From upside down to cashing out

Avery Vise is editorial director of Commercial Carrier Journal. E-mail avise@randallpub.com.

Tulip bulbs in 17th century Holland. Dot-com stocks in early 2000. Used trucks in 2003? Under the right conditions, the value of a late-model used truck – seemingly worthless a year ago – could skyrocket by early next year. If that happens, the trucking industry could undergo the most significant restructuring since the dawn of deregulation.

Let’s assume three things. One, the Environmental Protection Agency does not budge on the Oct. 1 engine emissions deadline – and neither Congress nor a federal judge makes them do so. Two, a strong economic recovery drives fleets and owner-operators to buy more trucks. Three, truck buyers avoid the new exhaust gas recirculation-equipped engines like the plague. Big assumptions, I’ll admit.

First, there are so many ways for the consent decree between EPA and the engine makers to disappear. Congress could kill it through a limitation on appropriations. EPA could reconsider the underlying regulations for the 2004 model year. The agency might even get away politically with a postponement on the grounds that enforcing the deadline would cost jobs and undermine the economy.

The second assumption may be even iffier. Despite some positive economic signals, an economic rebound has yet to materialize. According to Bob Costello, chief economist for ATA, continued weakness in business spending suggests only a mild and gradual recovery this year.

The third assumption is the best bet. There aren’t many people singing the praises of the new EGR engines – in part because so few truck owners have seen them. Purchase price, fuel economy, maintenance and reliability concerns abound, and there aren’t many fleet owners who can contradict those fears with actual experience.

Whether the concerns over EGR are justified is irrelevant. ATA summed it up in its petition to EPA for reconsideration of the 2004 rule: “The trucking industry equates ‘untested’ engines as ‘unreliable’ engines and for good reason. Too much financial risk is at stake in the highly competitive world of trucking to purchase anything less than a fully tested engine.” And while the reliability worry might go away with actual experience, cost will remain a concern – especially since there is no apparent offsetting benefit to the truck owner.

What happens if all three assumptions hold true? Imagine this scenario. A rebounding economy has carriers eager to add capacity, but nobody wants to buy the new-technology trucks. The price of late-model used trucks – already recovering this year due to the looming Oct. 1 deadline – would escalate.

Consider this situation in light of recent carrier troubles – fuel-price spikes, surges in insurance premiums, loss of equity in their equipment and sluggish freight volumes. Now, weary owners suddenly realize that their balance sheets have swelled due to inflated truck values.

What you have, in a nutshell, are motivated sellers and buyers on a large scale. Owners of small- and medium-sized trucking companies might see perfect conditions for selling – especially if their trucks are relatively young and well maintained. At the same time, larger carriers might be willing to pay premiums to these owners just to avoid buying new equipment.

Normally, trucking company owners would insist on selling their enterprises to maximize returns. In such a frenzied used truck market, however, owners’ asset values alone might ensure healthy returns. Deals that otherwise would take months could be inked in just a few days. All that is needed is enough cash and financing to pull it off.

Flush with cash, sellers would liquidate remaining assets, pay off their obligations and move to Florida. Voila! In a matter of months the industry completes a realignment that otherwise might have taken years or even decades.

Unrealistic? Maybe. But if it happens, remember: You heard it here first.