Why are monthly Class 8 truck orders important?
As with any industry that operates in a competitive marketplace, pricing in the trucking industry is determined by supply and demand. Supply can be simplified to the summation of the availability of equipment combined with the availability of willing and able drivers. While many consider driver availability to be a perennial demographic issue, trucks are at times in oversupply, with excess power units “parked against the fence.” Excess equipment can cause industry oversupply as trucking companies chase freight at below-average profit margins (in an already thin-margin industry) in an effort to earn some return on the capital tied up in their equipment.
Why are Class 8 orders a deeply cyclical, lagging indicator of truck demand?
Setting aside carriers that operate in niche markets or with specialized trailing equipment, most carriers operate Class 8 tractors with dry van trailers. Dry van truckload is a competitive market with relatively little differentiation as compared to most other industries (dry van truckload is not a commodity, but is a thin-margin business nevertheless). Therefore, the same market forces impact all carriers at the same time. Carriers experiencing a robust pricing market want to own more trucks to take advantage of high rates and associated high profit margins. Similarly, carriers earning below-average or zero margins are unwilling to invest in additional equipment. In short, the timing of most carriers’ fortunes is aligned, and so is their equipment-purchasing behavior.
There are only four North American Class 8 tractor original equipment manufacturers (OEMs), and one of the OEMs’ primary objectives is to maintain steady production rates to maximize facility utilization and avoid paying overtime hours. So, the OEMs take measures to avoid production lumpiness and build up backlogs that typically average four to six months, though they can be much longer or shorter depending on market conditions.
The result is that trucking companies will place equipment orders because of today’s robust rates and profit margins for equipment to be delivered several months from now — just in time for the market to soften. And other carriers pursuing the same tractor-purchasing strategy exacerbate that softening.
How does seasonality impact Class 8 truck orders?
Monthly Class 8 truck orders mean very little without putting them in the context of the time of year, in addition to the length of the existing backlogs. In simple terms, Class 8 order season is like the school year: very busy in the fall and continuing through the spring, with not much happening in the summer.
In a typical year, pricing is finalized on the following year’s models in September, and OEMs open their order books in October, marking the beginning of the “order season,” which lasts from October through March or April. Often, large fleets choosing to place multi-hundred-unit orders for the following year place those orders early in the order season. The advantage of placing orders early is the availability of a range of build slots at that time (e.g., a carrier may want to take delivery of equipment in March or June when freight volume improves seasonally, or a carrier may want to take delivery of equipment ratably throughout the year).
As a result, October is typically seasonally the strongest month of the year for Class 8 truck orders, followed by November and December. The next busiest months are January through March. Few orders are placed during the summer since there may be few remaining build slots for the current year and the following year’s order book is not yet open.
There are exceptions to that description of seasonality. For example, a period of extraordinarily strong demand may entice OEMs to open their order books early for the following year’s production to preserve market share.
How should Class 8 order cancellations be evaluated?
Like many other contracts in the transportation industry, Class 8 truck orders “don’t have a lot of teeth” and are canceled frequently without major repercussions. The OEMs typically permit that because they do not want carriers’ ever-present uncertainty regarding upcoming market conditions to discourage ordering. Accordingly, cancellations in a month that are equal to a low-single-digit percentage of the units in backlog are typical, but cancellations of 10% or more of the backlog would be associated with a recessionary period.
Another nuance is that cancellations often increase at the end of the calendar year independent of demand. End-of-year cancellations can indicate a recognition by OEMs and fleets that the equipment in backlog is not likely to be delivered that calendar year; that might not be a “true cancellation” because the units may be canceled only to be reordered for delivery during the following model year.