As the recession worsened to start 2009, only 5% of trucking firms expected to grow their fleets — compared to 12% last October.
That's the bad news Eli Lustgarten, senior VP at Longbow Securities, delivered to the audience in Industry/Market Forecast that also included PowerSystems Research CEO George Zirnhelt, Original Equipment Suppliers Association VP David Andrea, and Fleet Owner editor-in-chief Jim Mele.
He said companies buy trucks to move freight, and a weak economy will keep freight demand soft for most of the year.
High diesel fuel costs and a weak domestic economy continue to be a major problem for the truck sector.
“Profits are getting squeezed to the point that businesses are going under and fleets are being downsized,” he said. “Any increase in demand or base pricing follows markets where competition is shrinking due to existing from business. Buying used trucking fleets as firms exit the market is a viable alternative to new purchases near-term.”
Lustgarten said his truck surveys suggest that smaller trucking firms don't care about pre-buy and EPA emissions regulations and are trying to survive 2008.
“Larger fleets are definitely paying attention to the 2010 mandate but have not made any definitive decisions yet with respect to pre-buy or the use of urea,” he said. “Initial testing of urea trucks is very positive but the concern of availability of urea is still paramount.”
He said that freight movement has continued to fall as the recession took its toll. A January truck survey saw modest increases in the “Unsure” and “Don't plan to buy” categories, and an 8% decrease in trucking firms planning to buy in 2009. Overcapacity due to recent mergers and firms exiting the business, as well as general pessimism about the state of the economy, were common reasons among those who do not plan to buy. He said 64% of his contacts say they don't intend to buy trucks in 2009, versus 50% in September and 45% in July; 19% are planning purchases in the coming year, versus July's 33% figure. The percentages of undecided firms grew to 17% from 10% in October and compare to 30% in September to 21% in July.
“Most of our contacts intending to buy still intend to purchase an equal or lesser number of trucks compared with last year,” he said. “This is unsurprising, given current market conditions and lower than normal utilization rates mentioned in our survey.”
He said 47% now indicate they will purchase less in 2009, versus 40% in October and 43% in September.
“Current equipment is in good condition, though the average fleet age is creeping up at 6.2 years,” Lustgarten said. “There is plenty of capacity available. Used truck prices are very weak. Used capacity is coming to market as companies fail. The current failure rate is 1000 companies per quarter, freeing 40,000 trucks. There are potentially more favorable economics for 2010 engines compared to 2007 if fuel economy is correct.”
Lustgarten said the strong Mexico and export sales of 2008 will wane this year — in Mexico because of new emissions regulations that took place in mid-2008 and exports because of the strengthening dollar and global economic slowing.
He said there are other factors affecting the picture in 2009.
“With the EPA mandate, did companies buy in 2006 for 2007 emissions for a three-year replacement cycle?” he said. “Trucking profitability is uncertain and could force change — a lengthening — of replacement plans. Credit availability could limit ability to pre-buy trucks. The bottom line? There is no case for a pre-buy.”
He said the economy and credit markets are taking their toll on other truck classes. He gave the following NAFTA production estimates for 2008: 205,000 for Class 8, 157,000 for Class 5-7, and 155,360 for trailers. For 2009: 260,000 for Class 8, 140,000 for Class 5-7, and 105,000 for trailers. And for 2010: 195,000-205,000 for Class 8, 160,000-175,000 for Class 5-7, and 140,000-165,000 for trailers.
Addressing the 2009 estimates, he said: “If the credit markets don't begin to function in the next two months, take 15-20% off that.”
Lustgarten said that although the military vehicle market is slowing, it remains large. It will be competitive to 2017, with an expected 71,300 vehicles to be built, worth about $22 billion.
“HMMWV (High Mobility Multipurpose Wheeled Vehicle) is evolving into the Light Armored Vehicle and will dominate the wheeled vehicle market, accounting for 68% of production and 34% of market value.
“MRAP is the second-most prolific program. In 2008 and 2009, four companies will produce 11,590 vehicles, and the military objective is still 15,374. That's 16% of all LWV production and 29% of the dollar value. Key suppliers are BAE Systems, Force Protection Industries, General Dynamics, and Navistar.”
The Family of Medium Tactical Vehicles (FMTV) Program is expected to produce 79,900 vehicles through 2013, with the replacement of 2.5- and 5-ton Army and Air Force trucks.
Pearls of wisdom
Zirnhelt said that he has had a difficult time reading newspapers recently because of the pain caused by sifting through the proliferation of bad — and in some cases, tragic — news.
“This is tough,” he said. “I'm thinking, ‘We have been through this before. Have there been any pearls of wisdom we learned?’
“We really do believe we're going to see this come back, although not to the levels we've seen recently. Trucks are getting better and lasting longer. But we're optimistic it will come back. But this will be a rugged year. The challenge is that margins aren't that big. You have to live through difficult times. One of challenges we have is that there are so many variables in our market. When you consider the number of engine options and transmission options available, the problem that manufacturers have is that the number of variations is huge. Going forward, that is not going to be sustainable.”
He recited a statement made by Cummins chairman Henry B Schacht in a 1988 letter to shareholders: “We need to accept the fact that we serve a cyclical industry and we don't control the cycle.”
He said that when thinking about opportunities for the next big thing, we need to ask: What could influence the way truck productivity could be enhanced?
He said fuel (biofuels, alternative hydrocarbon sources, and hydrogen) and hybrids will have a serious effect.
“There are systems that have durability matching the service life of the vehicle,” he said. “There is heavy hybrid-propulsion technology that achieves a 60% improvement in fuel economy while meeting regulated emissions levels for 2007 and thereafter.
“There can be a reduction of parasitic losses — reduce the aerodynamic drag of a Class 8 highway tractor-trailer by a combination of 20%, reduce essential auxiliary loads by 50%, use lightweight material and manufacturing processes that lead to a 15% to 20% reduction in tare weight (aerodynamics auxiliary load lightweight material).
“If you can't get it out of the engine, where else can you get it? Better aerodynamics can make a substantial contribution. Most challenging is what they're trying to do with the engine. An engine manufacturer is trying to step up $25 billion in research and development 2020. The goal is to increase engine thermal efficiency by 5%. There are better ways to spend that money.”
Zirnhelt said we have reached a transitional point because the days of the pre-buy are over.
“Fleets have learned there's really no economy in it,” he said. “The cost for suppliers is steep. Down the road, we'll continue to see the industry become more competitive. Global solutions are part of the answer.”
Andrea addressed the issue of commodity prices, saying that mills were operating at 36% in capacity utilization in December, compared to 90% in July and August.
“That's when they had pricing power,” he said. “At 40% utilization, they don't.”
He said he wouldn't give a forecast on steel prices, but said that $200 a ton for steel won't support the steel mills and doesn't give them a fair return on their investment, and $1000 a ton puts the customer out of business.
“It will probably be around the $400 to $500 range,” he said.