Truck attainment has been a key challenge for private fleets, for-hire carriers, and organizations that rely on trucking across many industries, including manufacturing, construction and oil and gas. This challenge has been accentuated by the backlog of orders for Class-8 heavy-duty trucks, largely stemming from an American economy that has been booming ever since the Great Recession ended in 2010, and a decrepit industry philosophy toward truck procurement which is now shifting.
Class-8 truck orders and sales continued at a steady pace through much of 2018, as many companies saw the need to upgrade into newer equipment or add to their equipment to handle the increased demand in shipping goods. According to ACT Research, Class-8 net orders equaled 506,300 units at the end of November 2018 — the second-strongest 12-month order period in history, trailing only the 12-month period ending October.
In November, class-8 monthly orders totaling 28,082 still outpaced the 27,973 trucks that were constructed. While this gap is narrowing, it continues to show extraordinary demand for new trucks.
Particularly for oil, gas and energy brands, organizations will continue to feel the negative effects of an order backlog in 2019 if they continue their asset acquisition strategy based on functional obsolescence as opposed to economic obsolescence. Businesses that shorten their asset management life cycles based on a flexible lease model will be able to plan their replacements better and thus avoid the discomfort associated with the current backlog.
The vibrant economy means that more companies are shipping materials to job sites or goods across the country. More businesses are in need of re-stocking shelves and inventory; meanwhile, more consumers are in need of goods ordered online and thus the transport of those shipments. The result — trucks are working overtime.
Trucks and transportation have been the essence of this economic machine.
Replacement and truck attainment strategies that help the economy stay active need to be carefully considered, especially when companies take a closer look at their bottom line.
The long-standing business philosophy was for companies to make massive purchase orders of trucks and drive them for anywhere between five and ten years of service, or even longer, as a way to squeeze every nickel and dime out of the truck’s usage. However, data and analytics are proving this model to be expensive and ineffective. Instead, private fleets and for-hire carriers are realizing they can achieve more savings on the truck’s overall impact to the bottom line, as well as maintenance & repair (M&R) — the highest variable and volatile cost of a fleet operation, by moving to a shorter lifecycle.
When oil and gas companies drive their trucks as long as possible, they run on functional obsolescence — making decisions based on the truck’s ability to stay on the road. In most cases, when firms let the truck command the timetable for replacement, firms are left clambering to order a new truck based on limited planning cycles. Today’s backlog of truck orders is a result of this, as the multiplier effect of many transportation firms and this philosophy have caught up to them.
Instead, today’s leading companies are taking a new approach. Organizations are now focusing on a truck’s individual TIPPINGPOINT, the point at which it costs more to operate a truck than it does to replace it with a newer model. Features such as the cost of fuel, utilization, finance costs, and M&R, are all factored into arriving at each truck’s unique TIPPINGPOINT, giving fleet operations employees and finance departments a closer look based on data and analytics into determining and predicting the optimum time to replace an aging truck.
As an example, a recent analysis of long-term ownership versus shorter life cycle management illustrates significant cost savings over time. A fleet that opted for a four-year lease model on a truck would save roughly $27,893 per truck in comparison to a seven-year ownership model because of the aforementioned factors such as fuel, utilization, financing and M&R. The shorter lease model is also cost-effective when compared to just a four-year ownership model, showing average savings of $12,710.
This approach offers flexibility to adapt to changing markets, ultimately driving down operational costs while strengthening the corporate image and driver recruitment and retention efforts by continuously upgrading to newer trucks. Companies are leveraging data analytics and wide-ranging fleet studies that produce a fleet modernization and utilization plan, projecting when aging equipment will need to be replaced. This is especially applicable with today’s fluctuating demand and the current booming economy as companies trying to acquire equipment solely based on demand are faced with equipment shortages and long lead times.
Additionally, recent changes to the corporate tax rate, as well as new accounting standards, have made it more appealing to lease equipment. With these changes, at least in the case of truck acquisition, the cost of purchasing of equipment remains higher compared to shorter-term leasing of the equipment. What’s more, leasing remains the preferred method for companies regardless if they have a stronger or weaker balance sheet. In addition, leasing also allows companies to evade the risk of residual value and the expense of remarketing.
By adopting this new outlook of shorter truck lifecycles, industry organizations and transportation companies will become better equipped at swapping out their aging truck fleets in a more cost-efficient manner as we progress in 2019.
About the author: Brian Holland is President and Chief Financial Officer at Fleet Advantage, a leading innovator in truck fleet business analytics, equipment financing and lifecycle cost management. For more information visit www.FleetAdvantage.com.
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