There’s no doubt that we’re in an economic period where leasing a new Class 8 truck is a good idea. But the best approach to a fleet replacement strategy is taking a thoughtful, long-term, strategic approach.
When a disproportionate number of new units enter a fleet over a very short period of time, it can throw off the balance of older models and new in terms of average fleet age. This can lead to inconsistent and possibly increased maintenance expenses down the road.
Last year ended as the second-best year on record for Class 8 truck orders. The number of incoming orders was about 10,000 less than the all-time-high mark in the year 2004. This is a great sign of an economy rebounding from the recession and good news— for now at least — for trucking fleets and manufacturers.
It should also be good news to those of us working in asset management and finance. And it is. But my concern is that the surge in orders will disrupt the ratio of new and older model trucks in the fleet. This has been a consistently inconsistent cycle in the trucking industry.
There will be one to two years where there is a massive influx of new equipment and the next two to three years are marked by reductions in new equipment orders and slack demand. This cycle — along with driver and technician shortages — make long-term fleet planning critical.
It’s for that reason that we highly recommend that fleets adopt an asset replacement strategy that assures that the average age of equipment remains fairly consistent. In most instances only minor changes are needed to achieve significant savings. Evening up fleet aging brings with it many benefits, including spreading maintenance expenses out more smoothly, giving technicians time to adapt to new technologies and managing warranty claims to put the bulk of needed repairs back into the truck dealer’s shop.
The list of other benefits that come with even fleet aging is long and deserves serious consideration. Here are just a few:
Predictable Resale Value: If you’re going back to the market with a steady number of vehicles each year — ideally 20 percent of your fleet — the effects of supply and demand are tempered. If you take too many trucks to market at one time, normally the resale price goes down. With a strategy to sell a predictable number of assets each year, the fleet can develop a consistent pool of used truck buyers and maximize their resale value.
More Effective Budgeting: With a strategy in place to foster even fleet aging, fleets realize the financial benefits and cost controls that come with predictable budgeting. By maintaining a consistent replacement cycle, both fixed and variable costs become more predictable, and a fleet will avoid large year-over-year swings in their Total Cost of Operation.
Improved Fuel Economy: Fleets that cycle in new vehicles every year also benefit from new fuel-saving technologies that have recently shown improvement with each model year. And while the downward trajectory of diesel prices is predicted to continue this year, fuel costs still remain the most significant cost metric for any fleet. (The U.S. Energy Information Administration is forecasting the price of diesel fuel to run an average of $3.07 this year.)
With even a one-mile-per-gallon improvement, for a fleet of 500 vehicles with 100 new units running 100,000 miles a year, the savings on those 100 trucks can total northwards of a half million dollars in fuel costs. Fuel economy is the primary driver of shorter trade cycles in today’s market, but fleets must keep their eye on the long-term fleet plan and have contingencies in place should fuel economy improvements flatten.
So, yes, this is a great time to be a truck manufacturer or the owner or lessee of a brand new Class 8 truck. But fleet owners contemplating adding new trucks into their fleets should remember that the best approach to a fleet replacement strategy is taking a thoughtful, long-term strategic approach.
About the Author: Patrick Gaskins is vice president of Financial Services with AmeriQuest Transportation Services. He has nearly 20 years’ experience as a financial services professional in the transportation industry. His blog posts appear at www.blog.nationalease.com.