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September 15, 2020 8:45 AM, EDT

COVID-19 Pandemic Stalls Replacement Cycles

But Industry Expects Rebound for Next Year
Truck fleetJacek_Sopotnicki/Getty Images

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Motor carriers paused their replacement cycles during the early days of the COVID-19 pandemic, but most dealers, fleets and analysts said the industry merely delayed making purchases for a few months, and they don’t expect long-term changes.

When the pandemic struck, most truck dealers “got hit pretty hard,” said Rusty Rush, chairman and CEO of Rush Enterprises, which operates more than 115 commercial vehicle dealerships in the United States.

U.S. retail sales of Class 8 trucks dropped dramatically in April and May, but have recovered gradually in recent months while remaining well below last year’s pace, according to data from WardsAuto.com.

Rusty Rush

Rusty Rush expects fleets to return to regular replacement and growth cycles. (John Sommers II for Transport Topics)

Rush said fleets paused their equipment replacement cycles for a few months when the pandemic began. For a time, new trucks weren’t available because manufacturers temporarily shut down, which gave dealerships a chance to right-size their inventories.

But the major fleets most likely will return to their historical replacement and growth cycles. They may buy trucks three months later than normally, but Rush expects they will get back on track. He does not anticipate fleets making major changes to their purchasing cycles unless there’s another outside driver such as a technological change.

Order intake has started to recover, and the overall freight market has stabilized and tightened. With consumers spending on goods instead of services or travel, some shippers are struggling to find trucks and drivers to meet demand. Used truck sales also dropped when the pandemic took hold, but values have stabilized and more typical depreciation is occurring, which makes it easier for fleets to trade in their trucks.

“It’s like the story of two different years,” Rush said. “There was January through the first half of March, and then the second half of March is when everything changed.”

Don Ake, vice president with the research firm FTR, said larger fleets have stuck with their existing replacement cycles. Almost all fleets paused their orders because of the uncertainty, but activity is resuming. A few large fleets restarted in June, and a few more did in July.

Ake said fleets aren’t trying to catch up from that three-month delay. Those that are confident the economy is improving are ordering what they would have earlier, but orders are still running below replacement demand. Medium-sized and small fleets that probably aren’t as profitable have delayed replacements, which will continue into 2021. There’s still too much uncertainty.

Ake said the consumer market is strong, but it’s being supported by government supplemental income programs. Those have expired without a replacement, and the effect is unclear. FTR assumes a slow but uneven recovery will continue into 2021. Then the market will reset and fleets will resume their normal cycles.

Tim Denoyer, ACT Research vice president and analyst, said equipment demand this year will be “considerably below replacement,” even though trends have shown improvement. He expects fleets to shorten their cycles over the next year.

Denoyer said a refrigerated carrier president who spoke at an ACT seminar said he was shortening his company’s truck replacement cycle from five years to four, partly because federal stimulus dollars had bolstered his confidence. Before receiving funding through the government’s Paycheck Protection Program, his company had considered canceling its orders, but instead ordered even more trucks as the economy improved.

Current replacement cycles can depend on how fleets were affected by the pandemic. FTR’s Ake said manufacturing and industrial markets are weak, so flatbed fleets aren’t replacing as much equipment.

Memphis, Tenn.-based Ozark Motor Lines, on the other hand, saw its business surge as a hauler of consumables, including toilet paper and other paper products. CFO Jason Higginbotham said the truck manufacturing slowdown caused the carrier to fall behind its replacement curve, and now it’s replacing faster than normally.

Kyle Treadway

Treadway

Kyle Treadway, president of Salt Lake City-based Kenworth Sales Co., said refrigerated carriers and last-mile delivery providers are sticking with their replacement cycles. Others, such as those in the energy sector, are struggling. The bigger the fleet, the more likely it is to stick with its cycle.

Treadway estimated that used truck values reached their trough in the first quarter of 2020. Then the pandemic hit, and values fell 5% to 8% more. Interviewed in August, he said used truck values seemed to have hit bottom.

While his new truck sales are matching last year’s, used trucks have declined 30%.

Treadway expects some delayed growth in the spring. He foresees small fleets and owner-operators returning to the market. This year’s slowdown will speed up replacement cycles next year because fleets will need to catch up.

Treadway said between the pandemic and the presidential election, he’s expecting flat quarter-to-quarter sales the rest of this year. With the presidential election, “The uncertainty is the problem, not the outcome,” he said. “Groceries and garbage are still going to move regardless of who’s in the White House.”

Greg Arscott

 Arscott

On the other hand, Greg Arscott, president of the Southeast division of The Pete Store, a family-owned chain of East Coast Peterbilt locations, said not a single customer had referenced the election. Usually it’s a hot topic.

Arscott has experienced a somewhat different dynamic than Treadway. Sixty to 90 days after the pause, smaller and midsize fleets were buying trucks, while large fleets were “just taking a pass on the year.”

But Arscott said fleets aren’t changing their cycles. They’ll do a normal bid schedule at the end of this year and take delivery next year. Some customers are initiating bidding now.

“I don’t think there’s a fundamental change,” he said. “I think everything’s just slid by six months or so. … The sense is, back to business [in] 2021.”

Steven Bassett, dealer principal and president of General Truck Sales with two locations in Indiana and one in Toledo, said his Volvo and Mack dealership also had seen higher sales to small fleets and owner-operators, while larger fleets were still waiting. Bassett noted that his region has been dependent on heavy manufacturing and the auto industry, which were more affected by the pandemic, and agreed that replacement cycles aren’t changing.

“I think the good news is in our industry, you eventually have to replace those trucks,” he said. “You can delay purchasing for six months or 12 months, but those trucks still get age on them, and they still have a higher cost of operation, and the newer trucks [are] cleaner, greener and better fuel-economy trucks.”

Bassett said the industry will ultimately catch up to its usual cycle, adding that he is “bullish” about the next year, though the economy faces the headwinds of a presidential election, recession and possible resurgence of coronavirus cases.

A Shifting Market

Future replacement cycles could depend on many factors.

RoadSigns

What are fleets doing to help attract the best possible diesel technicians to join the changing workforce environment? Host Michael Freeze speaks with Ken Boyer, dean of the Auto/Diesel Institute at Baker College, and Ralph Romero, vice president of talent management at U.S. Xpress. Hear a snippet, above, and get the full program by going to RoadSigns.TTNews.com.

ACT’s Denoyer said they could be shorter because many fleets recognize late-model used units have good trade-in values because of their fuel efficiency premium.

Edward Coble, whose family’s Tennessee-based Neely Coble Co. dealership carries Freightliner and Western Star vehicles, said trade cycles have accelerated in recent years because of the cost and complexity of diesel aftertreatment systems. What once was a five-year cycle has fallen to 39-48 months and 400,000 to 450,000 miles.

“We’re starting to see the more sophisticated buyers are accelerating that trade cycle so that when … that critical event happens to that aftertreatment system, it’s going to be the second owner that happens to, not the first owner,” he said.

The truckload market entered the year at overcapacity, which was driving freight rates down. In 2018-19, truck production was well above replacement levels, while private fleets were increasing capacity to hedge against the risk of another spot rate hike, Denoyer said.

Treadway said there was a big backlog of orders at that time. Freight wasn’t growing, but carriers engaged in panic buying because the wait for a truck was increasing significantly.

Arscott said carriers had been almost in a buying “frenzy.”

But that frenzy ended. Eventually, there was just too much equipment, particularly sleeper trucks. Treadway said used truck values plummeted.

Meanwhile, a freight recession began in the fourth quarter of 2018 and lasted through 2019, Denoyer said. Because of those factors, the Class 8 market was already contracting prior to the pandemic.

The natural response to overcapacity is for manufacturers to gradually reduce production. Instead, it happened suddenly due to the coronavirus outbreak, and “production went to almost zero for a while,” Denoyer said.

Penske truck

Penske Truck Leasing will evaluate replacements on a truck-by-truck basis. (Penske Truck Leasing)

Penske Truck Leasing and its customers won’t formally change their purchase cycles, but they will evaluate replacements on a truck-by-truck basis, said Paul Rosa, senior vice president of procurement and fleet planning.

If a truck hasn’t moved much in six months, that time could be added to the cycle. Trucks are more durable and technology has advanced, so the vehicles can last longer. However, customers may not want to extend the first life of a 5-year-old truck because they might want a newer one with better fuel mileage, a newer safety suite and creature comforts that help with driver recruitment and retention. Another consideration is the coming greenhouse gas standards in 2021 and 2024.

“We are always evaluating the entire equation,” Rosa said.

Rush is relatively confident about the economy’s short-term prospects, but he’s wary about making long-term predictions. The future is too uncertain between the pandemic and the elections.

“It’s not one of those times where you can look out a year, year and a half and say, ‘OK, this is what it’s going to look like for the next 12 to 18 months,’ ” he said. “I feel pretty solid about what the next six months look like. I’m not saying beyond that is bad, but there are too many outside uncertainties that could affect demand, affect the economy.”

The pandemic delayed replacement cycles at Tontitown, Ark.-based P.A.M. Transport, but the truckload carrier is still taking delivery of everything it’s ordered, and it placed orders after the pandemic had already started for trailers that will arrive late this year, said Shane Barnes, associate vice president of maintenance.

P.A.M. typically has a three-year replacement cycle for its own fleet and also operates a lease fleet where certain vehicles spend two more years on the road. The shutdown of manufacturing plants delayed equipment replacement, but although the carrier logged fewer miles, it will follow its plan.

“We’ve still got to rotate our fleet,” Barnes said. “I mean, this isn’t going to last forever.”

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