The Magic Number

Ed Castagna Guest Columnist

The number 100 can often be a significant one, and that's proven to be the case when it comes to fuel prices and the ripple effect they can have.

The trucking industry is learning that painful lesson these days, as crude oil has soared past the $100 per barrel mark. $100 a barrel represented a tipping point, changing the purchasing patterns of truck owners and operators. It will likely to continue to do so, as fuel costs show no sign of declining.

Nassau Asset Management offers a wide range of services for financial and banking firms, contractors, and equipment purchasing agents. In terms of equipment purchasing, we are especially active in remarketing, both here and abroad. Because of our reporting process that allows us to stay aware of these changing trends, we have had a clear view of the changes wrought by rising fuel costs in the past six months.

Foremost among them is a shift in interest away from larger trucks with higher-horsepower engines (over 450 horsepower) to trucks equipped with lower-horsepower engines.

In the past few years, we had seen great interest in these larger vehicles, which include sleepers and engines with big horsepower. These trucks had been attractive remarketing targets, because the secondary market provided a cost-effective way to purchase these high-performance vehicles.

But with fuel prices soaring, operating costs on these big trucks may add an additional $80,000 to $100,000 in fuel costs per year. Truck owners and operators can't necessarily cover those operating cost increases in today's market, placing many of them in very difficult positions. For some, it means they can no longer afford to pay for their trucks.

Through our NasTrac Quarterly Index, our quarterly review of equipment trends, we have seen only a slight decrease in truck repossessions in early 2008. While our latest data show that repossessions are down approximately 21 percent in the first quarter of 2008 as compared to the same period in 2007, repossessions were up by such a dramatic margin in 2007 that this decline represents only a slight pause in an upward trend. It does not indicate anything resembling a reversal.

These operating pressures are causing truck owners and operators to make difficult decisions. Some truckers have decided it's no longer profitable to drive a truck. Others choose to reduce horsepower to increase their profit margin or switch from long hauls using a sleeper unit to local runs with a day cab.

We have seen this reflected in the soft sales of the more expensive ($60,000-$80,000) trucks in our markets. Sleeper units with big horsepower are not nearly as easy to sell as the less-expensive, lower-powered units.

Sales in the middle market (units with a value under $60,000) are still very robust. This market is the one most likely to benefit from a change in purchasing strategy by owners and operators to more energy-efficient models.

Another factor in truck sales is the export market. In this area as well, sales in the middle market have been strong, while sales of larger trucks do not show equal strength.

Based on current projections, we expect conditions to remain the same. Fuel costs seem likely to continue to rise, as will operating costs. These factors will also continue to shift buying patterns toward more fuel-efficient models.

What is also likely to continue is extensive media coverage of this topic, coverage, which has bordered on hype. We have recently seen news reports based on an analyst's projection that crude oil could rise to between $150 and $200 a barrel within two years. This analyst claimed growth in supply would fail to keep pace with demand from developing nations.

While this projection may prove to be true, the extensive amount of media coverage and conjecture it has received adds a level of pressure to the market that is not helpful. Clearly, current conditions are tough enough to cause more than a few headaches. Everyone concerned would be more than happy to wait until that next big round number shows up.



Ed Castagna is  president, of Nassau Asset Management, Westbury, N.Y.