Lessors Anticipate Strong Vocational Truck and Trailer Market
The strong truck and trailer market is
anticipated to continue into 2006 fueled by factors that include solid domestic economic conditions, a shortage of trucks, pre-buys before the 2007 EPA-mandated engine change, better trade values, replacement of equipment firms couldn’t afford to buy previously, and the possible re-emergence of bonus depreciation.
As a result, the truck and trailer equipment leasing market is also anticipating strong growth years. An examination of the current market situation, driving forces, and leasing companies’ expectations provides a clear picture of leasing as a critical financing and asset management mechanism to the trucking industry.
Segment is 10 Percent of New Leasing Volume
Leasing companies strongly anticipate trucking firms will turn to lease financing to manage cash flow and debt, conserve capital, and leverage the many other advantages of leasing to acquire equipment. In the most recent Survey of Industry Activity Report issued by the Equipment Leasing Association (ELA) in 2004, trucks and trailers represented 9.9 percent of new business volume among responding leasing companies during fiscal year 2003, the second highest category of new business volume. The study also reported that truck equipment ranked fifth among end-user industries in new leasing business volume with 7.2 percent of the total.
In studies presented at ELA’s recent Equipment Management Conference, trucks and trailers were consistently ranked among equipment types with the highest growth potential and stable secondary market value. These two factors make trucks and trailers very attractive assets for leasing for both the lessee and the lessor.
Many factors impacting the truck and trailer industry impact the leasing market. However, increasing fuel prices didn’t seem to have a major effect on truck and trailer leasing over the past year. With tight capacity, surcharges are being passed along with little or no issue. Leasing companies believe that even dramatically higher fuel costs shouldn’t be an issue as long as capacity remains high and the economy stays strong.
Market consolidation continued, with deals such as GE Commercial Finance’s announcement to acquire CitiCapital’s Transportation Financial Services Group. With the acquisition, GE gains CitiCapital’s financing capacity of approximately 196,000 medium- and heavy-duty commercial trucks and trailers, in addition to opportunities for creating additional market share. The deal indicates the inherent potential in this market’s positive conditions.
The overall outlook for the For Hire market is optimistic, as trucking firms will need to increase fleet vehicle totals while replacing a large number of older trucks. In 2005, between 250,000 and 260,000 trucks should be produced, representing one of the strongest markets in history.
Leasing companies are finding the scheduled engine change for 2007 due to new Environmental Protection Agency diesel standards coming into play now, though they offer varying viewpoints of its extent. Some lessors believe that the high number of anticipated pre-buys may be significantly less than expected (20 to 25 percent rather than the 50 percent projected). Even more report that customers are eager to acquire their trucks before the deadline. In addition, bonus depreciation has the potential to become a factor in 2005 if re-enacted.
The 2005 CIT Construction Industry Forecast bodes well for the vocational truck leasing market. Thirty-
seven percent of contractors in the survey said they plan to acquire a truck in 2005, compared to 31 percent who planned to do so a year ago. For the 10th consecutive year, the CIT survey found more contractors planning to acquire trucks than any other type of equipment. Leasing companies are seeing less room for price negotiation as demand rises and manufacturers require longer lead times.
The small-ticket truck leasing market, including dump trucks, delivery trucks, and construction-use trucks, has also performed well. Lessors in this segment are optimistic that they will continue to build business.
Financing Options Now Vary
Truck and trailer companies should be seeing a greater variety of attractive financing options now, including leasing. Many leasing companies have observed the transportation sector returning to favor with bank lenders, and they are now competing with banks for tier-one trucking companies. Banks’ recurring interest appears to coincide consistently with the regular improvement cycles of truck and trailers.
Many financing options are available to contractors acquiring vocational trucks. They will often establish a line of revolving credit, allowing them to leverage existing equipment fleet equity. Lessors are also seeing a slight increase in the number of construction companies that choose to lease over purchasing trucks. While interest rates continue at very affordable levels, they are expected to rise in 2005. This expectation is resulting in truck buyers choosing fixed-rate rather than floating-rate loans and leases when acquiring equipment.
Tax-affected terminal rental adjustment clause (TRAC) transactions were lower over the last year due to the high amount of corporate liquidity and the desire of lessees to keep tax benefits provided through bonus depreciation. Leasing companies that were looking forward to a strong increase in truck and trailer lease transactions, both tax and non-tax, with the expiration of bonus depreciation at the end of 2004 will need to adjust expectations with bonus depreciation still potentially in play.
Information about truck and trailer leasing, including the 10 questions to ask before signing a lease, a glossary of leasing terms, and a directory of leasing companies throughout the U.S., can be found at the Web site: www.ChooseLeasing.org/.