Equipment Type

2005 Industry Giants:Highway Act Supports Giant Optimism

Largest fleet owners forecast a business outlook reminiscent of the late 1990s before highway and energy legislation loosed federal coffers

September 01, 2005

 

United Contractors Midwest
United Contractors Midwest is working on four contracts as part of the largest downstate highway project in Illinois history, the $460 million upgrade of I-74 through Peoria.
Volume Continues to Climb
Work-volume growth exceeded the expectations of a small percentage of Giants in 2004. But more Giant contractors saw work fall than anticipated, too. In fact, 21 percent of Giant highway-and-heavy contractors worked less in 2004 than in 2003. Only 14 percent expected a drop. Giant contractors, nonetheless, lead all vocations except rental firms in expecting work volume to increase. Sixty-nine percent of highway-and-heavy contractors expect volume to rise.
More Great Expectations
After a remarkable 2004, more Giants expect 2005 to be a very good or excellent business year. Materials producers and highway-and-heavy contractors are the most conservative segments among Giants, with 42 percent of Giants in both groups expecting a very good year. Thirty-six percent of materials producers and 38 percent of contractors anticipate 2005 will be a middle-of-the-road "good" business year, and 21 and 20 percent, respectively, are bracing for fair to poor business.
Fleet Spending Soars
Forty-seven percent of Giant firms increased their spending on new equipment in 2004 and only 17 percent reduced equipment spending, duplicating the statistics from 1999. Rental companies top the charts, with 88 percent expecting to spend more on equipment this year. Many Giant contractors appear to be improving fleet utilization — while 71 percent expect work volume to increase, just 45 percent will increase new-equipment spending.
Rentals Will Rise
The percentage of Giants expecting to increase rental use in 2005 is identical to the 2004 forecast — 32 percent — and as high as Giants have forecast since 1998. But 40 percent of Giants actually increased rentals in 2004, and the group is persistently overconfident about its ability to reduce rentals. In every year since 1998, the percentage of Giants who actually increased rentals was larger than forecast. And in six out of seven of those years, fewer Giants actually decreased rental use than forecast.
Operating Costs Mirror Work Growth
Last year, Giants increasing repair and maintenance spending reached an eight-year high. Firms expect this year's maintenance-cost growth to continue at the peak 2004 rates, but fewer Giants forecast repair costs to increase this year. Giants tend to underforecast repair and maintenance costs, though, so expect shops to continue spending more to keep increasingly utilized fleets productive.

 

Congressional authorization of highway funding in late July settled the Big Uncertainty in the heavy-construction economy. This crucial public policy secured projections made by the nation's largest equipment fleet owners in May of record work-volume growth and the most prevalent prosperity since 1999. Twenty-two months and 11 extensions after expiration of TEA-21, legislators sent the "Safe, Accountable, Flexible and Efficient Transportation Equity Act — A Legacy for Users" (SAFETEA-LU) to President Bush for signature. The new law provides $286.5 billion in guaranteed funding for federal highway, transit and safety programs through 2009. President Bush signed the measure at a special ceremony at Caterpillar's Montgomery, Ill., manufacturing plant.

Construction Equipment surveyed firms with fleet-replacement values of $25 million or more in May of this year to gauge their business outlook. The Giants list includes construction firms, construction-materials producers, equipment-rental companies, industrial companies, government agencies, and other equipment-fleet owners, but the most common type of company on the list is the construction contractor.

Many Giant contractors had an encouraging 2004. A small percentage of them exceeded their own expectations for work-volume growth. But more Giant contractors saw work volume fall than expected, too. Fleet owners working in non-contractor vocations such as rental, mining and materials production were much more likely to have increased work volume last year.

Nonetheless, contractors lead Giant vocations (other than rental) in expecting work volume to increase this year. Seventy-one percent expect 2005 work volume to increase.

Looking more closely at the makeup of Giant contractors, highway-and-heavy constructors outnumber the combined ranks of general building and industrial contractors on the list by more than five to one. And these highway-and-heavy firms' business projections have been the most restrained among Giant contractors. Their numbers have been encouraging, as 46 percent of highway-and-heavy Giants saw work volume increase in 2003 and 55 percent last year. But their optimism could not match general-building Giants, 72 percent of whom reported rising work volumes in 2003 and 75 percent in '04. Work volume rose for 77 percent of industrial-contractor Giants last year.

Last year's largess resulted in 75 percent of general building Giants and a remarkable 92 percent of industrial contractors forecasting increased work volume in 2005. Sixty-nine percent of highway-and-heavy Giants expect work volume to increase this year — a portion slightly greater than Giants as a whole. If highway-and-heavy firms conform to historical patterns, their work-volume forecast is likely to be fairly accurate, if a little conservative.

Despite the bright work-volume outlook, only 42 percent of highway-and-heavy firms expect 2005 to be an excellent or very good business year. Half of all Giants are looking forward to big business this year, and 58 percent of general builders and 69 percent of industrial firms expect 2005 business to boom.

It's probably too late for the SAFETEA-LU dollars to alter highway-and-heavy Giants' 2005 business performance dramatically, but next year's forecasts are likely to reflect the legislation's affect.

Despite two years of uncertainty over highway funding, it's important to point out that Construction Equipment's Giants surveys sketch an overall economic picture that closely resembles the halcyon days of the late 1990s. Percentages of firms forecasting increased work volume, a very good business year, and increased spending on new construction equipment are as high as they've been since 1999 or 2000.

The mean, or mid-point value among Giant fleets has risen significantly in this decade. From a low of $120 million in 2001 to $143 million in 2003, to $163 million this year, the average Giant fleet is worth 26 percent more than it was four years ago.

Even though mining Giants' work-volume and business-year expectations are moderating, 58 percent of them (second only to rental firms) plan to spend more on new equipment this year. Materials producers are the most conservative. After a big year of machine buying in 2004, only 30 percent plan increased spending this year, and 18 percent expect to spend less.

Giant contractors obviously plan to put idle machines to work. While 71 percent expect work volume to increase, only 45 percent will increase spending on equipment.

Use of rental to supplement these fleets spread dramatically last year. Just 26 percent of Giants recorded increasing rental use in 2003, but 40 percent rented more in 2004. Thirty-two percent expect to increase rental this year, but Giants consistently underforecast their rentals, so actual usage is likely to be similar to 2004.

Such prosperity across the spectrum of the nation's largest equipment users makes Giant rental firms very successful. Seventy-three percent of rental Giants reported increased volume in 2003, 88 percent in 2004, and 94 percent forecast work-volume growth for this year. Ninety-five percent of rental Giants expect business this year to be excellent or very good. Not surprisingly, rental companies top the fleet-spending charts with 88 percent of them expecting to spend more on equipment in 2005.

Perhaps the big surprise of the 2005 Giants study is the disposition of materials producers. Percentages of materials firms that recorded increased work volume in 2003 and 2004 handily outpaced contractors to a six-year high last year of 64 percent. Just 47 percent are expecting volume to increase this year, though, and only 42 percent forecast an excellent or very good business year in 2005. Late authorization of highway money may be teaming up with the high cost of raw materials and energy to pinch the fortunes of these firms that usually ride high on the tide of the construction economy.

Giant miners forecast 2005 work volume in much the same way as the materials producers. It won't be a bad year — nearly 50 percent of Giants in both materials and mining vocations are expecting volume to increase — but both groups are certainly prepared for a slowing of what has been meteoric growth.

The main difference between Giant materials firms and miners lies in how successfully they will complete their work volumes. Seventy-five percent of miners expect 2005 to be an excellent or very good business year, and none expect business to be fair or poor. Only 42 percent of materials firms forecast excellent/very good business in 2005, and 21 percent are bracing for a fair/poor year.

Uncertainty in small subsets of the Giants list can't dampen the enthusiasm with which the nation's largest fleet owners, overall, embrace this year. They made encouraging forecasts well before Congress sent generous highway-and-energy legislation for the President's signature. Loosed federal spending should continue two years of growth well beyond 2005.

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