Summary
New truck sales will soon be negatively impacted by the looming 2010 EPA Emission Standards.
The costs associated with the required emission changes are far exceeding all estimates.
Based on my own purchasing experiences I have seen prices rise by as much as $7,000 per unit, during the period from 2002 to 2009.
As a result I do not see new truck sales even beginning to recover until the third or fourth quarter of 2010, at the earliest.
Analysis
New truck sales continue to be hammered by the economy and are still reeling from the effects of past EPA Emission changes. New truck sales will soon be negatively impacted by the looming 2010 EPA Emission Standards, as well.
The Clean Air Act of 1990 mandated the EPA to begin improving the air we all breathe by lowering the emission levels of all new trucks and automobiles. Although the regulations issued by the EPA have achieved their stated goal of reducing emissions, the same objective has brought the truck transportation industry to its knees.
The actual costs associated with the required emission changes are far exceeding all estimates, especially those of the EPA. At the 2008 Spring Meeting of The Technology and Maintenance Council of the ATA, several large fleets shared their operating history concerning the EPA 2002 engines. Even though the EPA estimated the EPA 2002 change would only increase fleets "out-of-pocket" expenses by no more than $800 per vehicle during its life cycle, several fleets documented actual costs (acquisition, repairs and fuel) to be closer to $3,600 per unit in just the first five years of operation. Although to early to tell, it appears that the EPA will miss their other emission estimates by similar margins.
Another issue for fleets is that although emissions have been reduced, trucks are getting heavier. All of the emission changes have resulted in additional components and hardware to meet the requirements of the regulations. I estimate that a 2010 EPA vehicle will weigh approximately 1,000 pounds more than a pre-2002 EPA vehicle. This increased weight means lower payload for some fleets, thus reducing revenue.
Also working against the trucking industry is the fact that it is an asset heavy industry. The required capital to finance large acquisitions of new vehicles makes most bankers cringe in good times and makes them run the other way in poor economic conditions. Adding to this issue is that the cost of new trucks is rising dramatically due to the required emission changes. Based on my own purchasing experiences I have seen prices rise by as much as $7,000 per unit, during the period from 2002 to 2009, due entirely to the added cost of emission related components. This alone has stopped several fleets from investing in new equipment.
Even more concerning is that as we look forward to 2010, new vehicle prices are set to increase by another $9,000 to $10,000 per unit to meet the EPA 2010 requirements. This will represent an almost 20% increase in the acquisition cost of a new vehicle due to the emission changes from 2002 to 2010. Based on where we are today most fleets are wondering how they will ever be able to afford new vehicles. As most will tell you, we have not seen a corresponding increase in rates during the same period of time.
The bottom line is that although there are a few emerging signs of improvement across the economy, I believe it is "to little - to late" to have an impact on new truck production for 2009. Going into 2010 I believe you will continue to see fleets reluctant to order new vehicles based on "sticker-shock", weight and reliability issues. As a result I do not see new truck sales even beginning to recover until the third or fourth quarter of 2010, at the earliest.
James Cade consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
