By Dean Croke
We get asked this question the most in our DAT iQ Weekly Update: Is now a good time to buy a truck?
Based on recent industry cycles, the answer is probably “no.”
“Orders follow price” is a common theme in trucking. When rates surged in early 2018 during what was then the tightest period of truckload capacity in a decade, asset-based carriers placed record numbers of orders for new trucks and trailers in the latter half of the year. When capacity loosened in 2019, we saw record numbers of trucking bankruptcies.
These recent boom-and-bust freight cycles are important to analyze before investing in new equipment.
What went up came down
Total Class 8 truck orders for 2018 broke a 14-year record, according to ACT Research. Orders totaled 490,100 units, far outstripping the previous record of 390,000 units set in 2004. By the time all of those new trucks and trailers hit the road in 2019, demand declined, resulting in extra capacity that drove dry van spot rates down 26%. The national average went from a high of $2.05/mile (excluding fuel) in June 2018 to just $1.50/mile 10 months later.
Used truck prices crashed also. During 2019, the average retail selling price of 3 to 5-year-old sleeper tractors decreased 30%. The volume of the three most common sleeper tractors (3 to 7 years old) sold through the two largest no-reserve, nationwide auctions increased by 36%, according to J.D. Power Valuation Services.
Fast forward to late 2020, truckload rates once again hit record levels, and carriers repeated the 2018 buying spree. Truck orders totaled 142,093 in Q4, the second-highest total in history. This accounted for 51% of the total orders placed in 2020, according to ACT Research.
Will history repeat?
At the moment, spot rates are $0.71/mile higher than in 2020 and $0.53/mile higher than 2018. Capacity is the tightest it’s ever been, according to the Michigan State For-Hire Truckload Capacity Tightness Index. The driver shortage appears real this time around, and spot market volumes are almost double where they were this time last year. Now is as a good a time to buy a truck as any, right?
There are many caveats. While spot volumes surge, total freight volumes in February were up only around 3% year over year. We still have a bifurcated market where there are winners and losers in the ongoing economic recovery – not all shipper volumes are rising at the same pace. Jason Miller, supply chain economist and associate professor at Michigan State University, recently noted that in Q4 2020, dry van general freight was up 2.2% year over year, whereas specialized flatbed and bulk freight was down 4%.
Operating costs and cash flow
On the cost side of the equation, diesel prices are on the rise at $3.19/gallon, 46 cents higher than the same week in 2020. A small carrier running around 100,000 loaded miles and 10,000 empty miles per year would’ve been losing 3 cents per mile in March 2020, with line haul rates averaging $1.59/mile and diesel costing $2.73/gallon.
This year, with line haul rates at record levels around $2.40/mile, that same carrier would be making 65 cents per mile in gross profit before taxes and depreciation. These higher spot rates are generating just over $80,000 in additional top-line revenue for carriers compared to the same time in 2020, which largely explains why the recent hike in fuel prices is not causing as much alarm as it normally does.
The truck orders placed in late 2020 will eventually add significant amounts of capacity to the marketplace, taking pressure off of truckload rates. When that occurs, the higher fuel costs will be much more painful for carriers.
Now is a good time to put some cash aside for that inevitable rainy day. It’s also a great time to fully understand your operating costs and how to manage cash flow.
Recently we addressed the most frequent question asked on our weekly DAT iQ Live series: Is now a good time to buy a truck? This week, we asked a leading industry expert will weigh in with insights.
Todd Amen is President and Founder of American Truck Business Services and former Co-President and owner of Trans-Western Express. ATBS specializes in helping owner-operators manage their financial and compliance affairs through their Rumblestrip suite of products, which handles the “business of driving.” ATBS clients also produce the Independent Contractor Benchmarking (ICB) yearly report, which Todd shared on the recent Truckloads Carriers Association webinar.
By the numbers
According to Todd, “2020 was like a full truck economic cycle that takes four or five years, but happened in the space of just one year.” ATBS clients ended 2020 averaging 104,000 miles for the year, an increase of 3.2% year over year. All equipment types averaged $1.46/mile, excluding fuel surcharges, which was a 5.7% decrease – the equivalent of $0.09/mile lower.
One major trend in 2020 was the shift from owner-operators being 100% leased onto another fleet to running on their own authority as independent contractors (IC). ATBS calculates the costs of being an IC adds $0.48/mile (IFTA, permits, licenses, insurance, trailer and load fees) in expenses. In June 2020, spot rates took off, increasing by close to a $1.00/mile over a 6-month period. The average rate per mile for leased owner-operators in 2020 was $1.50/mile, but with spot rates averaging $2.11/mile in the second half of the year, many carriers decided to go independent.
With rates still up around $2.36/mile excl. FSC as we end the first quarter of 2021, the incentive to become an IC and/or remain one is high – as are the profits. In 2020, ATBS clients earned an average net income of close to $68,000 representing an 8% increase over the previous year.
Know what you’re getting into
One more time back to the original question. Yes, it’s a great time to buy a truck. It always is – provided you know what you’re doing, fully understand the business side of running a trucking business and have good partners to support you along the way.
Lastly, consider the advice from Todd Amen, who looks after the business affairs for more than 20,000 O/O’s: “Good times don’t last but people that manage for the downside do.”
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