By Anthony Sasso, Head of TD Bank Equipment Finance
2019 was a year of disruption and change for fleets, which will set the tone for 2020. According to FTR Associates’ latest Trucking Update, the Trucking Conditions Index (TCI) spent most of the year in the negatives. This will set the tone for 2020, although the TCI is projected to be closer to neutral in 2020. FTR’s loadings outlook for 2020 is weakening but still shows growth, with a forecasted growth of .6% down from .9% previously.
There are two catalysts driving change in the industry. The first is e-commerce, which was the source of industry disruption in 2019. The second one has loomed on the horizon for a while now: we continue to see signs of a slowing economy. Even as growth slows, there is still plenty of room for fleet managers to maneuver so long as they prepare now for a possible downturn.
Next year promises to bring both challenge and opportunity for fleet managers. Successful fleet managers in 2019 were able to adapt to the changing environment, and they will have to do so again next year to continue to stay ahead of the competition. Here’s how fleet managers should prepare for 2020.
Position for E-Commerce
We are in the middle of the advent of e-commerce. The Commerce Department reports e-commerce is outpacing total retail sales growth, with an estimate of a 16.9% increase from the 3rd quarter of 2019 over 2018 for e-commerce and only a 4% increase in total retail sales.
Last year, the shift to e-commerce was at the heart of major disruption for the trucking industry. It drove changing consumer habits, especially around expectations for shipping speeds. Just-in-time and same-day delivery grew, leading fleets to change their composition to favor last mile delivery. The smaller trucks and vans used for last mile delivery operate with more frequent short-run local deliveries, which can drive maintenance costs higher.
When financing to position your fleet for disruption from e-commerce, look for flexibility.
Flexible financing allows fleets to adapt to the rapidly changing demands of e-commerce. Talk with your financial institution about ways to increase your flexibility. Use fair market value leases to shorten the lease cycle and allow yourself flexibility to replace vehicles and re-adjust your fleet composition more often.
Also consider shorter financing terms based on an updated review of replacement cycles to allow yourself more flexibility, in addition to exploring fair market value leases to allow for vehicle replacements based on more frequent adjustments in fleet composition.
Flexible financing allows you to replace vehicles more frequently, update your fleet composition and update your fleet to keep up with changing technology. It’s the best way to keep up with e-commerce.
Get Yourself Recession Ready
At TD Bank, we have been advising clients to stay “downturn ready” even as we remain in a slow-growth environment. Market dynamics in trucking are changing due to decreasing truckload rates and weakening truck loadings, causing impact on top-line revenue.
Many of the factors driving the broader economy are unpredictable and beyond the control of individual companies, so we always recommend companies prepare well in advance to stay ahead of the competition. Economists have begun to see the warning signs of a recession on the horizon, so now is the time to prepare.
When you’re getting ready for a recession, get your expense line down.
To protect your business against a possible downturn, make sure to manage your expense line as closely as possible. Seek out financing alternatives that provide for a lower cost structure. Tax Leases can be especially helpful because they allow the lessor to take depreciation on assets, which results in lower monthly payments. Tax Leases also have a residual or unamortized balance at lease maturity, which further lowers monthly payments. Ask your financial institution about TRAC and Fair Market Value Leases to get examples of Tax Leases that might work for you.
Additionally, look into Balloon Payment Finance Leases and Loans. Larger payments at the end of the financing lower monthly lease or loan payments while providing you the ability to retain the depreciation benefits.
Conclusion
2020 should be a year of opportunity for fleet managers. Even as growth slows, there is room for expansion, so long as you make sure that you have the financing to position yourself for it.
The growth in e-commerce is likely to drive continued demand for shipping. While it can cause temporary pain as it forces fleets to readjust to disruption in shipping patterns and changing in shipping speeds, it is likely to be a long-term boon for the industry.
While growth does seem likely to slow in the coming year, any headwinds introduced by a slowing economy will face all trucking companies alike. You can make sure that you are uniquely well-positioned to navigate them.
Work with your financial institution and leverage their industry expertise. They can help you spot trends and finance accordingly for growth amid disruption.
