One headline screams, “Truck orders are up.” Another says, “Truck orders are down.” A third claims, “Truck sales are up.” While still another indicates, “Truck sales are down.”
It is hard to know what to believe about the state of the trucking industry today. After studying data from the Department of Transportation’s Bureau of Transportation Statistics, I can tell you this: looking at the adjusted truck tonnage number from 2010 until today, you will see that truck tonnage is up significantly over the past several years.
The conflicting headlines we are seeing are a result of analysts evaluating very short-term market reactions and not focusing on the long view. It’s almost as if we have become day traders in the equipment sales marketplace. Consequently, they make a case for the market being up or down for a given short period of time.
I prefer to take a longer view of the trucking market. After speaking to executives at a major truck manufacturer, I learned that new trucks sales are not just being generated by large fleets, as some analysts think. Financially strong mid-sized and small fleets are making purchases as well.
Basically, for the past several years, we have seen fleets return to their normal buying patterns.
But that doesn’t mean all is rosy in trucking. Last year we saw a significant increase in the number of bankruptcies by for-hire carriers and those carriers tended to be the smaller fleets. I think we will continue to see this occur as the industry becomes burdened with the new electronic logging device mandate, and because of the trend toward higher efficiency standards and the increased complexity of new equipment. Although this is tough for smaller carriers, it will improve the overall health of the industry.
The biggest headline for the transportation industry concerns what is happening in the retail sector caused by changing buying habits of consumers. Retailers are changing their business models, as more and more people turn to on-line purchasing and away from in-store shopping. Investors are pulling out of retail stocks, and retailers are desperately trying to keep up with the Amazon model of online sales
This shift in buying patterns, as well as a shift to domestic manufacturing, and the change in global shipping patterns will have a profound impact on the trucking industry. Last mile delivery is going to become more and more important and at least two truck manufacturers — Navistar and Volvo — recently introduced what they are calling regional haul tractors.
These truck manufacturers know that the shift in retail buying means we are going to see a trend away from the high mileage sleeper fleets and the growth of local or regional day cab type trucks. They are preparing for the change now and are saying in effect to their fleet customers, “Look, you need to have vehicles that fit this application.”
Given this developing change in shipping patterns, it is no surprise that medium-duty trucks sales have been trending up over the last seven years. In general, that segment of the market tends not to have the same volatility as the Class 8 heavy truck market.
In general we are seeing Class 5, 6 and 7 medium-duty straight truck sales growing year-over-year. With the steady growth, the resale values of used medium-duty trucks are very strong. It used to be that at 150,000 miles, the price of a used medium-duty truck would fall off a cliff. Now, used medium-duty trucks with 200,000 to 250,000 miles on them are selling for values equal to the historical values seen on the trucks with 150,000 miles.
Larger fleets, which in previous years may have added (and financed) some used trucks, are back to buying new equipment. This is true in part because we have seen new truck prices come down or stay flat since 2016. In an effort to fill order boards, truck manufacturers offered special pricing through June of this year.
A likely price increase is coming later this year as roll stability comes into play for heavy trucks. That technology will increase truck prices a bit — figure about $1000. However, year-over-year truck pricing is flat, which means fleets are less likely to look to the used truck market. This is a really interesting time to be involved in the trucking industry because we are not seeing price pressure on new assets.
I would be remiss if I did not touch on trailer sales. For the past 10 years, trailer sales have been like the medium-duty truck market in that they have been experiencing steady growth year-over-year. The value of used trailers is just short of amazing. I am seeing 10-year-old trailers selling for almost 40 percent of their new value. Again, as you start to look at the change in consumer buying habits, you can see huge growth opportunities for “mobile warehouses.” There are already large companies that are opening up regional distribution centers and then having a lot of trailers all over the country loaded with product ready to be delivered just-in-time.
Another big trend I am seeing is the increased focus on safety through technology. Safety is one of the biggest selling points for new equipment buyers, starting with car buyers and moving all the way up to fleets purchasing Class 8 tractors. Technology around safety is becoming “a must have.” Things like lane departure warning systems, forward-looking cameras, and collision mitigation systems are quickly being adopted by truck fleets even more quickly than by the car buying public despite their price tag.
Safety technology is one of the reasons fleets don’t want to get into older used trucks. They want to make sure their drivers are equipped with the necessary tools to safely deliver their cargo. These new technologies are becoming the seatbelt of the future, using them will not be optional.
As for alternative-fuel vehicles, low diesel fuel prices have stifled their growth to some extent. Because alternative-fuel vehicles are still in their infancy, we don’t have a good handle on their true operating costs. These trucks are just now entering the secondary market, so we don’t have enough information on what kind of value they will garner at the resale level. That lack of knowledge is muddying the waters as more and more fleets are focusing on total cost of operation (TCO). Not having data on the resale value of alternative-fuel vehicles makes it impossible to do a proper TCO analysis.
My advice to the financing community is to take trucking industry headlines with a grain of salt. Look at the time span represented by any order or sales trends you see. I believe fleets will continue to engage in their normal equipment replacement cycles. They will continue to chase new technology because the entry cost of the new equipment is not a barrier at this point in time. We are going to see a slow, upward trend in financing opportunities for the remainder of 2017; and beyond this year looks even better.
Interest rates are exceptionally reasonable right now, which is another incentive for fleets to purchase new equipment as is the fact that freight rates are staying fairly consistent. Of course if the current administration’s tax programs go into play, we will see an explosion of growth in the economy. If corporate tax rates are lowered there will be an abundance of cash and financing capabilities.
Clearly, financing favors companies with strong credit ratings. However, some lenders may be feeling pressure from shareholders to increase their margins. And the only way to increase margins is to dip down into lesser credit and take on more risk.