Trucks, trailers, and aftermarket parts sales poised for growth
Feb 1, 2010 12:00 PM, By Bruce Sauer
TEA points higher
An upward shift in TEA is pointing to improved conditions for trucking.
“About the third quarter of 2007, the components of TEA began to sag or crater,” MacKay said. “Government was the only component of TEA that continued to increase. The third quarter of 2007 was about the time that the housing industry began to decline. TEA dropped into negative territory in 2008 and into serious negative territory in 2009.”
Demonstrating the benefit of using TEA instead of GDP, MacKay reviewed GDP performance in recent years — strong in 2006, stronger in 2007, flat in 2008, and down modestly in 2009. This obviously was no indication of what happened in the heavy truck and trailer markets during that period.
MacKay showed a graph that compared TEA and changes in the population of Class 8 trucks. In the graph, TEA was holding relatively steady between 2005 and 2007. The population of Class 8 trucks, however, grew significantly during that time as fleets bought trucks ahead of the 2007 diesel emissions mandate from the Environmental Protection Agency. The implication: more trucks were sold during that time than were needed, an indication that it will take longer than expected for new truck and trailer customers to get back into the market.
“It really takes a long time to burn up that surplus equipment before we start to see any improvement of any consequence in the new truck business,” MacKay said. “The good news is that we are starting to see TEA coming up. We are starting to see equipment that had been parked being put back into service.”
Aggregate spread moves higher
Based on the direction the aggregate spread has been taking, MacKay says the economy bottomed last summer and is moving up.
“The mess that we are in began to turn around somewhere late in the third quarter,” MacKay said. “In spite of the increase, we are still in the tank in the first quarter. We should begin easing back up in the second quarter. The aggregate spread points to extremely positive for the fourth quarter of 2010. The data that we see indicates that we can expect a sharp rebound in economic activity. It's a very encouraging sign from our perspective.”
Matching up TEA and heavy-duty aftermarket parts sales, MacKay said 2009 was the worst year since he has begun tracking it. According to a graph that MacKay showed, the 1990-1991 recession was bad, with two consecutive years of decline in TEA and in parts sales. This time around, the retraction has been deeper and more prolonged. TEA has declined every year since 2004.
Along with the decline in TEA, parts sales showed a real loss in 2008 and an almost 10% decline in 2009. This has been a far more serious retraction than other recent downturns. Parts sales, for example, never went into negative territory during the most recent recession of 2001-2002.
Trucking activity as measured by the Morgan Stanley Truckload Freight Index is another reason for optimism, MacKay said. Throughout the first three quarters of 2009, that index was well below the level of recent years (2003-2008). But beginning in the fourth quarter, the index began to exceed 2008 levels and was on par with 2006.
“This is a very positive indication,” MacKay said. “This will stimulate demand for trucks and, over time, the sale of aftermarket parts.”
Getting back to work
A third factor that MacKay tracks is fleet utilization. To get an idea how effectively fleets are operating their equipment, MacKay & Company surveys between 700 and 900 fleets. By MacKay's measure, fleet utilization bottomed out in the first quarter of 2009 and moved higher in both the second and third quarters before leveling off in the fourth.
“We still have room for improvement,” MacKay said. He pointed to 2007, when fleet utilization was at 87-88%. His most recent survey showed it at about 83%. Nevertheless, fleet utilization is markedly better than in the first quarter of 2009, when it was below 77%.
“The point I would make is that utilization has turned, but we are a long way from the kind of utilization that would trigger serious new truck activity and serious aftermarket demand.”
As has been the case with other indicators, fleet utilization hit bottom in 2009. It was at comparable levels in the early 1990s, a low point which MacKay explained was caused by the aftermath of deregulation.
Aftermarket variables
In spite of the positive economic news, aftermarket parts sales are facing several hurdles before they can work their way out of this recession. They include:
- Too many trucks
There are still more trucks than needed to move the current amount of freight. At one point, more trucks were sitting idle than at any time MacKay had seen since at least 1982.
- Parts cannibalization
“We had a bit of this in 1982 as a result of deregulation,” MacKay said. “But I haven't seen parts cannibalization like this in any of the previous recessions.”
Based on an electronic survey of 300-400 fleets along with a large number of distribution businesses, MacKay concluded that approximately 15% of parts demand was being met through cannibalization.
- Inventory pull-down
Parts inventories are being trimmed to historic lows. At some point, however, shelves will need to be restocked.
Aftermarket outlook
A year ago, MacKay forecast that parts demand would decline 1.3% in 2009. “But when we looked at all the parked trucks, cannibalization, and the impact of inventory reduction, the number went to -8.3%,” he said.
“So where are we headed? We think for 2010 and probably not until the third quarter, the number of parked trucks will be reduced to 1.5% to 3.5% of the population,” MacKay said. “In 2009, 7.6% of Class 8 trucks were parked.”
Utilization rates will improve in the coming years, but nothing like we saw in 2005-2006, he said. But as utilization rates improve, parts and service departments can expect to see more business. The equipment from some of the big production years will be reaching the overhaul and replacement cycles.
“That should drive a 4.5% increase in the aftermarket compared with where we are right now,” MacKay said.
Parts should also get a boost as the cannibalization process runs its course. After all, a part is only cannibalized once.
All of these factors combine to lead MacKay to expect an 8% increase in aftermarket parts sales in 2010. However, he does not expect a lot of growth long term in the aftermarket. The reason: components last much longer. MacKay pointed out that engines used to receive an in-frame overhaul after 250,000 miles of service and an out-of frame overhaul after 450,000 miles. That is being stretched to as much as a million miles today. The same trend can be found throughout the drivetrain.
MacKay is forecasting an 8.3% increase in parts demand for trailers and for Class 6-8 trucks in 2010, followed by an additional 2.2% increase in 2011. But because of the improved quality in components, he believes parts sales will edge down 1.5% in 2012, 1.8% in 2013, and 1% in 2014.
Parts sales for trailers and container chassis could drop by 6-7% as fleets continue to adopt technology that allows them to utilize their equipment more effectively.
On the positive side, MacKay expects annual mileage to increase for trailers and Class 8 trucks. In 2009, trailers averaged 49,650 miles for the year. That should increase to 54,042 by 2014.
Looking out to 2020, MacKay identified several trends to watch:
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Slow growth in the population of trailers and Class 8 trucks.
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Class 8 truck manufacturers increasingly will place proprietary engines in their vehicles.
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Increased acceptance of medium-duty hybrid trucks and heavy-duty trucks powered by alternative fuels.
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Universal use of onboard electronics.
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A minimum increase of 20% in repair/replacement mileages.
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Increased desire on the part of fleets to outsource service.
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Improved availability of service technicians.
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A $55,000 increase in the purchase price of a Class 8 truck.
Looking out to 2020, MacKay predicted two significant changes in the aftermarket:
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The OE dealer will get more of the parts business. The reason for the shift will be that trucks will become more complex.
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Independent dealers increasingly will become part of a buying group.
“Short term, we are going to have better market in 2010,” MacKay said. “It's appropriate to gear up for a market rebound. Long term, buckle up for distribution changes.”
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