What's affecting fleets

TIGHTER regulations on diesel engines, tighter supply of truck drivers, and tighter spaces on the nation's roadways are some of the issues facing trailer fleets now and in the future.

What can trailer manufacturers do to help?

Wabash's Bill Greubel filled an unusual role for an incoming TTMA chairman during this year's convention. He also served as moderator during one of the convention sessions — a panel discussion regarding key issues facing fleets.

Joining Greubel were Steve Duley, vice-president of purchasing for Schneider National; Peter Nesvold, associate director at Bear Stearns; and Ken Vieth with ACT Research.

The interview went like this:

Greubel: What is the biggest impact on your business of the new engines?

Duley: Several things. We learned from the 2002 emissions standard that Congress has given EPA the power to force technology that is very good for the environment but that creates problems for us and our suppliers. The standard is so challenging. By the time the standard is in place, you have a lot of risk regarding reliability and some of the cost factors. We want to make sure the products are reliable. The best way for us to do this is to test them. For the 2002 regulation, we had very little time to do that. To get ready for the 2007 regulation, we asked manufacturers to give us one full season to test them.

We have engines from two manufacturers, but it is now less than nine months before the regulation goes into effect. This is limiting our ability to find out how well these engines will perform. This has caused us to disrupt our normal buying cycle. We prefer to buy a certain number of units each year. Instead, we are buying time.

A bigger concern than the technology is the reliability of the engines. Will they deliver the service we need?

This regulation has a lot of cost involved with it, and it affects fuel as much as the engine.

Greubel: How will this regulation affect some of the smaller fleets?

Nesvold: The smaller the fleet, the more difficult it is. The OEMs tend to favor the large fleets and take care of them as much as possible. The smaller fleet may not have as much capital to use to prebuy, and it may not have access to the truck manufacturer's production slots. Of those 355,000 trucks that are being built this year, I would estimate that 75% are being bought by truckload carriers. Of those, two-thirds are public companies. The smaller fleets will not be able to prebuy.

Greubel: It isn't just the cost of the engines. It's the added costs of maintenance and fuel. Is there an issue with the ultra-low sulfur diesel, particularly with the engines you currently have?

Duley: The fuel is compatible with our current engines. The biggest concern, though, is energy content. We tested the fuel and found that it had 2-2½% less energy content. That means we are facing a reduction in fuel economy. Plus, we aren't confident that the refineries will be able to have the fuel available, and we aren't sure that it will be able to reach its final destination without being contaminated.

In terms of the overall cost, we found that the 2002 emissions regulation increased our costs 2-3 cents per mile. We believe the cost this time around will be a lot higher — perhaps 6-7 cents. And the purchase price for a new truck will be $7,000-$8,000 more — with federal excise tax on top of that.

Greubel: Who is going to pay for this?

Nesvold: Ultimately, you and I. Eventually, these costs will be passed through.

Greubel: What does the driver shortage mean to fleets, and from a cost perspective, what does it mean for tomorrow?

Duley: The problem really began in the second quarter of last year. Getting enough drivers became as severe as we have seen in quite some time. At the beginning of last year, we implemented increases in wages and benefits for drivers. That helped us for a couple of months, but the effect was not long lasting. The central point is the lifestyle of long-haul truck driving and its appeal relative to other options that potential drivers may have. The unpredictability and the amount of time away from home continue to be limits for a lot of drivers. The number of people in the age group that we typically get drivers is smaller than it has been.

We are doing what we can internally to address those problems. We are making the quality better. We are trying to be more flexible. We have been taking some segments of our business and making them more regional, and we have increased our intermodal business. But even with all that, we could use 600 more drivers today. The shortage of drivers is one of the things that is limiting our ability to grow. Much of the revenue growth you see fleets reporting is because of rate increases — not because they are driving more miles.

Nesvold: Base pay needs to go to about $60,000 annually, up from $45,000 today in order to get some slowing in driver turnover. A lot of fleets have increased the pay they offer truck drivers, but there is still a way to go. And as Steve said, intermodal will be a substitute for longer haul freight. The country has to get more efficient with the transportation that we have. Traffic congestion, for example, will be a major source of stress for drivers.

With more drivers retiring, we have a need for triples trailers and bigger trucks. Unfortunately, there will be a lot of public pushback, and I am skeptical about politicians making this happen.

Vieth: I think it's reputation. If you go back to 1980, a truck driver made at least four times what an employee at McDonald's earned. Today, it's maybe just twice as much. How many of you would recommend to your sons and daughters that they drive a truck for a living? The trucker today does not have the reputation. They have security concerns. The idea of getting them home at night isn't happening nearly as much as they would like, and it's unlikely that it is going to happen. The thing that appeals to truck drivers is pay and recognition. But I don't see an immediate solution out there.

Greubel: Fleets are paying drivers twice what their wages were three years ago, and fleets will have to raise wages more in the future. One fleet I know is paying their drivers in excess of 50 cents per mile. I can remember when it was 23-25 cents not too long ago. Fleets want to pay their drivers well so that they don't lose them. But what happens when things turn down? How do fleets manage their drivers during a downturn?

Duley: I don't think anyone anticipates that issue anytime soon. I think the situation with drivers is actually preventing that situation where fleets might have an imbalance. As for us, we have been dealing on the other side of that equation.

Nesvold: Clearly if freight demand pulls back, the driver shortage isn't nearly as severe as it is today. Pay increases to drivers slows down, but so does fleet profitability, and equipment orders go down.

Vieth: To me, the flexibility I have as a fleet is the ratio between company drivers and owner-operators.

Greubel: What must we as trailer manufacturers and component suppliers do to improve the productivity of the fleets that we service?

Duley: The hours of service regulations that went into effect last year is an area that moved in the wrong direction. At a time when we didn't have enough drivers, this increased the need for drivers 5-6% — and it increased the need for additional productivity. Another drain on productivity is traffic congestion and infrastructure. We all have representatives in Congress. To that extent, we all can encourage our representatives that money be allocated to expand the highway network and make necessary repairs. We have sufficient funds, but a lot of the money has been diverted elsewhere. That's a general suggestion.

In terms of equipment, we have been investing in trailer tracking systems. It's installed on all of our fleet, but we still have some work to do to utilize the technology more effectively.

A lot of work is being done in the area of communications. Broadband has helped. So has software that improves routing and fuel optimization. These are things that let us use our assets better.

In the area of safety technology, we have made progress, but we are still looking for an integrated solution that will allow us to utilize our assets more effectively while at the same time making them safer.

Nesvold: Trailer tracking is something that we hear comments about constantly. It is an increasingly important element to this industry.

Vieth: Manufacturers are also shippers and receivers. How many of you have made your docks as efficient as possible? Do incoming truck drivers spend a minimum amount of time at your docks and then get back on the road? This is a major area that has to be conquered.

Greubel: We have not returned to our traditional ratio of 1.5 trailers per tractor. If we were to hit that figure, what effect would that have on the number of trailers that fleets need?

Vieth: The ratio this year on an actual production basis calls for 360,000 Class 8 tractors and 250,000 trailers. That's less than one trailer per tractor. But as we go through the next couple of years, tractors will go down to 210,000 or lower, and trailers should increase to 260,000-270,000 next year. I take the external variables along with the economic variables and scrappage. It is hard to apply a ratio to these forecasts. You just have to look at each of the variables.

Nesvold: One of the bullish indicators that Ken had in his presentation was that the average trade cycle has remained eight years for the last 4-5 years. That would suggest that all of those trailers that were delivered in 1999 are coming up for replacement. That may be one reason why trailer orders have lagged in this cycle by 20% or less.

Greubel: What are we faced with in terms of the 2010 emissions regulations?

Duley: It's still pretty early, but everyone we have talked to expects to see NOx traps or SCR — a solution involving the injection of urea. This was something Daimler and Volvo considered for 2007. They decided not to do this because there is a lot of resistance. If some other technology does not come up and we have to use SCR, my understanding is that it involves about the same amount of change as we have seen for the 2007 engines. If that's the case, I would expect another round of prebuying in 2009. But to have prebuying, you have to have something you want to buy. At this point, the 2007 engines are unproven. But if the 2007 technology turns out pretty good, expect another cycle of prebuying like we are in right now.

Nesvold: We also need to keep this within the context of what is happening with the economy. The 2007 prebuy is four times as great as it was in 2002. Look at the number of trucks that were ordered in 2002 and how long the prebuy lasted. This has been a two-year prebuy, versus a six-month prebuy in 2002. A lot of the strength we are seeing in 2005 and 2006 for Class 8 trucks is a combination of prebuy and the strength of the economy. So arguably, you may not see much prebuy in 2008 and 2009. You may see the back half of 2009 as an exceptional.

Greubel: How deep will the decline in Class 8 trucks be in 2007? I have heard anywhere from 20% to 35%. From what I have heard from you, Steve, you won't be buying many trucks next year.

Duley: We probably will be off at least 50%. I think the first quarter of 2007 may not be so bad, because it is an engine cut-off December 31. There will be some vehicles built after January 1 that could still use the 2006 engines. But the second and third quarters could be pretty tough.

Vieth: One of the truckers at the Mid-America show expressed it very well. He said he will buy a lot of 2007 trucks — in 2009. Based on current orders, Class 8 trucks should be in the neighborhood of 360,000 this year. We expect that to drop to a little more than 200,000. But that will depend on the economy. If the economy is still strong, Class 8 truck sales might be 210,000-220,000. If the economy stinks, I can't give you a worse scenario. When it comes to 2008 and 2009, it will look a lot like 2005 and 2006. But 2010 will look like 2007, but the decline might be two years long instead of one. That's because a lot of fleets will either delay purchases or prebuy. But there is going to be a major change coming in 2010. If SCR is the technology of choice, where will we get the distribution system? Where will the urea tanks go? With idling legislation, we also will have to find a place to mount battery packs. We will have a lot of equipment being added. Will we have enough space?

Greubel: From our perspective as trailer manufacturers, we always put in a trough when we are doing our five-year forecasts. It is nice to see that potentially there isn't one. I think the good news, too, is that there has not been that irrational exuberance that leads to overbuying of trailers. The industry seems to be in a nice level mode, and that's good business for all of us. We may be looking at some pretty good years.

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