Serious imbalance in Class 8

WHILE THE CLASS 3-5 truck market will see the greatest gains and the Class 6-7 market is improving steadily, Class 8 has the most serious imbalance, according to Martin Labbe.

In his truck market outlook at the National Truck Equipment Association's Economic Outlook Conference in Dearborn, Michigan, Labbe said the Class 8 used truck market will be further impacted by the issues surrounding the 2007 emissions standards.

“You can't keep Class 8 trucks on the lot,” said Labbe, president and CEO of Martin Labbe Associates, a transportation information consulting firm. “Remanufacturing engines should become more common. There are truck fleets out there who are training people how to re-man engines. This engine issue is a nightmare.”

Labbe said the period of ownership will increase for new trucks, and it won't be uniform by fleet size, GVW, or region, nor will it be a short-term issue.

He said the first-owner population (trucks five years old or less) will go up by 40% in four years, and the primary second-owner population (six to 10 years old) will decline by 13% in four years. The result? “Far too many used trucks are heading to the market, and will be for some time,” he said.

His Class 8 use changes: greater average annual miles for purchased new and leased new; engine impact will increase lifetime miles for current equipment; may pressure fleets to increase in-shop service; and private carriage will grow until for-hire solves the labor issue.

His Class 8 tractor fleet profile: increased consolidation (“to increase fleet size, they have to buy other fleets because of a driver shortage”); increased specialization; driver shortage occurred early in 2005; and reliability is a key issue at the moment.

“Unscheduled downtime is a problem,” he said. “If they're in the middle of a trip and dropping a load off and they have a problem, and they're penalized if the load doesn't get there in a period of time, they have a real issue. A fleet can handle an increase in fuel prices.”

Class 6-7

Labbe said the Class 6-7 market's steady improvement is based on the fact that it is an “efficient market” right now.

“That equipment continues to improve over time,” he said. “I have an outlook that says we'll have a spike in Class 7 demand because the 4×2 tractor is going to get attractive with the fuel prices, and people decide they don't have to have a 6×4 piece of equipment to randomly move freight once in a while.”

He said the first- and second-owner populations both will grow by 3% in four years, resulting in “plenty of equipment for the second owner, with low mileage and high economic life.”

Total miles are increasing by 10% per year due to Class 7 tractor population in that group, adding that straight trucks are not growing by that rate. He believes housing will stabilize demand for short-haul service applications and regional distribution will continue to increase.

There will be a slight increase in fleet size, he said.

“A lot of them are leasing 1.5 vehicles on average per leasing contract,” he said. “We're looking at pretty small businesses that want a fixed monthly payment. They don't want headaches dealing with equipment. They know if it goes into repair, they're at the mercy of truck dealers, and all they understand are autos.”

He added that emissions standards may increase demand, the used truck market is in balance, and maintenance issues eventually will affect independents.

Labbe said the Class 3-5 market will see the greatest gains.

“There's not a lot of storage available in most retail outlets, so they have to replenish inventory on a constant basis,” he said. “So freight has to move there.

“I believe more equipment will become specialized. If you can save one hour a day of a person doing deliveries, at the end of the year you've dropped off $4,000 to your bottom line. And you've been able to increase the amount of freight you've moved into the system. In addition, they're going to hang onto equipment longer because we build it better. Materials don't corrode as much.”

He said the first-owner population will grow by 50% in four years (but the challenge is that the body has to last longer) and the second-owner population will grow by 2% in four years. The result? Extended life for the original owner, and productivity is not a major factor in commercial ownership — depreciation is.

“I'm more and more impressed with the equipment I see out there because it's bulletproof compared to what it used to be,” he said. “These things are going to last. If I'm a businessman and I own a vehicle, why do I want to go out and get something else if I can still haul my freight? But it means the body and everything else have to have longevity. It's not a challenge of drive trains or chassis. It's with the other equipment.”

His analysis of trailer issues: 200,000 more trailers would be needed if hours of service were strictly enforced; storage is less of an issue than in the past; and carriers are now in the driver's seat when negotiating fees for service.

His market conditions impact: freight will grow for the next six quarters; fuel prices are at record highs; driver wages will increase 25% by 2008; insurance increases will be 15% per year; and 60% of operating costs will increase in excess of 15% per year.

His conclusions:

  • The players will change dramatically in the next two years.

  • Be prepared to offer equipment that is very use-specific.

  • Look to have first owners hold onto equipment for more of its economic life.

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