Revenue Fuels Fleet Expansions

By Rod Sutton, Editorial Director | December 18, 2013
Revenue Fuels Fleet Expansions

It’s been a lifetime since the recession began, at least measured in equipment years. A machine operating 2,000 hours a year would be more than 10,000 hours old by now, and its fleet manager could be facing a repair/rebuild/replace decision.

Of course, this scenario assumes the machine had that much work to do over the past five years, which many fleets have not been able to offer. America’s fleet includes machines that are under-utilized, machines that are inching past their useful life, and machines that can finally be pushed no further.

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Fleet managers enter 2014 dealing with this machine dynamic coupled with an economy and markets that continue to be less than calm. America is entering its sixth year of uncertainty. Healthcare and mid-term elections will certainly consume Washington this year, while the economy stumbles up and down the course to recovery.

Machine management trends illumine 2014 with a glimmer of hopefulness. Construction Equipment subscribers responded to our 2013-14 Annual Report and Forecast survey with a welcome outlook.

Last year’s business year met expectations that were slightly up from 2012. Business for 2013 was reported as off, up from poor the previous year. Although far from a rebound, the trend continues upward in the forecast for business this year with fleet managers expecting an average 2014. Positive signals continue to be muted by dysfunction in the general economy.

An example of this contrast is contract volume. Over the past couple of years, forecasts have been rosier than actual performance. Although 2013 reflected this tendency, the difference between forecast and actual narrowed. The percentage reporting an increase in contract volume minus that reporting a decrease left a net of 12 percent, the first positive net in many years. The 2014 forecast is even better: a net of 24.6 percent.

Contract volume converts to revenue, which can be invested. For fleet managers, expectations of volume growth should naturally carry over to fleet management expectations that would include a long-awaited ability to upgrade equipment fleets. Indeed, manager responses indicate that fleet expansions and replacement rates rebounded in 2013.

Construction Equipment Fleet Trends

The net for fleet expansions hit the highest level since 2007, well beyond the expectations for last year. Twenty-nine percent of respondents said their fleets had expanded in 2013, as measured by the  number of machines in the fleet. Subtract the 11 percent who noted fleet contraction, and the net was 18 percent. In 2012, the forecast net was 7 percent. The forecast for this year mirrors last year’s actual: A net of 19 percent results by subtracting from the 29 percent that expect to expand their fleet size the 10 percent that expect it to contract.

Machine replacement rates, the percentage of a fleet replaced in a year, also returned to near pre-recession levels. In 2013, respondents reported an overall replacement rate of 7.9 percent, more than double the rate reported in 2011. As with the fleet expansion numbers, the replacement rate is the highest since 2007. The forecast replacement rate for this year is 9.4 percent, which if attained, would be a return to the healthy rate of turnover consistent with historical data.

Work needs to continue, however, in order to return fleet health to pre-recession levels. The portion of fleet managers who labeled their fleet health either excellent or very good in 2013 is 37 percent. In 2012, 33 percent responded in this way. Most of the positive movement came from the “good” category, with the worse-off fleets still accounting for 17 percent of the total.

Short-term rental remains the story in acquisition trends. Driven by emissions angst and cash flow, fleet managers see value in keeping new machines on the job sites and off the books. In 2013, 21 percent of managers reported using short-term rental, and 15 percent used rental/purchase agreements. Almost 27 percent of respondents said they had increased their use of short-term rental in 2013, and 17 percent said they decreased usage. Outright purchase is still the No. 1 method of acquisition, though, with 47 percent of fleet managers acquiring machines in this manner. Thirty-two percent purchase by financing.

Workforce trends indicate some pick up in hiring. The net between those increasing and those decreasing entered positive territory in 2013, at 5 percent: 29 percent increased minus 24 decreased. This is improved compared to 2011, when the net was -18 percent.