FTR revises its 2015 projection to 305,000 units, says market won’t ‘fall apart’ after that

FTR’s Don Ake predicts 2015 trailer market may be one for the record books

THE trailer market has been booming so much that Don Ake, vice president of commercial vehicles for FTR Associates, increased his 2015 trailer forecast from 302,400 to 305,000, and believes there still is “an outside shot” of exceeding the record of 307,800 set in 1999 if trailer OEMs produce a lot in December.

But everybody agrees this is the peak year. What happens after that?

Ake projects 275,000 in 2016, 225,000 in 2017, and 220,000 in 2018 and 2019.

“There was general agreement at the conference that the market had peaked, but it’s not going to fall apart,” he said. “Nobody thinks it’s falling apart. Nobody thinks it will be higher next year. So I feel pretty good about our forecast. I increased the forecast from 273,000 to 275,000 for next year just because the dry van numbers were so strong in August and orders were pretty good.”

Ake forecasts 73,000 trailers for the fourth quarter of this year and 73,200 for the first quarter of next year.

He also thinks there’s a chance of breaking the backlog record of 187,200 set in 1999.

“There’s only a 1100 difference between this year’s 186,100 and the record from 1999,” he said, “and these are estimates not exact totals, so you’re well within the margin of error, so it could be a record year.”

Ake’s “FTR Commercial Vehicle Segmented Trailer Outlook” was one of the key presentations at the FTR Transportation Conference September 15-17 in Indianapolis.

With over 40 sessions and 50 industry speakers and panelists, the FTR Conference provided insight on the economy and all modes of freight transportation. Sessions were split into four content channels: shippers, carriers and brokers, truck and trailer equipment, and rail equipment.

Ake said the boom year of 2015 was the result of “The Perfect (Demand) Storm,” which had five factors that were all positive and all working in the same direction:

•  Replacement demand.

•  Expansion demand. “Because of freight growth and more trade.”

•  Pent-up demand. “It’s demand that could have been bought since 2009 but because of the recession and after recession, people were cautious. Fleets didn’t expand. They managed their assets a lot more conservatively. When demand spiked up, they were a little behind, so they’re ordering more trailers now to catch up.”

•  Structural demand (drop-and-hook). “There are things that are happening in the industry outside of these other factors that increase demand. The main factor here is more drop-and-hook operations from fleets, but some shippers have redesigned their docks and processes to incorporate drop-and-hook into their process. Refrigerated van customers are using more drop-and-hook. You used to never see it because refrigerated vans cost too much, but in this new environment where drivers’ times are critical and there are driver shortages, everybody is looking at maximum efficiency, so you have seen drop-and-hook start in refrigerated vans and continually increase.”

•  Regulatory demand (CARB–reefers). “With CARB regulations in California, that has caused a big demand for new refrigerated vans.”

What type of demand?

Ake said FTR tried for the first time to measure the five types of demand in the total of 302,400 trailers: replacement (225,000), expansion (35,000), pent-up (20,000), structural (15,000), and regulatory (7000).

“Pent-up demand is hard to measure, but you know it’s there,” he said. “Same with structural. And regulatory demand is hard to measure. But people like this graph because you consider all those concepts.”

He said this is the longest up cycle of consecutive years of trailer growth (six years, from 2010-2015) that there’s ever been. The last one was 2002-2006, extending five years, and the others were four years (1992-1995) and three years (1997-99).

He said freight growth drives fleet growth. The year-over-year loadings for different segments are growing. Through the first two months of this year: flatbed (6.9%), tank (6.7%), dump (4.5%), refrigerated (3.2%), dry van (2.6%).

“There are other numbers out there that show refrigerated vans are growing at a higher rate,” he said. “My gut feel tells me that for this chart, when we revise the numbers, the numbers will be higher for refrigerated and dry vans. This is kind of deceptive because the flatbed and tanker markets are segments that are hurting right now. They started strong and then have fallen off when we got into the end of the second quarter.”

High use

Ake said active trailer capacity utilization is high. It’s coming down from a high of 96% in the first quarter of 2014, but won’t get below the historical average of 87%, and will go down in 2016 to about 88%.

“Demand should be good,” he said.

What’s hot:

•  Refrigerated vans. Orders have been strong. The old record build was 39,450 in 1999, but 2015 featured a whopping 45,600. “You go back to the demand factors, where there’s more drop-and-hook, a tremendous amount of pent-up demand, and you have the regulations generating a big demand for refrigerated vans out west. I call this “Reefer Madness” because the new record compared to the old record is huge and significant.”

•  Dump trailers. “You have all the construction projects going on, infrastructure projects for the government. Again, there wasn’t enough replacement demand in the previous year, so people put off purchasing. Now they’re buying, so the dump market is very hot.” Since November 2013, this past April was the only month when orders went below 680.

•  Dry vans. “It’s hot, but not as hot as the other ones. Because it’s the biggest segment, it has a big impact. Demand for the past five months has varied just a little bit, but at a very high level. August and December of last year featured over 30,000 dry van orders—a record. The spike point was in 2013. Once capacity got elevated, it took fleets a while to realize, ‘We’re tight in trailer capacity. We need to order some new trailers.’ They started ordering at the end of last year. Tight trailer capacity created the demand for the dry vans. As those dry vans get put into use, the utilization then goes down. Utilization was high through 2013 and 2014, and that led to an order spike. Build increased because of that, and that will help sustain the market in 2016 once we get to the forecast.”

What’s not:

•  Tankers. After a year of growth, orders fell off dramatically last January from 1500 to near zero, and had crawled back to about 600 by July. “There was a big falloff in orders, basically due to the energy industry. There were a lot of cancellations. Order rates fell way down and production dropped for five straight months. It will continue to drop. You have some tanker manufacturers—especially if they were heavy in the energy business—in a very bad situation. The tanker industry in general is in trouble. For other segments of the tanker segment like food and chemical and cement, the markets are good but not great, and they can’t compensate for what’s going on.”

•  Flatbeds. Orders peaked at the end of 2014 at 7000, and have fallen steadily to 1000 a month. “Freight was good early in the year, but has weakened. You have the drop in orders. Production has held up pretty good (3000 a month) but if orders don’t increase, production will continue to fall. So that part is not doing as well as it was earlier in the year. When you compare it to other segments, it’s a weak point.”

Ake said new van capacity is on the way, with four OEMs building or opening plants in the next year:

•  Great Dane: specialty vans, late 2015/early 2016.

•  Hyundai: dry vans, mid-2016.

•  Vanguard: dry vans, mid-2016.

•  Utility: dry vans and reefers, Q4 2016.

There will be an estimated capacity increase in 2016 of 20,000 units. Because all of them will be operational in 2017, there will be an increase of 40,000 units.

“Will this lead to increased competition and lower prices?” Ake said. “The lower prices could increase demand more than we anticipated.”

Ake said we should expect a soft landing this time, with GDP at 2.5%, freight growth at 2.1% (in ton-miles, down from 2.5%), and trailer utilization still high.

“The driver shortage will tighten late in 2016, which means they might buy more trailers to compensate for that,” he said. “Van orders will be strong in Q1 and Q2. They haven’t shown up in the totals yet. But the van market is going to at least maintain its momentum through the first quarter.”

“We’re estimating a 10% decrease, which would be the lowest of the last four year-after-peak-production years. In 2007, there was a decrease of 24%.”

He said October would turn out to be a key month, because order rates start to rise, and production rates historically fall around nine months after a backlogs peak, which happened in January.

“From what I see, this may not happen,” he said. “We may continue to be strong in October.”

 

Issues Facing the
Trailer Market Today

Dean Engelage, president 
Great Dane Trailers

Engelage said we need to take the long view in looking at the trailer market.

The total trailer market peaked in 1999 at 307,800 units, cratered in ’09 at 80,000, and is expected to top 300,000 this year.

He said there has been “unprecedented stability” between 2011 and this year, and although production is expected to decline slightly in the next three years, all three years will be above 2011 levels.

He said the “upside of the downturn” is that companies developed human capital, embraced millennials, and gained an understanding of customers’ needs.

Now, during a healthy period, is the “time to climb.” It’s a time to embrace technological advances.

He quoted Steve Sasson, a Kodak engineer who invented the first digital camera in 1975: “(Management said), ‘That’s cute, but don’t tell anybody about it.’ ”

It’s also the time to avoid arrogance.

He quoted General George Armstrong Custer: “There are not enough Indians in the world to defeat the Seventh Calvary.”

Commercial Vehicle Class 8
Equipment Outlook

Erik Starks,
president FTR Associates

Starks said US truck freight levels are easing back on growth, with at least a 2% increase every month since mid-2013, with the exception of June.

Modest freight growth is expected going forward, with over 3% projected for 2016.

He said North American Class 8 orders “remain healthy” and build activity “remains elevated,” with 30,000 units in June and 28,000 in July. He said Class 8 backlogs peaked in February at nearly 190,000 units, but remain healthy.

Total Class 8 utilization should top 90% in 2016—the highest rate since 94% in 2005.

The production forecast for the fourth quarter and the first quarter of 2016 is the same—25,000 units. Orders are looking a lot like 2013, and about 75,000 units are forecast for the last quarter of this year and also for the first quarter of next year.

Class 8 inventories are reaching near-record levels, with 67,000 units in July—just short of the 70,000 in February 2007. Tractors account for 42,000 of that, with straight trucks making up the rest. As of July, tractors made up 24,000 units of Class 8 retail sales.

FTR was forecasting 82,000 total Class 8 units for the fourth quarter, then 79,400 in the first quarter of 2016.

Starks talked about the Phase 2 GHG regulations, saying that they cover the entire system, including trucks and trailers in the equation. Implementation will start after current GHG rule—depending on equipment, it will start to take effect between 2018 and 2020.

“Fleets would expect to see significant improvements in fuel economy—they’re unsure of the technology and design of the equipment at the moment,” he said.

He listed the Class 8 production risks:

•  Higher production: trucking regulations and lower productivity (late 2016 through early 2018); high truck utilization levels (late 2016); accelerated replacement/ equipment getting older and worn out (2015/2016); and overshooting the market. “During peak cycles, we always overproduce,” he said.

•  Slightly higher production: better fuel economy.

•  Lower production: orders are currently below build levels; announced OEM shutdown downs in Q3 and Q4; economy (industrial sector is declining, and going forward, risks are balanced both up and down; and economically derived numbers are forecast to ease in early 2016).

His conclusions:

•  The short-term economy is showing mixed signals.

•  Freight demand will be choppy over the next several months.

•  Truck capacity remains modestly tight.

•  Trucking regulatory changes will have a negative impact on productivity and will be a game changer.

•  Demand for CV equipment is healthy.

 

What are the fleets saying?

Chris Kemmer, president
CK Marketing & Communications

More fleets plan to buy trucks and trailers in the near future, according to a survey conducted by CK Marketing & Communications.

Kemmer said the survey involved 70% for-hire and 30% private fleets, and the equipment-buying plans involved 50% trucks and 43% trailers.

For both trucks and trailers, the number of fleets with buying plans is higher than at the same time last year. Trucks show a slide from their peak in late 2013 and early 2014. The percentage of fleets with buying plans in Q3 2015 is basically right at the average for the past five years (Q3). For trucks, activity was shared between smaller and larger fleets. For trailers, there were many more smaller fleets in this mix.

Order size: 8.7% of the truck population and 6% of the trailer population. Trucks experienced a significant drop from the previous quarter, impacted by a large fleet plan. The trailer volume is “fine based on history.” Both are above the average volumes for Q3 of the last five years. Nothing indicates any falloff in order volume into 2016.

Kemmer said the CKCVR Power Index measures velocity (percentage of fleets) and estimated volume of orders.

“Our index has followed the general movement of orders until Q2,” she said. “We counted an order from a major fleet that didn’t get booked until Q3 July. Our index for Q3 is 17% higher than the same quarter last year, so expect a continuation of that solid trend.”

She said the trailer index fluctuates based on who might be planning orders at the time of CKCVR’s inquiry, and follows general upward activity of the trailer industry. The trailer index is higher by 12% versus Q3 last year.

“As with power units, we don’t see any reason to think trailers orders are expected to fall off and should follow seasonal trends into 2016,” she said.

Kemmer said fleets continue to buy units primarily for replacement, and most simply cannot add capacity because of driver shortage.

A typical comment: “We have the orders but not the drivers to pull them.”

There is strong replacement demand, in part to attract drivers with better trucks but also to improve miles per gallon, add technology, and improve overall performance and cost of ownership.

The number of fleets that have more freight (or work) demand than they have capacity to haul it continues to grow.

“In a normal cycle, this would result in more equipment purchased to add more capacity, but without a driver, that’s not possible,” she said.

The driver shortage continues to affect most fleets and many “don’t have a clue how to grow the pool.” She said most ideas are simply how to “steal drivers from the other guy.”

One comment: “I spend hours researching this and still don’t have a clue. I am completing this (survey) while at an Army recruiting fair with limited access.”

In April 2015, CKCVR asked its fleets if they have accelerated their “typical replacement” cycle for trucks during the last couple of years, and 26% of them indicated they have.

One reason given captured the overall view: “We took advantage of lower CPM from less maintenance issues, increased fuel efficiency, and lower average age.”

While most of what CKCVR is getting from fleets indicates no real pullback in orders, 45% of those that have “accelerated purchases” indicate that may reduce how many they purchase in 2016.

She said she figured with all the changes fleets have been making in their specs along with improvements made by the OEMs, fuel efficiency would be improving (reducing overall costs). And it is for 80% of them. The average improvement is 5% over the last two to three years. How they’ve done this: new equipment specs (AMT, APUs, wide base or rolling resistant tires); newer trucks that have better fuel economy; driver training; and better maintenance practices.

“Reflecting some of the accelerated replacement activity, fleets are closing in on their average age goal,” she said. “Consider this data is from typical new truck buyers, so it wouldn’t reflect the entire industry, but since they are ‘new truck buyers,’ it could impact replacement purchases going forward. Some will continue to lower their fleet age as they have the ability to do so in terms of money.”

She said she doesn’t see any significant change in fleets moving to full-service lease equipment. Those that have it, like it (because they don’t have to worry about maintenance) and those that don’t lease now won’t plan to do so in the future (because they’d lose control of vehicles).

There is strong attention to specs on new vehicles to improve fuel efficiency, safety, bottom-line results and to attract and keep drivers. AMTs, disc brakes, aerodynamics, and tire technologies are just a few products that are gaining acceptance at a fairly rapid rate.

“Fleets have come around to the benefits of integrated drivetrains,” she said. “They still like to spec brands on many components but see the good results from proprietary or matched drivetrains.

“Fleet management is doing a good job analyzing metrics available to them. Some are using it to move OEMs in their direction. Our group of fleets has not responded to Navistar’s attempt to gain market share—most have moved on to another brand and are satisfied. Most of our fleets have a positive view of ELD, collision avoidance, and similar regulations that ‘even the playing field.’ They readily adopt technology that offers obvious benefits.

“Overall, they’re happy with post-2010 emissions trucks now that bugs have been worked out. They’re seeing improved mpg and performance.”

 

What is the consensus regarding
heavy-duty markets?


Don Ake,
VP of commercial vehicles

Jonathan Starks,
director of transportation analysis
FTR Associates

In the first-ever consensus forecast compiled by FTR from its subscribers and conference attendees, FTR surveyed them on what they thought the truck and trailer forecast would be for next year. Thirty forecasts were submitted.

“Initially, the data on that was not that significant in that this is not a scientific survey at all,” Ake says. “It has a high degree of bias because these are our customers that are getting our forecast and like our forecasts and have confidence in our forecasts. When you ask them to forecast, they’re highly influenced.”

For Class 8 annual production in 2015, FTR forecast 332,700 and the consensus was 330,000, and for 2016, there was just a 100-unit difference (290,000 by FTR versus 290,100 in the consensus). For 2015, the high forecast was 345,000 and the low was 296,000. For 2016, the high was 308,000 and the low was 260,000.

Despite the nearly identical numbers, Ake said the presentation was “well-received beyond my expectations.”

“I can tell when people are engaged,” he said. “It was a lively discussion. There was a lot of back and forth, questions between some people. They really liked this. A lot of questions were, ‘When are we doing this again? How often are we doing this?’ Even though our chart doesn’t give you much, people still enjoyed it and were interested in the process.”

For trailers, he said there was a “nice high-low range.”

For trailers in 2015, FTR forecast 302,500 this year and 273,000 in 2016. The consensus was 300,100, with a high of 307,000 and a low of 280,000. For 2016, the high was 291,000 and the low was 250,000.

 

“OEM Truck Keynote: Making Sense of Greenhouse Gas Regulations”

Amy Kopin
Regulatory compliance program manager,
Daimler Trucks North America LLC

Kopin said Phase 1 of these regulations was very successful in recognizing the need to minimize test burden. She also said it was forward-looking by using vehicle simulation as a component of certification.

Many OEMs pushed for complete vehicle standards in Phase 1, but due in part to the aggressive timing of the rule, separate vehicle and engine standards were set. System-level improvements, like powertrain optimization, are not captured by separate engine and vehicle certifications.

She listed Daimler’s “high-level principles” for Phase 2:

•  Regulation must accurately reflect real-world reductions. The only way to accurately reflect real-world fuel consumption is through a complete vehicle standard.

•  Phase 2 must not force technology that doesn‘t reduce total cost of ownership for the first customer (payback within 18 months), otherwise new technology won‘t be purchased and environmental benefits will be delayed.

•  Standards should be “technology neutral” and not be set presuming any one technology will be applicable to all vehicle applications, or that any one technology be mandated for a particular application.

•  Trade-off of NOx and CO2 reduction targets. Additional NOx stringency has negative impacts on engine efficiency and GHG emissions. Regulators need to recognize that improved efficiency means less power demand—which results in proportional reductions in NOx and all criteria pollutants.

•  EPA, NHTSA, and ARB should have one single program for GHG in the US.

•  Complex clean diesel technology requires long design cycles. It is not feasible to work to EPA/ARB three-year mandated cycles. Consequently, at least one manufacturer has already left the market and another is still working to meet EPA2010 standards on many of their products.

She said DTNA’s vehicle manufacturing divisions, Freightliner, Western Star, Freightliner Custom Chassis, and Thomas Built Buses, were the first to be certified to the new Phase 1 vehicle regulations—certifying DTNA’s entire product line before any other manufacturer certified any portion of theirs.

EPA Phase 1 estimates: vehicle reductions, 23%; engine reductions, 6%; technologies = off-the shelf; average cost per vehicle, $6000; anti-backsliding, N2O/CH4; vehicles and engines only.

EPA Phase 2 estimates: vehicle reductions, 24%; engine reductions, 4.2%; technologies = technology forcing; average cost per vehicle, $8000-$12,800; additional 50% reduction in N2O; vehicles/engines and trailers.

She said technical problems within the proposal must be solved to assess the actual impact of the rule.

“The positive aspects of Phase 2 that we really like include more representative vehicle standards that include the actual engine fuel map, a method to credit more technologies, and better simulation,” she said. “The proposal can and should be improved by eliminating the separate engine standard, lowering stringency to an achievable level, using realistic technology penetration rates. As proposed, SuperTruck does not meet the standards.

“While EPA has improved Phase 2 by including the actual engine fuel map, they may have also increased opportunity for future divergences. Phase 2 includes many new and costly test procedures; inadequate time to fully develop these new procedures; and overly burdensome and complex methods for engine manufacturers to represent powertrain performance in GEM. A simpler approach is needed, with separate engine testing, fuel map testing, vehicle testing, a “powertrain” test approach, an “alternative” test approach, and chassis dyno testing.

“It is important to note EPA published a range of alternatives and ‘options’ and are seeking comment on many different issues. While the proposal presents their ‘preferred’ approach, it is but one of five alternatives published. The other alternative they discuss the most within the NPRM—outside of the ‘preferred approach’—has the same reduction levels, but will be implemented two to three years sooner. EPA states clearly that they can adopt this alternative in whole or in part. There are also more stringent alternatives. This alternative is much more costly and EPA is strongly considering finalizing this approach. We are concerned about a pre-buy resulting from the agencies ‘preferred approach.’ Alternative 4 would very likely lead to a pre-buy.”

She said there are options beyond GHG regulations to reduce CO2.

“Safety translates into CO2 reductions,” she said. “Four billion gallons wasted due to congestion plus 25% congestion caused by avoidable accidents equals one billion gallons to be saved with safety technology. NHTSA has reported a potential 18% fuel savings with increased truck size/weight. Other options include: increased fuel tax ILO FET; preempt state laws incompatible with 6x2 axles; driver training or eco-driver feedback; platooning; V2X technology (e.g., control traffic lights); traffic/roadway improvements; and eliminate side-view mirrors and/or front license plates.

She said Daimler shares the same goal as EPA—to improve fuel efficiency—and believes that this can be accomplished by using realistic baseline and future technology assumptions; a technically feasible rule with reasonable stringency/costs; elimination of the redundant engine standard; and a focus on improving on P1, not developing new test methods.

“Phase 2 is much more aggressive than Phase 1 and will have a substantial impact on many aspects of the heavy-duty market,” she said. “There are many other areas of the goods transportation industry that could provide efficiency improvements to benefit trucking.”  ♦

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