Lake Success, NY-based Advantage Funding is a leading non-captive lender to the U.S. ground transportation industry.
The consensus is in: Growth opportunities in transportation finance abound and are available across the board.
Editor’s Note: This is based in part on a panel discussion led by executives from Advantage Funding, TCF Equipment Finance and Residco on trends in transportation finance at the annual ELFA Conference in October. The following entry summarizes and analyzes points brought out at the session and also comments on later releases of relevant industry data.
Transportation finance is an enormous asset category with numerous sub-sectors and nuances, but the consensus on the subject at the 2014 ELFA Convention in San Diego was solid and sweeping: Growth opportunities in this sector abound and are available across the board.
Whether discussing trucking, specialty vehicles, corporate aircraft or rail cars, panelists at the “Trends in Transportation Finance” special session agreed that we all face similar opportunities — and similar challenges.
Gary Peterson, executive vice president and CEO of TCF Equipment Finance, observed that in the U.S., the transportation sector employs 16 million people, represents 10% of the GDP and generates $1 trillion in annual revenues.
A business category of TCF Equipment Finance is commercial trucking, and Peterson said demand created a 2% revenue increase in 2014 over 2013, with new truck sales sharply higher and used truck pricing solid heading into 2015. Peterson’s outlook for 2015 is optimistic because, as he noted, approximately 70% of all freight shipped in the U.S. is delivered by truck.
Since the ELFA gathering last year, additional data released by the U.S. Census Bureau has led to further optimism. For example, an Advance Report on Durable Goods Manufacturers’ Shipments, Inventories and Orders showed transportation equipment leading an overall increase in unfilled orders to $746 billion in October. Transportation equipment also led an increase in inventories of these goods, up 18 of the last 19 months, to $131.7 billion.
In other developments, the U.S. Department of Transportation recently reported that the nation’s Freight Transportation Index had risen a whopping 27.8% above that of April 2009, the lowest index point reported during the Great Recession.
Speaking to the challenges of continuing to serve and grow the transportation finance market segments, those on the ELFA panel identified the following as key drivers of demand:
1. Customers have entered a major equipment replacement cycle, exhibiting considerable pent-up demand to upgrade or replace aging transportation assets. At Advantage Funding, for example, small- to middle-market clients say they are unable to obtain from banks the same positive responses to their funding needs.
2. The oil and natural gas boom continues to demand more equipment for over-the-road and rail transportation.
3. New safety and efficiency technologies, as well as regulations requiring eventual upgrades to these technologies, are driving the manufacture of new transportation assets, such as double-wall railcars.
4. Manufacturers and business owners are more sophisticated than ever, understanding that their assets are revenue-generating, and need not be owned to do the work required.
5. The economy continues to recover, producing a growing need for vehicles and rail cars to carry grain shipments, sand, water and a multitude of other products. In commercial aircraft, the recovery has spawned an increase in investors who are rebuilding the securitizations market.
To take advantage of these opportunities and meet accompanying challenges, transportation equipment finance firms must continually evaluate technology and the regulatory environment as key business factors. For example, fleet management systems that help track drivers and manage maintenance are now in demand. Also gaining attention is technology automatically allowing trucks to manage the braking or acceleration of another company truck immediately behind it. Availability of such technologies points the way to our future.
Sahil Patel, director of capital markets at Residco, a firm specializing in the finance of aircraft and railcars, said regulations will soon be implemented that require rail cars carrying flammable liquids be retrofitted with thicker walls for safety. Of the 92,000 such cars now on the rails, Patel estimated that more than two-thirds will need retrofitting. Even so, he anticipates higher lease pricing and the current 4% growth rate in the rail car industry will keep this business strong.
Despite, or perhaps because of, recent successes and current optimism, panel members also discussed the importance of diversification in managing risks not easily forecasted. Advantage Funding finances vehicles ranging from vocational trucks to motor coaches. We also partner with manufacturers and dealers to finance specialty vehicles. Increasing business volume and relative low cost of funds make profitability in these markets stable. But we don’t have the same sources of market data as certain other transportation segments, so our own experience and careful credit considerations are critical.
We at Advantage Funding do see increased competition and new trends such as Uber and ride-sharing businesses as factors disrupting parts of our market. But we also believe these developments represent new opportunities for equipment financing. As this entry was being written, we learned that Uber has formed an agreement with a Chinese investor.
Nonetheless, panel members remain optimistic, forecasting 2%-4% growth for our markets in 2015, consistent with the U.S. GDP forecast. Demand is so high in rail that cars ordered now won’t be delivered until the third quarter of 2016 or later. Truck finance is also stable and growing, although insurance costs are rising and competition is heating up. Competition, after all, is to be expected in a growth market. And judging from the size and interest of the audience at our panel session, we’ll be seeing more of it in the future.
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