Trucking Industry Changes Drive Market Growth

by John Flynn November/December 2012

Remaining optimistic about near-term industry forecasts, John Flynn, CEO of Fleet Advantage, explains how the rapidly changing dynamics of the trucking industry are converging with more traditional indicators — like current fleet age and replacement demand — to drive the market.

Demand for heavy over-the-road truck equipment increased sharply during the last two quarters of 2011, and the order board quickly exceeded the manufacturers’ capacity to produce new equipment. In response to a major increase of incoming orders and an anticipated uptick in volume for 2012, the industry began increasing capacity in the first quarter of 2012 by expanding facilities through additional shifts at current operating plants.

The incoming order board weakened in the first and second quarters and did not produce enough orders to meet the added Original Equipment Manufacturer (OEM) capacity increases. To remedy what was perceived to be a short-term problem, the OEMs began building from their backlog, which has been reduced from approximately 125,000 units in January to 67,000 units in August. The backlog and lead times remain well below recent highs.

Although demand for Class 8 tractor equipment has been erratic throughout the year, we have started to see some stability returning as we enter the fourth quarter. According to ACT Research, “Class 8 net orders rose to their highest level in October since the start of the year on both an actual and seasonally adjusted basis. Seasonally adjusted, the volume was 22,900 units.” We expect strong demand to continue through the end of the year and are forecasting the Class 8 tractor build for 2012 to be between 275,000 and 280,000 units, while actual retail sales of delivered units to end-users are estimated at 280,000.

There is still a high level of economic uncertainty — particularly in the wake of the recent elections — but positive trends in the industry and underlying market fundamentals remain favorable. The housing market appears to be improving, freight levels remain positive and carriers and end-user customers continue to be profitable. In addition, the average age of the Class 8 fleet is near an all-time high of 6.7 years and the size of the truck fleet is well below the peak in 2007, which would indicate some real upside opportunity.

Even though Class 8 retail sales have returned to more normalized levels after lagging below replacement levels for the prior four years, replacement needs continue to drive demand. We expect this to change over time as replacement demand transitions to growth demand. These factors will contribute to improve metrics as the market recovers from the recent slowdown and volume starts to increase. The next few months should provide a good indication of production and demand levels for 2013.

In fact, there is growing optimism. According to a report published by CK Commercial Vehicle Research, “intentions to buy heavy trucks jumps to 62%, a six-year high.” The report further stated, “nearly two-thirds of respondents to a Fleet Sentiment Report plan to order a truck in the next three months, the highest since 2006. The 62% compares with 41% in Q3 and 52% a year ago. While year-end improvement in orders is typical, buying optimism may support higher Class 8 orders heading into 2013.”

Economic Obsolescence Versus Functional Obsolescence

New truck technologies are advancing at a rapid pace and are drastically impacting how well-informed fleet operators acquire, operate and manage their equipment. These advances — taken in conjunction with rising fuel and maintenance costs – are causing the market to recognize the difference between “functional obsolescence” and “economic obsolescence.”

According to the traditional definition, items become functionally obsolete when they no longer function in the manner for which they were originally intended. This definition conforms to the manner in which many companies have historically managed their fleet’s lifecycles. That is, they run their trucks to functional obsolescence or “until the wheels fall off.” Today’s technologically advanced trucks will easily operate in excess of a million miles, but just because you can, doesn’t mean you should!

Replacing the traditional functional obsolescence lifecycle management model with a more efficient economic obsolescence approach is by far the quickest and most economical route to achieving cost reductions and corporate sustainability goals. This may also have a considerable effect on increased demand.

Leading fleet operators are now embracing the concept of economic obsolescence, which considers external factors — including Big Data — in determining each vehicle’s most economical lifecycle. Although a truck may not be functionally obsolete, it may be economically obsolete due to changes in technology, safety features, emissions, maintenance and fuel costs.

If you could upgrade a truck that is delivering 6.3 MPG to one that is delivering 6.8 MPG, why wouldn’t you? At 100,000 miles per year, the savings are over $4,600 per year using the last 12 months’ rolling average of per gallon diesel cost.

Environmental Obsolescence

Newer emissions technology and recent information on health risks are giving fleet managers a new perspective on environmental obsolescence that may also affect demand for new trucks. From 2000 until 2010, the federal government placed numerous mandates on OEMs to reduce harmful emissions including particulate matter (PM) and nitrogen oxides (NOx). This required significant investments in R&D and resulted in OEMs exceeding the mandates and ultimately led to the development of Clean Diesel Technology.

Today’s Clean Diesel engines have reduced harmful emissions by over 93%. On a comparative basis, one pre-1990 Class 8 tractor emits the same amount of PM and NOx emissions as 60 2010 compliant Clean Diesel tractors. This means that older heavy truck equipment is also environmentally obsolete.

In June of this year, the World Health Organization declared diesel exhaust emissions to be a known carcinogen in the same category as asbestos, arsenic and mustard gas. Due to the availability of Clean Diesel Technology, fleet operators — through careful planning — can address this lingering threat by quantifying their current emissions and developing a plan to reduce emissions from their transportation fleets while simultaneously generating cost savings and an excellent return on capital. According to the Clean Air Task Force, an estimated 21,000 Americans die prematurely each year as a direct result of dirty diesel exhaust emissions. Diesel exhaust emissions also contribute to non-fatal cases of lung cancer, heart attack and stroke.

New federal regulations require mandatory reductions in Carbon Dioxide (CO2) emissions by 2017. Since diesel fuel emits 22.2 pounds of CO2 regardless of the manner in which it is burned, the only way to meet the mandates is to reduce fuel consumption. So compliance with the new regulations to reduce CO2 emissions can only be accomplished by increasing a truck’s MPG. A .1 MPG improvement at 100,000 miles also saves about $1,000 per year.

Managing Costs

Other than driver salary, the three most significant cost components to operating a Class 8 tractor are fuel, maintenance and repair (M&R) and depreciation and interest (D&I). For a new tractor, the annual cost breakoutis 76% fuel, 2% M&R and 22% D&I. For a five year old tractor, the annual cost breakoutis 72% fuel, 12% M&R and 16% D&I. The clear cost driver for any age tractor is its fuel expense. Moreover, fuel costs usually amount to six to eight times the truck’s capital cost outlay over a typical lifecycle.

With the cost of fuel outweighing the other expenses and OEMs building tractors with better MPG year over year, the tipping point to a lower cost of ownership means accelerating the replacement cycle to capitalize on year-over-year efficiencies. Tracking metrics on fuel is paramount to maintaining lower operating costs and proper lifecycle management.

Many fleets utilize third-party on-board computers to record and disseminate information coming from truck engines. Much of the data captured relates to tractor performance, utilization (including mpg information) and driver habits. This influx of large amounts of available data is also referred to as “Big Data,” and is changing the way forward-thinking companies make decisions regarding their fleets and drivers.

Using Big Data at the Truck Level
Truck fleet managers don’t need more information; they need useful and accurate information to achieve the lowest cost of ownership and meet corporate sustainability goals. New technology combined with Big Data offers information that was previously unavailable. This data — when properly interpreted and applied — will dictate the lifecycle of the asset and can be predicated on metrics such as return on capital employed instead of the arbitrary methods now used to determine how long to operate a truck. By understanding and managing costs over the truck’s lifecycle, companies are able to determine the optimum point when it is most cost effective to replace an asset, thereby maximizing efficiency, minimizing overall costs and avoiding economic obsolescence.

The Road Ahead

We continue to be optimistic about near-term industry forecasts. The dynamics of the trucking industry are changing at an accelerating pace. Technology, economic obsolescence, government regulations and the availability of Big Data are converging with more traditional indicators like current fleet age, and replacement and growth demand to drive the market. Many industry experts believe the current fleet age can be reduced by one to two years from its current all-time high. Doing so would significantly increase demand above the current replacement demand and provide strong industry growth for the near-term and the future. Of course, it all depends on the economy.

John Flynn is CEO of Fleet Advantage, a provider of truck fleet business analytics and equipment financing. In 2011, Flynn was awarded the Florida Ernst & Young Entrepreneur of the Year award in the “Emerging” category. The award recognizes entrepreneurs who demonstrate excellence and extraordinary success in such areas as innovation, financial performance and personal commitment to their businesses and communities. Fleet Advantage serves as an off-site analytics department for fleet clients, delivering data capture and intelligent interpretation. This IT, combined with the company’s equipment design and engineering capabilities and flexible financing, gives clients a rapid response strategy to meet changing market and regulatory conditions.

 

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