2008 New Truck Demand

If we build them, will they come?

Stu MacKay • Guest Columnist

Conventional wisdom would lead one to believe that early next year, demand for new medium- and heavy-duty trucks will once again springboard into (or at least toward) the stratosphere. After all, that's what we saw the last time the good ol' EPA hit us upside the head, late in 2002. Demand cranked in with a vengeance in 2003 and really took off over the next three years. With the operational and economic mysteries of 2007 hanging over the truck buyer - and with the economy on a relative rampage - mediums, heavies and trailers got cranked out in record numbers.

I don't recall seeing Kevin Costner in Denton, Chatham or Allentown in the past few years, but he may well have been. Because we built 'em - and they came, and kept coming! Retail Class 8 sales for the three years culminating in 2006 totaled more than 740,000 units. Just for the record, this is nearly twice as many Class 8s per year than we built for the entire 1970s, before deregulation wrung the excess out of the system. Consumer confidence was high, the market was on a bit of a tear, interest rates were bouncing off the bottom of the scale, housing was strong, etc. We really had a boomer going.

Thanks in significant measure to the export market, most of our truck factories have had at least enough demand for 2007 trucks to keep the doors open and the lines running. Sure, we had closets full of 2006 engines to stick in 2007 chassis, which also softened the blow. And truck buyers whose budgets required them to purchase trucks this year - or for whom engine glitches wouldn't be the end of the world - did generate some core domestic demand. But for the guys who buy in serious quantity, the sideline was the place to be.

Now that we're on the threshold of 2008, many of us are a bit breathless in anticipation of getting things cranked back up to where they were a few years ago. Conventional forecasting would certainly support a strong outlook for 2008. After all, with about 1.6 million Class 8 trucks in the hands of the original owners and average trade cycles for all vocations in the seven- to eight-year range, base domestic demand should be at least a couple hundred thousand rigs. When you overlay the "fear factor" of 2010 engines, demand could be a good deal stronger than the base case outlook.

In the truck business, there are no guarantees beyond traditional warranties (and some of these can often fall a bit short). A forecast is certainly no guarantee - it's a solid best guess based on the available facts and assumptions. Forecasts generally rely pretty heavily on what has happened in the past, seasoned for what changes might occur in the forecast period. And sometimes things that are going on in other related businesses get factored in as well.

It's the characteristics of ownership and purchase in a handful of relatively related businesses that give me pause to reflect on 2008 in the truck business. It is not uncommon for railroads to operate locomotives for 20 or 25 years in first-line service before trading them out. Airline operating procedures reflect the same practices. Even the trailer industry manages to live with average trade cycles for equipment purchased new of 11 or 12 years.

If airlines and railroads can manage equipment over a 25-year life cycle, why can't the truck industry do maybe half of this? The issue of roadside breakdowns certainly doesn't hold much water. A "roadside breakdown" on an intercontinental flight turns a 777 into a submarine - and this just doesn't happen. A locomotive failure on the BNSF between Chicago and Los Angeles can shut down an entire system. This doesn't happen, either.

So, at what point do prospective new power equipment buyers finally claim that enough is enough and engineer their purchase and maintenance schedules to longer trade cycles? Is it really necessary for truckload carriers, lease/rental firms and several other classes of volume truck purchasers to hold to four- or five-year (or sometimes shorter) trade cycles? The equipment is certainly better - and it is certainly more expensive - than it used to be. The first spike in maintenance and repair costs today is several years further out than it was not too many years ago. Does the aura of having the newest tractors do much more than perhaps knock a couple points off the driver turnover rate? Probably not.

2008 may not be the year that rationalization like this starts to happen. But, from this observer's perspective, it might be the year to at least start thinking about it. North American truck guys build good stuff. It's certainly good enough to last a lot longer than many of today's buyers of new equipment are keeping it.