Convoy and Smokey & the Bandit, two iconic films of the 1970s, portrayed truckers as rebellious cowboys thumbing their noses at the law. The industry has changed dramatically since those days. As part of the 40th anniversary of GE Capital’s Transportation Finance business, we decided to take a look back.
When our legacy truck financing business started in 1974, it was built around relationships. The founders knew they needed a local presence and people who understood the finance business as well as trucking.
We both started as management trainees in 1980. We know how important it is to recruit new college graduates and to teach them the business so they learn it like we did — from the ground up.
Trucking as an Economic Indicator
Trucking is generally viewed as a leading economic indicator along with manufacturing activity, retail sales and inventory levels, to name a few. It’s a $682 billion industry, according to the American Trucking Association (ATA), which amounts to more than 80% of all freight transportation revenues. Trucks move almost 70% of the nation’s domestic tonnage, and the industry employs more than 7 million people.
We monitor the industry very closely. We look at new truck orders, new truck sales, the size of the U.S. fleet, the age of the U.S. fleet — basically any metrics that can help us form an opinion. In general, we think the industry is in a good position right now.
It doesn’t appear that there’s been excess expansion. We believe most fleets are still replacing trucks when necessary, but not adding much new capacity. While industry data reflect upward movement in freight rates, we don’t think they’ll increase drastically until capacity tightens significantly and shippers are unable to find someone to move their freight. When that happens, we expect that shippers will have to pay more, which may allow companies to increase driver pay.
Right after the Great Recession, we saw driver turnover drop dramatically, but now our customers say it is back up to about 100% at many large for-hire carriers. However, less-than-truckload carriers and private fleets aren’t experiencing the same degree of churn. There’s obviously an expense associated with having to continually put new drivers behind the wheel. With margins already tight, it’s a tricky position.
Recruiting and Retaining Employees
Respondents to GE Capital’s most recent Trucking Industry Economic Outlook Survey indicated their top three business concerns are the cost of healthcare, the cost of doing business and maintaining margins.
We know from talking to our customers that controlling healthcare costs and increasing productivity through healthier drivers and employees are top-of-mind. We’ve seen fleets respond by working with drivers on health education programs, including assigning health coaches, having mobile medical teams conduct on-site visits to do routine screenings and vaccinations, and offering incentives to encourage healthier lifestyles.
Technology and Equipment Costs
The trucking industry has embraced technology. In 1980, practically everything was done manually. We literally had to call the credit bureaus for each company or individual who wanted to finance equipment. We were proud of ourselves for processing a credit application in eight hours. Now we’re doing it automatically in a few minutes.
Fleets are now using onboard telematics systems that have integrated wireless communications, vehicle monitoring systems and GPS devices. They’re also using trip optimization software for truck routing and scheduling, which helps improve fuel efficiency and decrease delays due to traffic congestion or construction. That’s incredibly important considering that the average private trucking company’s net profit margin is about 6%, according to a February 2014 Forbes article.
The price of equipment has spiked in the past three or four years, in part because of new regulations and technological enhancements. In 1980, a new truck cost about $35,000. Now it’s about $125,000. However, the equipment generally lasts much longer today. In the early 1980s, after 300,000 to 400,000 miles, you typically had to have an overhaul. Today, trucks can run 1 million miles without an overhaul. In our experience, the average Class 8 truck runs 100,000 to 125,000 miles per year and it’ll usually stay in the fleet for four to six years before being sold into the secondary market, where it’ll run for another few years.
Financing Trends
To help the industry cope with the higher equipment costs, we’re allowing customers to space out payments over a longer period. Our typical financing term is 36 to 60 months, but we also offer 72-month financing.
The credit markets are robust today. Generally, we see that businesses are conserving their cash and leveraging credit for large purchases like truck fleets. With the low interest rates, people seem to think it makes sense to lease equipment or finance it with a loan rather than paying cash.
Still, we believe there’s a fair amount of pent-up demand for trucks and trailers. While fleets may want to delay buying new equipment, it’s possible that the maintenance costs they’re incurring plus advancements in fuel economy could balance out the cost of new equipment. In other words, the total cost of ownership may be lower than the cost of new equipment if fleets take all expenses into account.
Natural Gas Options
We’re seeing demand for natural gas vehicles (NGVs). Eligible NGVs use either compressed natural gas (CNG) or liquefied natural gas (LNG). In general, CNG is used for commercial vehicles that run for relatively short distances, while LNG is used for long hauls. So far, we’ve seen CNG as a bigger play, primarily in the refuse space and in metropolitan areas.
The biggest challenge is that the natural gas trucks can cost as much as 30% more than diesel trucks. In some people’s views, the greater equipment cost is offset by the cheaper cost of natural gas fuel.
The buyers of NGVs today are generally the most sophisticated over-the-road fleets. In three to five years, we’re expecting to see the development of a secondary market as those fleets start selling their used equipment. At that point, smaller fleets may look at that as an opportunity to get into NGVs.
Owner-Operators
Despite the glamorized truckers in classic Hollywood movies, many owner-operators today get the benefit of fuel and insurance discounts by aligning themselves with a fleet and hauling for that fleet almost exclusively. They feel confident they’ll have freight to haul rather than sitting idle. We’ve seen fleets with so-called asset-lite business models where they depend on owner-operators to act as their fleets.
The owner-operator business model has been declared dead at least a half-dozen times during our careers. Though there are probably fewer of them today, we expect it’ll always be part of the American dream to control your livelihood. The owner-operator is not extinct, though we believe today’s business model has shifted drastically.
The Next 40 Years
We’ve been part of this industry for a long time and we’re looking forward to continuing to grow with it for the foreseeable future. We have relationships with our customers that span multiple generations — in some cases, we’re working with the fourth generation now.
Throughout the years, we’ve continued to bring talented professionals into the business, and we’ve been very successful at retaining them. The average sales representative has been with us for more than 20 years. We have a very nice pipeline of people who’ve been with us for five to 10 years too. We can sleep at night knowing that we’ve taught them the ideals that were important to our founders.
Dan Clark is president and general manager, and John Conkin is senior vice president of sales of GE Capital, Transportation Finance. Conkin is also the current president of Act 1 (Allied Committee for the Trucking Industry), which kicked off a national advertising campaign this year. Called Trucking Moves America Forward, it focuses on how the industry is critical to the national economy. For more information, go to www.gecapital.com/transportation.
