Here we go again. Orders for new Class 8 trucks are surging like they did after tax cuts in 2018. This time, however, consumer-driven demand for stay-at-home goods during the pandemic is prompting carriers to pull forward equipment orders that would typically be placed later.
Household spending on goods and services rose 1.4% in September, according to the U.S. Commerce Department.
Buyers of new and late-model used trucks are both shopping, even as uncertainty surrounding a new wave of coronavirus infections threatens business lockdowns reminiscent of March and April.
But catalysts of higher Class 8 orders — freight demand and carrier profitability — are strong.
“The reasons for the cycle are exactly the same,” Kenny Vieth, president and senior analyst at ACT Research, told FreightWaves. “It’s a different set of circumstances.”
2018 tax cut-fueled demand
In 2018, fleets took advantage of federal tax code changes allowing full amortization of capital spending for equipment in a single year. Combined with a 3- or 4-percentage-point drop in driver productivity because of the electronic logging device (ELD) mandate, conditions were ripe for a pull-ahead to summer of orders typically placed in fall.
“What happened with the constrained capacity in 2018 and the turned-on economy, all of a sudden there was a capacity shortage and freight rates went up like crazy in the first half of 2018,” Vieth said. “Every trucker’s brother was like, ‘Man, we want to buy some trucks right now.’”
By December, with demand sated and production backlogs nearing 300 days, the trucking industry slid into a sector recession. Orders declined in all but one month in 2019. Manufacturers laid off thousands of workers as the slump continued into early 2020.
ACT in March projected North American Class 8 production at a below-replacement demand of 220,000 units. A month later, with the first wave of COVID-19 hitting the U.S., ACT’s revised estimate called for production of just 120,000 trucks this year. Its latest estimate calls for production of 200,000 Class 8 trucks in the U.S., Canada and Mexico.
Pandemic shutdown influences the 2020 narrative
Current demand is making up for the nearly two months of manufacturing and supplier shutdowns during the onset of the pandemic. Successful carriers shifted to hauling consumer goods like food and clothing instead of deliveries to restaurants, which were forced to curtail services, or resorts like Disney World that shut down because of social distancing guidelines.
Up to 100,000 truckers fell idle when their companies closed in the spring. Driving schools mostly shut down because of the pandemic. Few new drivers came on board.
Even when they could return, many drivers stayed away because the additional $600 a week in federal coronavirus relief payments on top of state unemployment benefits was a better financial deal than the unpredictability of pay-per-mile trucking. Thousands of other truckers failed drug tests under new federal regulations and did not apply for reinstatement.
“ELDs took out capacity at the beginning of 2018. The COVID shutdown and quarantine took out capacity in March and April this year,” Vieth said. “[In both cases] we have a huge surge in freight and a supply-demand imbalance. Freight rates go up to record highs. Carriers are going to make a lot of money, so they say, ‘Let’s buy some trucks.’”
Even if they don’t have to.
“There’s probably still available Class 8 trucks in the market that are sitting out there that can be put into service relatively quickly if you had a driver,” Vieth said.
What’s equipment got to do with it?
Modernization is another motivator of new equipment demand.
All fleets focus on the total cost of ownership. In 2017, most manufacturers brought out models with significantly better fuel economy. Automatic manual transmissions, available since the turn of the century, grew in popularity.
“It dawned on the for-hire carriers that drivers coming out of driver’s school didn’t know how to drive a manual transmission vehicle,” Vieth said. “Starting around 2017, there was a change in the must-have spec in the industry.”
That included advanced driver assistance systems (ADAS) with features like automatic emergency braking and adaptive cruise control. Better safety equipment cost more upfront. But it is a hedge against being hit with a business-threatening nuclear jury verdict in a crash where a driver is found guilty.
The trickle-down effect
Fort Lauderdale, Florida-based Fleet Advantage sells safety as an integral part of its fleet business analytics and life cycle cost management. The mantra: New trucks equal safer trucks. Safer trucks cost less in the long run.
With new Class 8 orders rising, so is the number of trade-ins with “new spec” features. As trucks predating 2016 languish, pricing is strong for the 2017-and-newer equipment. Between July and September, Fleet Advantage sold more than 400 used trucks with a total value exceeding $10 million.
“More companies are looking to replace aging trucks earlier in their life cycle to realize greater cost savings that newer equipment offers in reduced fuel, improved maintenance and safety expenses, as well as lower emissions output,” according to Francis Maloney, Fleet Advantage’s remarketing sales manager.
Fleet Advantage is offering cash to owners of older trucks in exchange for leasing a newer truck with better fuel economy and safety equipment. Since May, the company has booked $24 million through its Sale-Leaseback program, betting it can put customers in a new truck when the lease term ends.
Reducing the age of the fleet
Getting newer trucks on the road is reducing the age of the trucking fleet. ACT estimates that for the population of trucks 11 years and newer, the average age is 4.9 years, the lowest since 2008. In 2019, the average age was 4.7 years, the lowest in 20 years.
“We’re in an interesting spot where the fleet is young and demand is strong,” Vieth said. “What’s different this time beyond the COVID consumer spending on goods, is this modern must-have [equipment] spec.”