel economy in the coming years is the trailer. Wind tunnel testing has repeatedly shown that no matter how aerodynamic manufacturers make the tractor, the trailer will continue to have a negative impact on the overall aerodynamic drag. This will add a new dynamic to the asset replacement decision-making process, as you determine whether to invest in tractors or trailers. If a fleet can increase fuel economy on an existing tractor by .5 MPG by running a more aerodynamic trailer, they have just extended the useful life of their tractor.

The goal when determining the proper trade cycle is to find the sweet spot of fuel economy, acquisition cost, used truck value, interest rates, maintenance and repair costs, specifications and more. Unfortunately, this is a moving target so you can’t just determine a trade cycle once and forget about it. In fact, reviewing trade cycles annually is probably not often enough. To ensure you are trading in your trucks at the perfect time, ongoing evaluation is necessary. By making minor course corrections, you will save a lot of money.

At AmeriQuest, we review trade cycles on a quarterly basis with our fleet customers. The model is truly dynamic and considers all of the variables in asset lifecycle analysis. It is important to remember that changes made during these quarterly reviews are not huge. We are not suggesting you go from a seven-year trade cycle to a five-year cycle and back to seven years. You are going to be looking at minor adjustments in many cases, and continually validating the effect of those changes to ensure you are achieving your cost-reduction goals.

Fuel economy is just one factor in the equation to determine the best trade cycle for your assets. To ensure you are trading your assets at the optimum point, make sure you include all the pertinent measurements and that you review your calculations on a regular basis.

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Terry Mulreany
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