Used Truck Pricing Dives

Overcapacity in the trucking industry is sending used truck prices plummeting and leasing companies are scrambling to minimize the damage and keep inventory rolling.

Weak freight demand has forced trucking companies to sideline or sell power units, flooding the used truck market and sending prices there down 10 to 20 percent from two years ago in most regions and higher in others. Truck leasing companies are getting hit the hardest.

“They’re more willing to do deep discounting” for their customers than was the case a year ago, said Peter Vroom, president of the Truck Renting and Leasing Association.

To help struggling carriers — and get some return on their assets — many leasing companies are offering trucking companies and shippers with private fleets a restructured lease package before the lease terminates to “help the share the pain,” Vroom says. “(Leasing companies) aren’t making a profit, but at least they’re keeping their equipment moving.”

Another big factor pressuring used truck prices is bankruptcies. There have been more than 3,500 of them in the last 18 months, flooding the market with repossessions. “The residual value for a sleeper a year and a half ago was $35,000, it’s now $25,000,” said Lance Bertram, vice president of sales and marketing for Idealease, a Chicago-based truck leasing company. “That’s huge.”

Falling used truck prices along with no end in sight to the recession was a major reason the stock of one of the country’s largest truck leasing companies, Ryder System, with a large used truck network, was recently downgraded.

“Used truck pricing is still down double digits year over year with no real signs of improvement,” said David G. Ross of Stifel Nicolaus. “Oddly enough, we believe it could be even worse if some lenders were not so accommodating with carriers right now on the finance side.”

Ryder’s profit tumbled 88 percent in the first quarter, earning $6.8 million, as revenue dropped 22 percent to $1.2 billion.

The company predicted business would be weak through the end of 2009, especially affecting the fleet management and supply chain segments of its business. The company’s full-service lease customers are operating fewer leased units and driving them fewer miles than Ryder had predicted, said Chairman and CEO Greg Swienton.

Small companies also are feeling the pinch. “For smaller carriers, sometimes you allow them to make every third payment” on their lease, Vroom said. “The collateral is so damaged, lenders and finance companies are just trying to get what they can” by keeping equipment on lease “and then hoping to better recoup their investment when market turns around.”

“It’s not hitting us to the magnitude of the Ryders of the world, but I’ve never seen (negative) factors come together at once like this,” said Tom Thayer, president and CEO of Idealease of Richmond in Richmond, Va.

Federal emissions mandates — which increase the price of new trucks and pressure carriers to hold on to their current fleet longer — the weak economy, and tight credit markets all add up to bad things for used truck prices, Thayer said.

“Credit is extremely tight. Even though the feds are throwing money at the banks, it doesn’t seem to be coming out in the form of loans in our industry,” he said.

“Banks don’t want the residual risk we’re seeing out there right now. There are a lot of customers that have a strong business with good balance sheets but aren’t able to play by the strict set of rules on these loans. We have customers finding it impossible for banks to compete for their business.”

Doing things like extending favorable lease terms, however, and providing leniency on late payments to help customers and keep inventory stock rolling can be “a double-edged sword,” Thayer said.

“You roll the dice on that, because adding one more year on a lease that should have been turned in puts leasing companies out of the (maintenance) cycle, and now you’re getting into having to replace hard parts like turbos and compressors. That can be very costly.”

It can also prolong what is already becoming one of the longest cycles of overcapacity in the trucking industry in decades, a cycle shippers have been using to pressure down rates as manufacturers and retailers cut costs.

“The longer lenders let the capacity remain in the marketplace, the longer it should be until we see better pricing in the truckload sector, in our view,” Ross said.

Contact John Gallagher at jgallagher@joc.com.