Patrick Gaskins, senior vice president fleet solutions at Corcentric Fleet Solutions, reports on what could be the most volatile economic environment in quite some time. What effects will the failure of major banks have on the equipment acquisition and finance market and what that means for asset lifecycles?
We are in one of the most volatile economic environments that we have seen in quite some time. Who could have predicted the failure of two major banks? The news surrounding Silicon Valley Bank and Signature Financial have made some people nervous and have sent officials at other banks to their “war rooms” to look at worst case scenarios and how they are prepared to weather them.
So how does this affect what we do in the equipment acquisition and finance market, the sale of used trucks and asset lifecycles? Rising interest rates make fixed operating costs of trucks higher. That means fleets must either increase their asset utilization or extend the lifecycle of the asset in order to spread the increased fixed cost over a longer period of time and/or more miles.
At the same time, we are seeing incremental gains in fuel economy on new assets. If fuel is at $6 or $7 a gallon the incremental gain in fuel economy will swing the pendulum over to a point where fleets will want to replace current assets with new assets to capitalize on the fuel efficiency gains of the newer assets. Unfortunately, this is not the case with $2.75 per gallon diesel.
You can see that this puts fleet managers on a teeter-totter with increases in fixed costs and variable costs being opposite forces. That leaves them wondering how they balance asset lifecycles given these two market forces.
Just as banks are in their war rooms, fleets need to hunker down and play the “what if” game and stress test their operations based upon various scenarios. Those scenarios need to include awareness of upcoming environmental regulations surrounding zero-emissions vehicles. At this point battery electric vehicles have a significant cost premium over diesel-powered trucks and also have a significant weight penalty. (The weight penalty is offset by a 2,000 lbs. weight exemption.)
At the end of the day, fleets are seeing asset costs going up along with rising interest rates and increases in driver pay. For smaller fleets, this can lead to a decision to close their doors and sell their assets to larger fleets. Remember that 85% of freight is hauled by fleets with 10 trucks or less so small fleets exiting the market will change market dynamics and give the remaining larger fleets more leverage when it comes to determining freight rates.
Regardless of fleet size, given the dynamics of the market, fleet executives need to be on their “A game” to ensure they do not get caught with a massive expense, especially if five years ago they misjudged the residual value of assets in today’s market.
Fleets need to be working with their finance company to stress test their business and financing models. It is time to begin having conversations surrounding what to expect in 2024 and 2025 with respect to equipment coming out-of-service and what the residual values for those assets will be. Today, fleets need to try to determine what their exposure is in terms of residual values and make plans for offsetting any potential downside exposure.
The good news in all this is that the transportation industry in general is financeable because it is vital to the nation. Segments will go up-and-down, and there may even be some bankruptcies, but freight transportation is always going to be necessary. Ultimately, the one market factor that drives all decisions is freight volume. Forecasted freight volume must be considered in all of your future fleet planning.