Fleets Still Cautious on Adding Equipment
This story appears in the Sept. 20 print edition of Transport Topics.
NEW YORK — Fleet executives warned that the continuing, though modest, rise in freight volumes won’t trigger an immediate surge in equipment orders.
Speaking at the Dahlman Rose investor conference here Sept. 8-9, top management at five fleets, including Werner Enterprises Inc., said they had no immediate plans to add more tractors because industry volume growth is bumping up against capacity reductions prompted by the recession.
Truck tonnage remained 5% below pre-recession levels even though it’s risen 6.7% so far this year, according to American Trucking Associations. At the same time, ACT Research Co. calculates that the tractor fleet has fallen 14% to 1.99 million over two years.
“At this point, we have no plans to go over 7,300 trucks,” said John Steele, chief financial officer of Werner, Omaha, Neb., referring to the current fleet size.
Noting that freight volumes “are good but not great” in the third quarter, Steele said the decision not to add capacity “enables us to be more selective. We are taking the least attractive freight and replacing it with better freight. We are trying to send a very clear message.”
The goal, he said, is to boost operating margins above 10% in the next year or two. When margins reach 11% or 12%, Steele said, Werner will reconsider its buying strategy.
Werner’s truckload profit margin improved to 9.8% in the second quarter.
On the less-than-truckload side, fleets also were cautious.
“There are opportunities to reinvest — if the market stays stable,” said Rick O’Dell, chief executive officer of Saia Inc., Duluth, Ga., without making any commitment to add equipment now. “The question is how to juggle the need to replace equipment against profit margins.”
Saia, which returned to profitability last quarter, saw a modest pickup in August freight volumes that followed what O’Dell called “a soft patch” in July.
“We still want to grow,” said CEO Rick Gaetz of Vitran Corp., Toronto, though he added that the company isn’t expanding its fleet yet, even though tonnage improved 5% in September after 3% growth in August.
Other sources predicted more aggressive buying ahead.
ACT, Columbus, Ind., predicted in a Sept. 13 report that strong profits from publicly traded carriers would boost demand for tractor purchases, which are forecast to rise 26% this year and even more next year.
David Jackson, chief financial officer at Knight Transportation Inc., Phoenix, said a lack of capital haunts many truckers as financing hurdles mount.
“The challenge isn’t getting capital to grow their fleets,” he said. “It is getting enough capital to refresh their fleets.”
Jackson illustrated the financing problem with an example: With new trucks costing about $115,000 and trade-ins of six- or seven-year-old tractors fetching $18,000 or so, fleets now must finance nearly $100,000, he said.
Three years ago, a new tractor cost about $95,000 and a four-year-old used tractor could be sold for $45,000, leaving $50,000 to pay off, he said.
Knight plans to add 100 to 150 tractors this year to its fleet of about 4,000 units.
“If the economy continues to grow, we expect to further grow our fleet,” Jackson said.
Lenders are stepping up the pressure by boosting down payments and tightening credit requirements, while original equipment manufacturers have shown no signs of cutting prices, the Knight official said.
Chief Financial Officer Paul Will of Celadon Group Inc., Indianapolis, shares Jackson’s view about capital, and said Celadon doesn’t plan to add tractors — for a different reason.
“Demand has stabilized, but no one is adding more equipment,” said Will. “Truckers are not in a financial position to buy. The capital just isn’t out there. I don’t see any capacity being added for the near term.”
Will believes Celadon doesn’t need new equipment because the company kept buying new tractors last year when others didn’t, a move he believes is a competitive advantage as the industry fleet age is at a record 6.7 years.
