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Market Trends

Top 6 Fleet Trends in the Medium-Duty Truck Market

July 14, 2009, by Mike Antich - Also by this author

By Mike Antich

Six key trends will determine Class 3-7 medium-duty truck lifecycle costs in the 2010 calendar-year. They are diesel prices, acquisition costs, resale, maintenance costs, replacement tire expense, and environmental regulatory requirements.

1. Diesel Price Trend

The cost of diesel is the most significant factor that will influence operating costs in the 2010-CY; however, the outlook for future pricing is somewhat fuzzy. "Operating costs will track diesel prices. Pump prices have fallen 50 percent from the record highs of last year. The most recent (July) forecast from the Department of Energy projects CY2010 diesel prices at $2.79, just over $1/gallon less than the 2008 average price," said Steve Byrd, fleet services manager for PHH Arval. "We expect that the new emission requirements on the MY2010 diesels will impact fuel economy. Some manufacturers are claiming improved fuel efficiency with 2010 engines; we are anxious to see if real-world use bears this out. Of course, future oil prices will ultimately drive operating expense."

One possible harbinger of the future direction of diesel prices is the commodity futures market for diesel fuel.

"If the futures market is any indication, prices will be relatively flat over the next six months. This should result in the first quarter of the model-year being lower than MY2009, the second quarter trending higher, with the rest of the year close to MY2009," said John Bauer, manager, fleet analytics for Wheels Inc.

However, a return to improved economic conditions will likely cause upward pressure on diesel prices due to increased demand.

2. Acquisition Trends
The national macroeconomy is an uncontrollable factor that will continue to exert a strong influence on truck fleet costs. "These cost trends will undoubtedly continue as the economy struggles. Fleets are tending to delay new-vehicle purchases and keep existing fleet vehicles in service longer, which adds to long-term maintenance and repair costs, especially as more powertrain components fall out of warranty terms," said Charlie Thomas, manager, PHH Vehicle Maintenance Assistance.

In addition, 2010 emission standards will introduce entirely new maintenance items, plus increase the initial acquisition cost of trucks.
"New, tighter emissions in 2010 will increase the price of new vehicles, increase their weight, and may cause reluctance to buy new vehicles," said Byrd.

One possible reaction to higher acquisition prices is an uptick in used-vehicle sales. "The down economy will lead cautious buyers to go with used vehicles because they won't have the newer emissions equipment," added Byrd.

The increased maintenance costs due to the new 2010 emission standards will not be felt in the near-term. "The complexity of the 2010 emission standards will not significantly impact maintenance costs until late 2010 and after," said Eric Strom, maintenance and safety product manager for GE Capital Fleet Services.

The volatile price of commodities, such as steel and aluminum, will further impact truck costs.

"Most medium-duty trucks have bodies, and the rising cost of material surcharges in commodities has increased the cost of bodies," said Ezel Baltali, fleet services applications engineer for PHH Arval. "If the bodies are refrigerated, these bodies need a reefer unit. We believe the cost of these additions to the chassis will remain high, especially with so many competing companies. Many body companies now offer their own reefer systems. Rather than install as a separate item, a company may purchase a body at a premium price, fully functional as a reefer system."

The economic downturn has helped reduce maintenance costs due to lower utilization rates; however, trucks are being kept in service for longer periods, which threatens to increase future maintenance costs.
"The economic slowdown has resulted in many fleets, particularly delivery fleets, seeing a drop in their vehicle utilization," said Greg Stanford, business consultant for PHH Arval. "Fewer deliveries lead to fewer miles, and in some instances, the need for fewer trucks. So a key area in cost management over the next year will be properly managing fleet resources to what are likely lower levels of demand. Decisions made this year on the capital budget side will impact operating costs many years into the future. Trying to save money by delaying vehicle replacement will result in higher maintenance and associated downtime costs later."

Fleets are implementing expense control measures to counteract decreased utilization. "Expense controls being adopted by many fleets are optimizing drivers' routes and engaging fleet drivers in the importance of reduced idling and other fuel-savings tips, and walk-around inspections," said Strom of GE Capital Fleet Services.

Longer truck service life is one reason maintenance costs are forecast to rise. "New truck sales have slowed in the past year, so this will increase the maintenance operating costs of vehicles that would have otherwise been replaced," said Byrd of PHH.

However, it is important truck fleet managers stay focused on lifecycle costs when extending truck service lives.

"Even though the state of the economy is uncertain, it's important to keep your fleet aging and lifecycle values pure. Otherwise, you'll lose control of several key benefits. To do this, you must determine your optimum lifecycle," said Byrd. "Optimum lifecycles include determining the 'sweet spot' for replacement. You need to look at original capital cost, cost of capital, per-year maintenance costs, utilization, residuals, and business plan. If that magic number equals, say, six years and you have 100 trucks, you should replace 16 or 17 trucks every year to keep your operating costs as low as possible. The discipline is not easy, but is critical."

Most companies are in the midst of major fleet cost-reduction initiatives. "Medium-duty truck fleets will continue to maximize cost reductions in 2010," said Strom. "Many will review their cycling policies, consider preventive maintenance scheduling changes, and seek strong maintenance repair providers. When considering a cycling policy change, fleets should keep in mind that skipping a planned cycling of vehicles may drive up downtime and increase maintenance costs."

3. Resale Value Trends
Depreciation is the largest expense for medium-duty trucks. Resale values for five-year-old medium-duty trucks (Classes 3-7) have decreased, on average, 18-23 percent in the past 12 months.

"There have been significant declines across the board on medium-duty trucks. This includes one- to three-year old trucks, as well as seven- to 10-year-old trucks," said Mark Orth, national remarketing manager - truck & specialty assets for GE Capital Fleet Services. "In particular, trucks older than 10 years are difficult to sell. These units have older technology,  higher fuel and maintenance costs, and currently have very little demand."

The ongoing sluggish business environment is the key reason for the soft resale market.

"There is an overabundance of used units due to small businesses not needing as many of these trucks because of the slowdown in construction, delivery applications, and landscaping," said Ricky Beggs, VP and managing editor of Black Book.

This slowdown has caused wholesale inventory of used medium-duties to remain higher than buyer demand. For instance, there is currently a glut of box trucks in the wholesale market. Contributing to the increased supply of used medium-duties has been an uptick in early lease terminations and repos caused by numerous business failures. In addition, the secondary tradesmen market, a key buying segment for used medium-duties, has dried up due to the downturn in new construction. This, in turn, has had a cascading effect on other related industries, who are also traditional buyers of used medium-duties, such as appliance merchandisers, furniture stores, and carpet retailers.

"Since mid-2007, utilization levels of medium-duty trucks have fallen to a level not seen since the early 1990s, a time when medium-duty trucks were still recovering from the dried-up market of the 1980s," said Jonathan Starks, analyst for FTR Associates. "With nearly a quarter of the market idled or severely underutilized, pressure has been mounting, for nearly two years, on both new truck sales and resale values."

This impact on resale values was especially evident at wholesale auctions.
"Over the past 12 months, the medium-duty trucks were among the hardest hit in terms of resale values," said Jane Morgan, president, Specialty Sales Division for ADESA Corp., a nationwide auction chain.
The decline in medium-duty resale values began in late 2007, when the residential construction slowdown started. In 2007, resale values dropped 10 percent and remained that way through the first half of 2008. Then, a combination of market forces starting last July converged to create a "perfect storm" to further drive down resale values by 15-25 percent.

These convergent forces were higher fuel prices, tighter consumer credit, and the stagnant construction market. As a result, the pool of buyers (hence market demand) for used trucks contracted, exerting downward pressure on resale prices. This soft resale market has persisted into today.

The oversupply of medium-duties is causing prices to remain soft. "This is pretty much tied to homebuilding. We see the market staying down for the rest of the year. There are too few buyers for a large number of sellers," said Charles Cathey, heavy-duty truck editor for Black Book.

Another factor influencing medium-duty truck resales is the number of retail dealers who have gone out of business. New and used inventory from closed dealerships is being consigned to auctions. In addition, the growing number of dealerships closing may potentially affect the buyer pool by decreasing the universe of medium-duty truck dealers going to auction.

Compounding these problems is the extremely slow new-truck market. Sales are so slow, many dealers still have brand-new pre-2007 emission-standard models sitting on their lots. The sluggish new-truck market is prompting significant price discounting on new models, putting downward pressure on used-vehicle prices. In some instances, aggressively discounted new trucks are competing with late-model used trucks.

Medium-duty truck sales are somewhat soft in the marketplace today, with stable prices and demand, but no signs of growth yet, according to Dave Nagy, senior vice president of fleet assets for Emkay. "The impact of the government stimulus programs has not yet trickled down to this segment. As the economy improves, we look for firmer pricing in this segment."

The glut in unsold medium-duties will continue to impact new-truck sales.
"While new-truck sales have appeared to bottom out, we do not expect to see a significant rebound in sales until late 2010," said Stark. "The glut of used vehicles has to be addressed and construction activity has to rebound before new-truck sales can return."

A key factor driving resale values is mileage, which seems to have the biggest impact on prices, with 120,000-150,000 miles as the preferred mileage.

"Condition is important only to the extent there is no major collision damage; cosmetic damage currently does not seem to have a significant impact on the value of this class," said Nagy.

The forecast is for medium-duty resale values to remain soft at current price levels. Everyone agrees medium-duty truck resale values will strengthen only when the new-construction market rebounds. Many used-truck buyers in the construction market are deferring purchases until a turnaround occurs.

One possible silver lining for the future is the current decreased volume of new medium-duty truck sales may result in a shortage of used trucks two or three years from now. A decrease in supply has traditionally put upward pressure on resale prices.

4. Maintenance Expense Trends
Maintenance costs for medium-duty trucks have been increasing at a 5-percent annual rate. "We expect the economic slowdown will tend to bring this down, and there are signs of this already in CY2009. The trend to extending service lives will push fleet maintenance costs up, as these increase steadily with vehicle age," said Byrd of PHH. "Depending on their average fleet age, a typical medium-duty fleet can expect a 4-plus-percent increase in maintenance expenses if they delayed vehicle replacement in the last year."

Many see maintenance costs rising in the foreseeable future.

"Maintenance costs are expected to continue to increase and not offset those repair providers who may be more willing to negotiate parts and labor prices," said Strom of GE Capital Fleet Services.

The 2010 model-year brings with it yet another round of new emission requirements. The new diesel emission standards will increase operating costs for medium-duty trucks.

 Most manufacturers are choosing to use selective catalytic reduction (SCR) techniques to meet these requirements. "Aside from increasing the vehicle base price by several thousand dollars, SCR equipment will add maintenance and repair cost items to vehicles beginning with the 2010 model-year," said Byrd. "Of course, new MY2010 vehicles will see fairly low operating costs in their first years. Over their lifetime, we'd expect overall improvements in reliability balanced out by the additional cost items introduced by the new emission requirements. Over the long-term, maintenance cost inflation of 4 percent per annum seems to be a good bet."

The increasing age of the average medium-duty truck in fleet service will negatively impact future repair costs.

 "These costs have been relatively flat in terms of the price per repair. However, the average medium-duty vehicle in our fleet is nine months older as companies delay replacements. As age increases, the number of repairs has increased. New diesel emissions regulations will eventually have an impact on repair expenses, but probably not in MY2010," said Bauer of Wheels.

Maintenance costs are also experiencing upward price pressures due to rising labor rates. "Preventive maintenance (PM) costs relating to the individual parts items have risen a small amount, but the labor and other costs associated with PM services rose about 11 percent. Average tax rates also rose about 1 percent in 2008," said Thomas of PHH. "As we see the first vehicles equipped with diesel particulate filters (DPFs) gaining higher mileage, we are starting to see some costs associated with repairs and maintenance to these systems. This will probably be factored into costs even more in the future, as trucks with SCR systems and advanced EGR (exhaust gas recirculation) systems start hitting the road to meet 2010 emissions standards."

In recent model-years, a variety of new technologies have been offered on medium-duty trucks. These devices are introducing new expenses. "This includes repair costs related to new truck technologies such as APUs, hybrid devices, more complex transmissions, and other electrical components not previously available on trucks," said Byrd of PHH Arval.

5. Regulatory Trends
New environmental regulatory requirements will exert upward pressure on fleet maintenance and upfit costs.

"This summer, Congress is considering carbon legislation that will likely have a significant impact on the cost and operation of medium-duty trucks, and everything else as well," said Byrd of PHH Arval.

"Unfortunately, what the end result will be is unknown at this point, so making definitive statements is tough. The general direction is toward more regulation and controls by government, which generally do not make for lower costs or easier management."

Another consequence of greater regulation is increased maintenance costs. "With new emissions measures, new components come into play for maintenance and repairs, along with the cost of upfits for regulatory purposes," said Baltali of PHH.

This trend requires fleet managers to stay on top of manufacturer equipment requirements relating to new emissions standards.

"Whether on new equipment or in making any retrofits that might be required by local or national legislation, emissions equipment is expensive and will impact overall fleet operating costs," said Stanford of PHH. "In many respects, California leads the nation in environmental issues, and complying with the proposed California Air Resources Board (CARB) reporting requirements for medium-duty trucks will be an added burden to fleet managers. In addition, there will most likely be increased reporting requirements on vehicle emissions, based on the direction CARB is going."

These regional environmental regulations impact not only local fleets, but also nationally dispersed fleets.

"The proposed CARB requirements will affect over-the-road truck units with 14,000 lbs. GVW and greater. CARB affects any units operating in California with engines older than 2010 or without 2010 emissions," said Thomas of PHH. "With the CARB proposal, fleets in California must upfit vehicles to obtain compliance, starting Jan. 1, 2011." These upfits can range from $15,000-$20,000 per unit, including installation and filters.
"Fleets are reviewing alternative-fuel options and their impact on upfit requirements, as many state governments are looking at emission reduction initiatives," said Strom of GE Capital Fleet Services.

"Fleets may either upfit or replace to obtain compliance. If a company decides to upfit, it pays for new technology and labor, along with the higher cost per mile with aging equipment," said Baltali. "The used-truck market also takes a hit, as owner-operators purchasing a used truck will need to upfit to be compliant. Most major truck and engine OEMs offer a solution for upfitting."

6. Replacement Tire Cost Trends
The industry expectation is replacement tire costs will remain flat due to decreased demand in the retail market.

However, some see tire costs increasing. "Tire costs are expected to increase slightly even if oil prices stabilize," said Strom.

Long driven by oil and energy prices, tire manufacturers bit the bullet somewhat during last year's oil price spike, keeping the lid on street prices. In addition, the slower economy decreased retail demand. "While increased use of synthetics is likely to continue (and decouple tire prices from petroleum somewhat), we do not expect a major decline in long-term tire costs," said Byrd. "Overall, tire costs are expected to be flat over the next year and should track with inflation after that. In newer models, increased use of tire monitoring systems is resulting in longer replacement intervals, a positive trend for future tire expenses."

Last year's high cost of replacement tires has prompted more fleets to increase use of retreads. "We saw a lot of tire price changes in 2008, especially in the first half of the year. For the entire year, tire costs rose about 6 percent overall, which influenced some fleets to start looking closer at recaps for at least a portion of their fleets," said Thomas of PHH.

A Cloudy Crystal Ball
The current national economy makes it especially difficult to forecast truck operating costs.

"The highly uncertain economic environment makes everyone's crystal ball pretty cloudy. Both the unknowable balance of supply and demand factors going forward and the open question of potential inflation are larger factors on future truck operating costs than the underlying maintenance and repair issues," said Byrd. "The cost projection that can be made with the most certainty is that we expect near-term future costs to track with the economy, and particularly the manufacturing sector. A healthy-to-strong recovery will likely push operating costs up, while a prolonged slump will tend to keep a lid on operating costs."

There are two possible forecast scenarios for the medium-duty truck market.

"The only near-term certainty is that we can expect a sluggish truck environment for the next six to nine months," said Starks of FTR Associates. "After that, there are two very divergent, and very possible, outcomes. The more favorable event would be a strong upturn like we've seen after most deep downturns. This would quickly alleviate the glut of used vehicles and would allow resale values and new sales to go up. This would also increase maintenance costs, but only with the addition of increased revenue. The flip side is a no-growth scenario, similar to several other economies that have experienced banking crises similar to ours. This scenario would favor the strong players as weaker companies would have a hard time suffering through two more years of weak growth. This would keep resale values and new sales from rebounding, though it would likely not fall much further than it already has."

What other trends do you foresee?

Let me know what you think.


  1. 1. Brad [ August 08, 2009 @ 08:44AM ]

    Any thoughts on why tire prices have increased 40% over last year? Seems like a price hike across suppliers and brands. Are they making up for low car factory output?

    I saw that increase between a pair of michelin's that I bought in July 2008 compared to the pair that I'm about to buy today Aug 2009.

  2. 2. randr [ October 07, 2010 @ 03:22PM ]

    I saw that increase between a pair of michelin's that I bought in July 2008 compared to the pair that I'm about to buy today Aug 2009.

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Mike Antich

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Mike has covered fleet management and remarketing for more than 20 years and entered the Fleet Hall of Fame in 2010.

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