The Intangibles of Fleet Average Age

Sept. 26, 2014

“How long do I keep it?” is a question that equipment managers ask every day.  They know that replacing machines at a relatively young age reduces repair costs, shop labor and downtime but increases the amount of capital invested in the fleet.  They also know that if they increase fleet age then capital expenditure comes down, repair parts and labor go up and efficient repair facilities become critical for success.  Striking a balance between a capital intensive young fleet and a repair intensive old fleet is more art than science.  There are some analytical tools to help us but success comes from knowing the implications of fleet average age and finding a balance that suits your business.

Calculating the theoretical economic life for an item of equipment is not very difficult.  Two approaches are frequently used. (See “How to Find the Sweet Spot”, July 2004 page 50 and “Cash is King, Even with Iron” April 2005 page 70)  Calculating the theoretical economic life gives a good starting point.  It helps understand how owning and operating cost vary with age but does not take into account many intangible factors that cause practice to deviate from theory.

The first factor is, of course, the reality of the industry.  Your careful analysis may show that it is time to replace two of the four twin engine scrapers you own but you do not have any scraper work on the horizon after the current six month project is complete. So, you hang onto the two old machines for or another thousand hours or so and wait until you have more confidence about future work.  The second, and equally important factor is your financial situation.  You may have ample work on the horizon but capital budgets are spent and you truly do not see yourself investing in new scrapers for a year or two.  So, you replace a few key components, give the old girls a thorough overhaul and keep them in your fleet for another season or two. 

The third factor relates to your style, your feeling and your personal philosophy as to how old you believe the fleet should be.  Some managers believe that the fleet should be “young and good” as this is an important part of the image they wish to project and an essential ingredient for success on the high tempo, high production jobs the company undertakes.  Other managers believe that machines are built to last and that you can keep them forever if you look after them with care and affection.  They believe that appearance is not a factor as long as you get the job done and that availability and downtime are not important if you allow for an extra machine or two on standby.

Lets look at the pros and cons of these two styles and understand what happens if you keep your fleet – or certain parts of our fleet – on the young side or the old side of the optimum point. The table above lists the advantages and disadvantages; let's discuss each in turn.

Keeping the fleet average age young

The principal advantage is that you will have lots of good iron that will work long hours on high tempo jobs without delays and disruptions due to equipment failure.  Reliability and uptime will be good, frequent replacements will make it possible for you to keep pace with the latest advances in technology and every machine will be a billboard for the high standards set by your company.  You will not need to establish large and complex repair facilities and the infrastructure you need to keep your fleet up and running will be small, simple and manageable – you will not get involved with expensive, complex and risky rebuilds.

It sounds too good to be true and, yes, there are disadvantages. First of all, the amount of capital tied up in your fleet will be high and financial metrics such as return on investment will be difficult to achieve.  High levels of capital expenditure together with the loans and leases needed to leverage equity means that annual financial costs will be high.  You will have to work long hours to bring these down to reasonable levels and you will be very

exposed to weather and other factors that make it impossible for you to get the most out of the investment you have in your fleet.

There are four things you must be good at if you want to keep your fleet average age low and be successful.  First, you must understand equipment finance and have access to the funds necessary to maintain a healthy capital expenditure budget.  Second, you must have the infrastructure needed to obtain and perform work at a high tempo. The investment you have in your fleet must be well utilized and it is unlikely that you will make money if you do not utilize a strong young fleet to the fullest extent possible. Third, you must have excellent dealer relationships and effective warranty administration. You will be spending a lot on new equipment and your dealers must stand by and provide the support you need.

Letting the fleet average age increase

The advantages are almost exactly the opposite to those of a young fleet. The capital invested will be lower, the annual cost of finance will not drive the organization and it will not be critical to work long hours and undertake high tempo jobs.  Some of your fleet will be “paid for” and you will not be as severely affected by periods of low utilization due to weather or work load fluctuations.  

There certainly are disadvantages associated with an old fleet.  Reliability and availability can easily reach a stage where they impact operations and you will need to get into the business of owning and operating substantial repair facilities.  Shop facilities and other infrastructure will require substantial investment and, while many of the costs such as parts and direct labor are variable, you will need to manage the fixed costs associated with the facilities, labor and overhead.  Long lives may cause your company to fall behind the technology curve and you become very exposed to the risk of parts availability and cost.

What do you need to do to be successful?  First, running effective and efficient shops must become a core competency.  This is much more easily said than done.  The facilities themselves must be first class, mechanic training must keep pace with turnover and technology and capacity must be sufficient to support demand without compromising quality. Second, you are buying for the long term and equipment selection is critical.  Parts and rebuilt component availability are critical and total lifecycle cost is very much more important than purchase price.  Third, operational planning will have to be flexible enough to accommodate the reality of downtime. Field crews will need to understand that the luxury of lower fixed owning cost does not come without a price and that availability will be less than perfect.

Clear understanding of these differing fleet philosophies will guide average-age decisions as much as will analytics. Know where you want to be and develop a policy or style that suits your business and each group of machines in your fleet.  It would seem appropriate for key production machines to be kept young and reliable.  It would also seem appropriate for highly stressed self destructive vibrating equipment to be replaced on the early side while stable, simple and inherently reliable machines like rigid frame trucks can be kept for longer.

Once the philosophy is set, stick with it. Changing your policy or your style can be difficult, time consuming and expensive. A decision to move from a capital intensive young fleet to a repair intensive older fleet carries with it a decision to develop the core competencies needed to own and operate effective and efficient repair shops.  This is not easy, it requires a significant investment in money, time and talent.