Escalating Class Eight Truck Costs Squeeze Profitability in Trucking
In the years before the recent US Environmental Protection Agency mandates, truck replacement for motor carriers yielded benefits. Newer model trucks had the latest technological improvements, which led to increased engine life, better fuel economy, predictable operating costs, and the like. Those were the good old days.
The three EPA mandates for the last decade (EPA04, EPA07, and EPA10) are now fully in place. But the impact of these changes is hitting the truckload industry with a wallop now.
The date for EPA04 compliance was pulled forward to October 1, 2002 for several of the larger engine manufacturers as part of an agreement with the EPA. Those trucks had the first of the “engine surcharges” applied to the purchase price, which were in the area of $4,000 to $5,000 or so, depending on the engine manufacturer and model. It was known up front that fuel economy would deteriorate with the introduction of exhaust gas recirculation technology, and that certainly was the case. Fuel economy generally deteriorated more than the manufacturers indicated. And now that these engines have generally run through their life cycle, it is clear that maintenance and repair costs were significantly above the engines they replaced.
Due to the experience with EPA04 engines, many motor carriers altered their truck purchase plans in order to avoid a potential compounding effect of the EPA07 models. The “pre-buy” was significant throughout the trucking industry, and drove record new truck build volumes in 2006.
Then the Great Recession hit, and industry Class 8 truck build fell by almost two-thirds after the EPA07 compliance deadline. Those few trucks that were built came with additional engine surcharges approaching $10,000, in addition to the surcharges from EPA04. Operating costs did not improve over the EPA04 versions. For example, many of these engines are equipped with diesel particulate filters, a single item that can cost hundreds of dollars to maintain and several thousand dollars to replace.
The mandate for EPA10 became effective January 1, 2010. Engines which had been built prior to that date could legally be installed in truck builds after that date. Much of the limited truck sales volume in calendar year 2010 had pre-EPA10 engines.
Now it’s 2011, and the motor carriers that survived the Great Recession find themselves with an aging tractor fleet, many of which are EPA04 engine equipped that are five years old or more. These trucks and engines need to be replaced, and the EPA10 engine is the only new equipment available. Due to the low build in 2007 through 2010, there isn’t much late model used equipment available.
The EPA10 equipment comes with a 3rd round of engine surcharges, adding to the others. It also comes with unknown operating costs. Experience tells us that as equipment becomes more complex, operating costs tend to increase. While these engines do get improved fuel economy compared to EPA04 and EPA07 models, the improvement is not nearly enough to provide a return on the additional investment.
We’ve only discussed engine surcharges so far. Let’s now consider other items that support the US EPA Smartway Partnership program that have added cost to trucks over this period.
- low rolling resistance tires
- aerodynamic side fairings and cab extenders
- auxiliary power units
Additionally, other costs like base model price and delivery charges continue to escalate.
When it’s all considered, the fully equipped trucks being ordered today cost about 45% more than the equipment purchased before these EPA mandates. Carriers’ costs are going up dramatically as they replace older equipment: depreciation and interest for acquisition costs, lower fuel economy, and increased repair and maintenance costs. And we haven’t even discussed the skyrocketing cost of tires.
Regulations promulgated by the California Air Resources Board (CARB) have the practical impact of specifying EPA07 or newer equipment will only be allowed in the state effective January 1, 2014, with interim requirements of 50% compliance by January 1, 2012 and 75% compliance by January 1, 2013. Fleets must be compliant in order to do business in California.
The general increase in freight rates in 2011 doesn’t come close to covering these costs. (The cumulative freight rate changes over the last few years are even worse.) Every new truck brings a reduction in carrier margin, and a hurdle to capacity replacement and expansion.
And we haven’t even spoken about trailers. We’ll save that discussion for another time...