Report says downturn in truck and trailer equipment sales markets signals bad news for leases

While the transportation leasing and financing segment is looking good, the truck and trailer equipment sale markets are not, and this is negatively impacting the number of leases made and the financing for those leases.

That's one of the results reported in “Transportation Outlook: Truck and Trailer Financing Trends,” which is based on research conducted by Global Insight and commissioned by the Equipment Leasing and Finance Foundation.

The report says a surplus of vehicles stemming from the 2007 pre-buy and weak demand for capacity are forcing even large fleets to scale back, and pushing smaller carriers out of business altogether. Soaring fuel prices and rising maintenance costs caused by aging fleets and new environmental regulations apply further pressure.

Environmental regulations and rising fuel costs add uncertainty, causing companies to postpone capital spending decisions on new truck and trailer equipment. Diminishing profit margins are leading companies towards full service leases and complete fleet management solutions in order to squeeze out every possible additional efficiency.

Used truck markets remain strong due primarily to exports. As a result, residual positions have not suffered as much as they could have. However, the report says, trailer valuations, which do not receive the benefits of the export markets, are very low. Despite this, threats to the continued strength of the export market for trucks pose a considerable risk.

“While the leasing and financing industry avoided the errors and arrogance of the subprime mortgage industry and its subsequent collapse, thereby maintaining access to funding, tightening credit standards and lower tolerance for risk is preventing many companies from being able to expand their fleets,” the report says. “Many parent companies have been significantly impacted by the subprime problems, which are having a dramatic effect on the availability of capital, thus impacting the equipment finance market.”

The report says forecasts for overall GDP growth over the next couple of years are low, with threats of stagflation and continued high oil prices. Late 2009 and 2010 are expected to bring restored growth.

Of the industries considered key to the truck and trailer market, a combination of the housing halt, rising fuel, food, and other commodity prices, and an overall weakening of the economy have harmed all of them, with some exceptions: non-oil mining, the energy industries, and agriculture.

“All of these industries are expected to pick up again in 2010,” the report says, “and after the pre-buy payback is done, sales of trucks and trailers are expected to resume.”

Class 4-5 trucks, the demand for which is dominated by small business, are expected to see a decline in sales this year, a 3.3% pre-buy driven increase in 2009, followed by a 3.3% payback decrease in 2010. After that, increases of about 10% are predicted, with a small decrease in 2013.

For Class 6-7 trucks, which are used primarily by for-hire and private carriers, a retail sale 15.1% fall in 2008 is expected, followed by a 7.4% pre-buying increase in 2009 and an 8.2% drop in 2010. Following 2010, increases of approximately 20% are anticipated and a slower 5.9% in 2013.

Class 8 sales are expected to fall 11.9% this year, with the hoped for pre-buying causing a 39.1% increase in 2009 and an 18.9% payback drop in 2010. 43.7% and 24.1% increases are expected, followed by a drop of 13.1% in 2013.

The report says that the diversion of resources towards power-unit pre-buying, combined with less-than-robust economic conditions, is expected to reduce trailer shipments by 28.2% this year, followed by a small 1.8% drop in 2009. Then 2010 and 2011 are expected to bring a surge of 33.3% and 19.0% respectively, falling to 6.1% and 2.3% growth in 2012 and 2013.

Truck and trailer buyers can expect heftier price tag on new equipment over the near-term. The cost of materials, components, energy, and labor will be heading higher over the near-term, putting upward pressure on new equipment prices. At the same time, more stringent environmental regulations will add to the cost of new medium and heavy trucks.

Prices of Class 4-7 trucks rose 7.4% in 2005, 5.2% in 2006, and 4.5% in 2007. Prices of Class 8 trucks rose 3.2% in 2005, 3.9% in 2006, and 5.5% in 2007. Truck trailer prices rose 5.8% in 2005, 4.6% in 2006, and 2.8% in 2007. Early in 2008, medium-duty truck prices were running 1.9% ahead of a year ago, while heavy-duty truck and truck trailer prices were up 3.4%, reflecting weak underlying demand. However, Navistar recently increased prices on International-badged commercial trucks by as much as $1600 per vehicle, citing soaring commodity prices. Other equipment makers, including trailer builders, are expected to follow suit as they wrestle with their similar operating cost hikes.

For truck makers there will be additional upward pressure on truck prices from meeting 2010 EPA diesel engine regulations. 2002/2004 engine technology added up to $4000 to the purchase price of a new truck, while 2007 engine technology added about $7000. Indications are that meeting the 2010 regulations will carry a heftier price tag than either 2002/2004 or 2007.

“EPA 2010 regulations are tougher to meet and will require additional engine engineering,” the report says. “In addition because exhaust systems will be larger and burn hotter, body configurations will have to change.

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