Article

Will Fleets Pre-Buy?

Anticipation of 2010 emissions regulations could cause fleets to pre-buy equipment, but that might only weaken the market.

October 2008, TruckingInfo.com - Feature

by Steve Sturgess, Executive Editor

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Predicting the heavy truck market for 2009 is anybody's guess. There are just so many variables in the equation. Many we can make educated guesses about. The big one, though, the overall health of the economy, just does not want to give us a clue. As this is being written, more turmoil on Wall Street and a faltering in Europe seem certain to push America's economic recovery even further down the road.

At the beginning of this year, Kevin Knight, chairman and CEO of Phoenix-based Knight Transportation, said at the Qualcomm users meeting in San Diego that the 2006 pre-buy was a disaster. In his estimation, any savings fleets made by pre-buying trucks to avoid the extra costs of new technologies to meet 2007 emissions regulations were more than given away by the excess capacity created.

Also at that meeting was Kirk Altrichter, vice president of maintenance for Gordon Trucking, Pacific, Wash. When asked about his fleet's plans for 2009/2010, he said he thought Knight was absolutely on track with his observations, and also agreed with Knight's assertion that fleets must purchase trucks out of revenues.

"I don't think anyone has the money to make equipment purchases to support a pre-buy," said Altrichter in an interview for this story. "I believe Kevin Knight said it right last time we met: that you need to finance purchases out of profits, and no one is making enough money in the high fuel price environment to do that. And in the current credit environment, I can't see any banks lending money to finance such purchases."

The aftermath of the 2006 pre-buy was worsened by an economic slowdown, already in evidence at the time. It has been stubbornly resistant to efforts to turn it around and has only worsened in the interim. And that surplus truck capacity has been a drag on the market, holding down freight rates so that any gains made by the fleets in pre-purchasing to avoid equipment costs and technology uncertainty was totally wiped out.

What lessons does that bring to bear on 2010?

The only bright spot has been the inability of less well funded fleets than Knight and Gordon to weather the economic downturn and the high price of fuel. Record numbers of failures are squeezing capacity out of the market right now and leading to a measure of balance.

Whether that scenario will hold up is anybody's guess. Fleets we talked to were not at all bullish.

"My last large project was to downsize the over-the-road portion of our fleet by 50 percent," wrote Terry Haas of Haas Cartage, carrier for Haas Cabinet, just before his retirement. "Even though our empty miles have been in the 10-11 percent range, we weren't getting enough revenue to cover those miles and make the trips profitable." Haas was selling the tractors and trailers the company no longer needs.

"We are affected like everyone else in the transportation part of our business," wrote James Herman with the private fleet for Perdue. "We also have had to tighten our belts due to increased commodity costs for our products. Because of this, we have taken a hard look at replacing equipment. If it needs to be replaced, we are doing that. But if overall costs are good, we will put off replacing it. So our total purchases are down some, and only existing equipment will be replaced with no expansion at this time."

There are a few pockets of good news. One is Garner Trucking in Findlay, Ohio. "We seem to be one of the few fleets that are adding units for growth, said James Husted, director of maintenance. "We have just put in service 30 new Freightliners. Of these, 25 are for replacements and five growth. We now have on order five more Columbias and one more Cascadia, all for growth," noting the company is adding a new terminal, which will start out hiring about 10 drivers. "For 2009 we will again be replacing about 20 more units and look to add another 10 or so for growth."

For the most part, however, especially for the bigger carriers, just maintaining is the name of the game. At flatbed hauler Maverick, where a little downsizing helped capacity last year, the established trade cycle will dictate purchases. "(Flatbed) business is slow, but the 500 planned purchases is on target for replacement," said Mike Jeffress, vice president of maintenance. "And from our perspective, we don't view this as a pre-buy, We're scheduled to have 300-400 for trade in 2010 and I'm sure we'll hold with that," he added. "We did look at extending the trade cycle and extend the 48 months by a year, but maintenance costs escalate beyond that point. When we weighed the numbers up, we decided to stay with our long-term decisions."

This supports the conclusion that all those trucks that created the over-capacity situation in 2007 were bad for the industry. But they have been in service since mid- to late 2006 and will need replacement in the 2009/2010 timeframe, stimulating sales a little. The fleet average age is up, even though annual mileages are down, and equipment will be getting old. By conventional fleet turn numbers, many trucks will be ready for replacement.

And those trucks will be "good used" and worth something as trades against mid- to late 2009s. That's new equipment but old technology - and who would ever have thought of 2007 technology as being "old?" Roy Gambrell, director of maintenance of Franklin, Ky.-based Truck It, says he'll be on the lookout for some replacement equipment in early 2010, but will be looking for 2009 power.

TECHNOLOGY

Just maybe, 2010 will be the good news. There's an indication that most new trucks in 2010 will deliver better fuel economy - in the order of 4 percent to 5 percent improvement through the use of selective catalytic reduction exhaust aftertreatment. And that brings in to play the other great unknown: What will happen to fuel prices?

If fuel is $5 a gallon, the payback for the post-2010 technology will be realistic. If it is $2.50, the additional cost for an SCR tank, pump and electronic control system may never be recovered during the first use of the truck.

Here's how Gordon's Altrichter sees it: "As far as promises for better fuel economy (from SCR engines) after 2010, you'd have to run the numbers to see what the realistic position would be. If they deliver 5 percent, that's $5,000 a year in fuel savings or $20,000 over the life of the truck," he said. "[You've] just got to look at the numbers and if they work out. You'd be a moron to not take advantage of the fuel [economy] gains."

Marty Fletcher, director of technology for U.S. Xpress Enterprises, said there was no pre-buy in his plans, though 2010 may hold out promise. "As you know, we pre-bought a lot in 2002 and 2007. We don't plan to for 2009 - though that could change in a heartbeat depending on the general economy," he said.

Fletcher notes that one school of thought is to consider waiting until 2010 because of the potential fuel economy gains. "We are currently purchasing the latest NOx certification - the '07 and later engines from the three different manufacturers - and we won't have urea technology (to look at) until closer to 2010. If it's possible to move to that technology earlier, we might consider putting our trucks there if we can get them to get the better efficiency earlier. But there are infrastructure concerns. We don't know if SCR urea (diesel emissions fluid) will be available in totes, drums or even if fuel stops will have it. We want to get the fluid at the same places as the fuel stops."

That concern is echoed elsewhere. "I don't have any particular concerns for SCR or the urea aspect of it," said Maverick's Jeffress. As far as infrastructure, I don't know that's been clearly defined. Since all our fuel is purchased through the truckstops, availability [of diesel exhaust fluid] is a concern."

Causing yet more wait-and-see in the early part of the new technology environment will be driver acceptance of 2010 equipment. Some fleets will do anything to avoid putting another chore on their drivers' work list. The task itself - adding another fluid at every three, four or five diesel fills - is not arduous or in the least distasteful. However, there have been mutterings that Teamster drivers are not going to handle "urine."

With no good news for 2009, uncertainty about a smooth transition to 2010 can only cause further concern among truck manufacturers desperate for some encouraging news.

SHIPPER PRESSURE

The early adoption of newer emissions limits and improved fuel economy is a much wider concern than just the trucking industry. When it becomes a shipper concern, then carriers may look to adopt new technologies earlier than they would otherwise.

The EPA's SmartWay Transport Partnership brings together trucking companies and shippers in a push-and-pull to save fuel. SmartWay certification through efficient equipment purchases earns carriers access to SmartWay shippers. Shippers, too, have more reason than ever to encourage carriers to be frugal, because they want to see what carriers are doing to lower the impact of these pass-along fuel costs.

But shippers are also trying to be green and establish procedures to lower their carbon footprint. If a carrier can be an early adopter of 2010 technology and demonstrate both fuel economy benefits and improved emissions performance, that can stand it in good stead with the shipper community.

RECONFIGURING

U.S. Xpress is one of the fastest technology adopters out there. But it is also very nimble. Fletcher says the company has changed its whole paradigm, which has led to a change of equipment as a shift to more regional operations and more intermodal business dictates the acquisition of day-cab tractors. "The changes to more regionalized freight mean different equipment specs, different cycles. Day cabs for instance, we'll keep out there for longer years; they run less miles."

In this case, it's not the next level of emissions that dictates changes in purchasing, "it's changes in operation," he says.

Similar reconfiguration is pushing equipment acquisition at an otherwise steady business at Batesville Logistics, the private fleet for Indiana-based Batesville Casket Company. "Batesville Casket is like many other fleets in that we are only replacing, and not adding power equipment," says Keith Hazelwood, manager of fleet maintenance. "The difference between BCC and other private fleets are that we are in a transition on how we deliver our product. BCC is starting to move more towards the use of 53-foot trailers instead of 28-foot pup trailers. There are advantages to the 53-foot trailers such as more capacity, increased backhaul opportunities and the purchase of one asset instead of three (two pups and a dolly). While our fleet has not increased in size, today's environment is going to change the way companies are going to deliver product."

Today's environment is one of great uncertainty, where trucking fleets have to be extra cautious when it comes to new equipment purchases. The last word goes to Jeff Floyd, president of Sycamore, Ala.-based Floyd & Beasley Transfer: "At this point we are going to stand pat and only buy when and if it becomes totally necessary, and that will be strictly on a replacement basis and when there is absolutely no other alternative."

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