As 2018 kicks into gear, AmeriQuest’s Patrick Gaskins takes a look at the year ahead and gives important information and advice on the tax situation, interest rates, equipment deliveries, used equipment technology and asset replacement.
As we kick off the New Year, we are faced with sweeping changes in both the tax system and equipment technology. If you have not already evaluated how these changes will affect your business, now is the time to do so before it’s too late.
Right out of the gate, the new tax bill does a couple of things. First, it reinstitutes 100% bonus depreciation where companies can depreciate 100% of the asset’s value for tax purposes in the first year. This added depreciation benefit gives business owners and equipment lessors the ability to reduce their taxable income. This should drive lease rates lower.
Second, the corporate income tax rate was dropped from 35% to 21%. This is an overall benefit, but it also counteracts the 100% bonus depreciation benefit. The reduction in corporate tax rates reduces the impact that a lower taxable income has on the financing of equipment. Updating your lease versus buy model and evaluating return on asset (ROA) as well as cash flow is critical under the new tax policy.
In 2017, the Federal Reserve raised interest rates three times and the forecast is that they are going to raise the rates another two times in 2018. This means the overall trend for the economy in 2018 is good. In fact, I forecast a very robust year in the equipment lending and manufacturing markets.
Overall, software and equipment deliveries are forecast to grow at a rate of more than 9%, according to the Equipment Leasing and Finance Association. The ELFA expects moderate growth for over-the-road trucking, but I am more bullish on the sector’s growth. We are going to see moderate to aggressive growth in the transportation equipment sector as more companies take advantage of new equipment technologies, which make their fleets safer, more efficient, and allow them to attract drivers.
The used truck inventory is still somewhat over capacity, but used vehicle sales are strong. And while we are not seeing growth in the used vehicle inventory, we are seeing a slow sell-off of existing inventory. As the used equipment inventory starts to diminish, we are going to see the price of used equipment increase. As used truck values go up, it will help keep payments on new assets lower.
I should note here that while the Class 8 vehicle market is cyclical in nature, the Class 5-7 market has had a steady growth rate over the past 10 years. The medium-duty market will continue to grow at a measured if not accelerated pace due to the lack of CDL drivers. As we see continued consolidation in carriers, and the increase in tonnage, capacity will be stretched, opening the door for smaller companies to grow. American Trucking Associations expects goods hauled by trucks to grow 3.4% in 2018 and beyond.
New technology in vehicles is growing at an exponential rate and will continue as market acceptance grows. Electrified vehicles have been in the news a lot lately, but I believe we are still a ways off in terms of market-wide acceptance and use. However, once they prove themselves, I think we will see a hockey stick style growth curve.
Technological improvements in the area of safety and efficiency on diesel-powered trucks, such as lane departure warning systems, passive and active cruise control, and collision mitigation systems are being spec’d more often. What is ultimately going to drive the widespread acceptance of these technologies is the fact that insurance companies are going to demand them. In addition to the pressure from outside influencers, fleets will start to realize that if the investment in these safety technologies prevents one fatal accident, they will be ahead financially.
As all these technological advances hit the trucking industry, fleets are going to need someone with them arm-in-arm who can help them determine what to invest in. They need someone to help them answer the question, “Do I want to invest in platforms that are proven or do I want to be on the bleeding edge, investing in the most recent advances?” It is critical to have a trusted asset management company as a partner to assist in the evaluation of new technologies. Larger fleets are better positioned to take risks with unproven technologies; the smaller fleets may want to wait until the market has tested and approved the technologies before venturing into unknown waters.
AmeriQuest will continue to coach fleets to take a measured approach to asset replacement. Minor adjustments in asset lifecycles and the implementation of technology will yield significant savings. If you have the fleet size and wherewithal to test new technologies, then slowly adopt some of them and see how they perform in your application. If you are a fleet with 20 or 30 trucks in your fleet, then you have to nibble away at the new offerings. Technologies like automated transmissions, lane departure warning systems and active cruise control are becoming the standard. If you operate straight trucks, I offer this advice: When replacing equipment, specify non-CDL equipment. If you have to spec CDL equipment, consider a single axle tractor and a short trailer rather than a tandem axle straight truck. The used truck market for tandem axle straight trucks is diminishing due to driver availability, and you will not get good value for your used truck on the secondary market, making your total cost of ownership higher.
The bottom line when it comes to assessing the state of the equipment financing market is that you cannot look at each of these factors on an individual basis. At AmeriQuest, we counsel our clients not to look at each factor as one thing unto itself, but rather to look at all the factors and their combined impact on your business. Be aware of all the levers — interest rates, new depreciation rates, corporate tax rates, technology developments, the used truck market, the cost of fuel and your anticipated logistical needs. Ask yourself how do all of these things affect the way you acquire, finance, manage and dispose of assets over the next three to five years. Develop the optimum plan for your fleet with all these factors taken into consideration.