Opinion: Fuel-Economy Rules and Used-Truck Pricing

This Opinion piece appears in the April 7 print edition of Transport Topics. Click here to subscribe today.

By Chris Visser

Senior Analyst and Product Manager

ATD/NADA Official Commercial Truck Guide

By now, you’re well aware of President Obama’s announcement that he will direct the Environmental Protection Agency and the Department of Transportation to set the next — i.e., the post-2018 — round of medium- and heavy-truck fuel economy and emissions standards. The first round of standards was finalized in September 2011, and trucks meeting those standards are just now going into production. I’m writing this to examine the impact of the 2002-2014 standards on selling prices and provide a look at how the used-truck market could perform after 2014.

If you’ve read a market analysis or looked at used-truck values recently, you’ll know that used Class 8 pricing has reached historic levels. A major reason for this market dynamic is the high price of new trucks. In 2002, a new phrase — “emissions escalator” — entered the trucking lexicon. An emissions escalator is simply a surcharge buyers pay for engines that meet current standards.

According to a recent American Truck Dealers report (available free at www.nadafrontpage.com), the cumulative effect of the 2004-2010 emissions mandates on the price of a new truck was more than $20,000. In other words, a new truck sold in 2012 cost $20,000 more — in real dollars — than it did before the requirements were in place. And pricing has increased since the report was published.

These price increases have pushed many buyers to late-model, low-mileage used trucks as a substitute for new. At roughly $56,000, the average sleeper tractor with mileage in the low 500,000s is about one-third the manufacturer’s suggested retail price for a new truck. Granted, most buyers pay substantially less than MSRP. But even at half the price of new, the difference is compelling.

On the supply side, thanks to the Great Recession and the 2007 pre-buy, a historically low number of new trucks were built for model years 2008-2011. This dynamic resulted in a tight supply of iron entering the secondary market as trade-ins. With buyers looking for late-model trucks to substitute for expensive new iron, pricing for low- to average-mileage trucks surpassed pre-recession levels in mid-2011 and has continued accelerating through the present time.

The current average retail price of about $56,000 is 14% higher than the pre-recession peak in mid-2008. And this average truck now has mileage in the low 500,000s rather than the mid-400,000s of 2008. So, buyers are paying more for trucks with higher mileage.

Marketplace acceptance of new technologies will determine whether these conditions continue. Historically, each new generation of emissions-control technology has been met with trepidation. The new truck pre-buy in 2002 in advance of the introduction of exhaust gas recirculation technology was a major market development, as was the pre-buy of 2007 in advance of the introduction of diesel particulate filters.

On the other hand, pre-buy activity was mild to nonexistent in advance of the most recent selective catalytic reduction technology, mainly because of sluggish market conditions, increased comfort level with this technology and the promise of fuel-economy improvements.

Pre-buys didn’t just artificially and temporarily increase demand for new trucks — they also increased demand for late-model used trucks to use as a “bridge” until each new technology had been on the market long enough to work out any bugs.

Fortunately, reliability concerns seem to have been largely alleviated with the SCR generation. Also, thanks to much better notice of upcoming standards, truck makers will have more time to develop and test new technologies. These factors, combined with the increased fuel economy of each upcoming step, suggest a pre-buy on the level of 2002 or 2007 is unlikely going forward.

On the supply side, thanks to the more typical build rate of 2012-2014 model year trucks, we expect a moderately increased number of late-model trucks entering the secondary market in upcoming years. However, this increased supply should be balanced by the likely ongoing increases in new-truck pricing, which will keep many buyers in the used market. For fleets and successful operators who can afford it, a new truck will provide real fuel-economy benefits. For other buyers, late-model used trucks will remain a popular substitute, helping to absorb any increased supply.

American Truck Dealers is a division of the National Automobile Dealers Association. Both organizations are based in McLean, Va.