Truck tractor pricing could hit a speed bump, explains Slavin

After an unprecedented year (2021), with COVID and other disruptive economic forces accelerating pricing, the transportation industry is still adjusting and finding its new normal among a new set of macroeconomic factors. Our in-house transportation industry expert Rob Slavin, Senior Valuation Analyst, speaks with us to break down what we are seeing so far in the sector in 2022, what we can expect looking forward, and why the uncharted pricing of 2021 is likely in the rearview mirror.

Q:The last time we talked, you were telling us about the unprecedented demand for truck tractors in 2021. What are you seeing in terms of demand so far in 2022?

Rob: Many factors came together to support what happened in 2021. Lack of supply of used assets, inability to get new truck inventory in reasonable time frames, historically high spot rates, lower interest costs, limited driver pool, lower fuel costs, high consumer spending, and plenty of freight in the market.

As I spoke about in our last interview, we saw the highest price increase on used trucks that our industry has ever seen. Most of it on sleepers, which jumped in value as much as +140% over the same age/similar mile units a year earlier. Everyone is expecting new Class 8 deliveries will be similar to what we saw in 2021, which didn’t lead to a surplus of equipment on the ground.

What has changed dramatically, however, is fuel prices, especially for small fleets/owner operators – those that live off spot-rates.

Q: In our recent Inside Edge Podcast, you discussed truck pricing trends. Are you still seeing an upward trajectory or has there been some stabilization?

Rob: We started 2022 with equipment continuing a similar increase to what we saw in previous quarterly jumps. It was mid to late-Q1 when we started to see a noticeable price drop on the units that jumped the most as a percentage of sale price. We are still seeing very strong pricing, and I don’t expect a cliff event. But I do expect prices will continue to drop over 2022.

Q: Some are anticipating a big downtrend in the freight industry, are you seeing the same indicators?

Rob: Yes, some are predicting a “bloodbath” in the industry. That’s interesting. It reminds me of 2019 (specifically Q3/Q4), a time that I jokingly refer to as the “truckpocalypse,” as in the worst of times. Here’s a quick example: we sold 2015 Freightliner Sleepers in that time frame with mileage in the 500-600k for mid-$20,000 range. If we sold those same units 2 years later, they would have gone up 148% in value.

So, what’s the big difference between then and now? New truck deliveries, for one. In 2018-2019, those were very big years in new truck deliveries in the US. In fact, 2019 was the second biggest new truck delivery year with 276,000 C8 deliveries; only second to 2006 (pre-emission year). And 2018 saw 250,000 C8 deliveries. This caused an oversupply of used and that meant LOW pricing.

Even with the limited supply, I never expected these current prices to hold. What we just experienced, in my opinion, is a “once in a lifetime market.” I originally expected a slow drop in prices over the course of the year.

Q: What are the indicators that may speed up the price drop?

Rob: First: diesel pricing – today it just hit a US national average of $5.62/per gallon. That’s up from $3.22/per gallon in May 2021 (75% increase) and up $3.13 (124% increase) from May 2020’s pricing of $2.49. I never expected fuel to jump so high – so fast! This will impact smaller fleets who live more off spot rates than the large fleets who typically have contract rates with a fuel surcharge that offset that increase.

Second: repossessions. Maybe I am jumping the gun, but if spot rates don’t see an increase to offset the diesel pricing increase, those that jumped into this market may consider leaving.

Third: inflation/consumer spending. During COVID, travel was limited and restaurants were closed. It became an “e-commerce” economy and many families had plenty of excess cash to buy “stuff” when restrictions lifted. But with inflation up to record levels and consumer spending down that limits the need for transportation. And look for that to get worse in the near future. Imports into port cities are expected to dramatically drop in the June to July time frame.

Q: If there is another downturn, do you have any tips on how to prepare or shield yourself against it?

Rob: Too many people spend their “extra” income on wants versus needs. If you’re getting ready to “brace for impact” – stockpile your cash now for down months. That new flooring, kitchen upgrade, new bedroom furniture can wait. If you can, lock in some dedicated contracts, even though it may not be as lucrative as spots rates have been in the past.

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