Pessimism Prevails for Fleet Managers

By Rod Sutton, Editorial Director | December 21, 2011

The story is the same, and it does not have a happy ending. For the third straight year, optimism slowly seeped out as the long-hoped-for recovery failed to materialize. Construction equipment fleets, except those used in mining and utility work, continue to lie mostly dormant.

Asset managers, in fact, have been openly discussing a change in management tactic, pushing out machine life in an effort to stretch fleet dollars further. Condition-based maintenance and consistent residual-value calculations are reaching mainstream among managers.

The same issues continue to dampen construction recovery: lack of infrastructure funding, a weak residential housing sector, tight credit, and state and municipal budget shortfalls. Backlogs are depleted, and the pipeline doesn’t look promising.

Construction Equipment subscribers responded to our survey of the industry in a manner consistent with other construction vocations: “Last year was poor; we are hoping for minor improvement in 2012.” Last year’s business rating fulfilled the forecast made at the end of 2010, another poor year.

Contract volume is expected to rebound this year, although it will not be anything near where it needs to be. The percentage expecting an increase minus those expecting a decrease leaves a net of 12 percent, following on the heals of a net for 2011 of -15. For 2012, 38 percent expect an increase in volume; 26 percent expect volume to decrease compared to 2011.

These are sobering statistics and point relentlessly to the increasing challenge equipment managers have in ensuring the iron in the yard will be ready to perform when it is eventually needed.

Fleet Trends

Continued pressure to contain costs has made effective asset management critical to the financial health of every organization owning construction equipment, trucks and related equipment.

Fleet managers are evaluating their acquisition strategies, looking increasingly at rental options. Few organizations have a capital investment plan to unleash, waiting instead for a pick up in construction activity and demand for machine hours.

As with all of our data this year, numbers represent the industry as a whole; there are no vocational breakouts. The majority of our readers are contractors, though, so some trend data will compare the industry with contractors from previous years.

Short-term rental, for example, was used by 7 percent of contractors in 2010. Over the construction equipment universe, however, short-term rental jumped to 17 percent in 2011 with 27 percent reporting an increase in the use of short-term rental compared with 2010. All other strategies stayed the same or dropped, reflecting the lack of acquistion activity overall. Asset managers with fleets that have work to do are refraining from making any long-term commitments. Rental-purchase has stayed flat. No one has confidence in long-term outlooks these days.

The lack of long-term insight plays out in fleet expansion and replacement data. Again comparing contractor data with overall data, fleet expansions for 2011 fell short of the forecast made in 2010. Subtracting those who expected to decrease fleet size (measured in number of machines) from those expecting to increase, fleets decreased in 2011 a net of -2 percent versus a forecast of 2 percent.

Managers expect fleets to expand at a net of 9 percent this year, with 22 percent expecting to increase fleet minus 13 percent expecting to decrease the number of machines in the fleet.

As the overall number of machines in fleets fell slightly, the rate at which machines were replaced also fell short of expectations. In 2010, equipment managers expected to replace 6.1 percent of their machines in 2011. In actuality, they were only able to replace 3.4 percent. The replacement rate for 2011 marks the fifth consecutive year of decline (measured against contractors) since 2007.

Fleet managers understand the risk, but the market is dictating. The replacement rate for  2012 is forecast to be only 4 percent. As a reference, fleets replaced about 10 percent of their fleet each year over the past 15 years prior to 2008.

Overall fleet condition has suffered, with 15 percent reported to be in “fair” or “poor” condition. An additional 47 percent are in “good” condition. That means fewer than four in 10 fleets are in “very good” or “excellent” shape.

Staffing is an area that fleet managers are evaluating, and 40 percent said they decreased their workforce in 2011. Service and maintenance personnel were cut by 26 percent of fleets.