Near-record demand for heavy trucks is boosting revenue for manufacturers like Navistar and benefiting suppliers and others tied to the industry, according to interviews with analysts and several local business owners.
The industry was already expecting strong demand this year before surging freight volumes, combined with last year’s federal tax cut and the desire from many companies to replace aging fleets, set up a buying spree that has companies trying to catch up to orders, according to local companies and industry experts.
Meanwhile, companies are scrambling to hire more drivers during a time that lower unemployment has strained recruiting efforts.
Orders for Class 8 trucks, the rigs that typically haul trailers along the highway, were up about 88 percent for the first five months of this year compared to the same time last year, said Kenny Vieth, president of ACT Research, a firm based in Columbus, Ind. that specializes in market analysis and tracking commercial vehicle industry data.
“Conditions in the market today for heavy duty vehicle demand are as good as they’ve ever been,” Vieth said.
The environment is benefiting companies like Navistar, where company officials said build slots for the rest of this year are nearly already booked. Company officials recently reported Navistar’s truck segment made profits of $42 million for the second quarter this year, compared to a loss of $56 million during the same period last year. Company officials said the improvement was driven by the impact of higher sales in the company’s key markets and a decline in used truck losses.
The surging orders are also benefiting suppliers and other firms tied to the industry, including Wheeler Trucking. That company, based in Flushing, Mich., opened a new location in Springfield last year after securing a deal with GM, which manufactures a cutaway van as part of a joint agreement with Navistar. Wheeler Trucking loads and ships the vans to customers across the U.S. and Canada.
“It’s at the point I don’t want to see it any busier because I can’t keep up now,” said owner Rex Wheeler.
Based on the first five months of this year, the industry has seen orders booked at a rate that, seasoally adjusted, would result in 475,000 new vehicles, Vieth said. To put the strength of order activity into context, 2006 was the high point for Class 8 demand, when truck manufacturers built a little more than 376,000 vehicles, he said.
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The final production figures for the industry are expected to come in well below the rate of order placement because of manufacturing constraints, Vieth said. However, he said that unmet demand should allow strong Class 8 production to carry over into 2019. He said the current freight cycle is about 13 months into a period of demand that typically lasts about two years.
“It’s kind of like the perfect storm of demand and supply,” Vieth said.
Spike at Navistar
At Navistar, the company has seen a spike in both heavy and medium-duty truck orders, said Jeff Sass, the company’s senior vice president of sales and marketing. Rising freight rates mean trucking firms are likely seeing solid profits, boosting confidence and encouraging fleets to replace their aging trucks, he said.
“We are seeing freight rates going up, not just on the spot market but also on the contract markets,” Sass said.
Workers at Navistar’s Springfield facility produce medium, severe service and heavy duty commercial trucks, as well as the GM cutaway van on a separate line. The facility is also launching a new joint venture truck with GM this year. Navistar is one of Clark County’s largest employers with more than 1,800 people working at its Springfield plant. Thousands of the company’s retirees also live in the area.
“We have a backlog we haven’t seen in a long time,” Sass said. “We’re virtually sold out for the year.”
The products being produced in Springfield are being well-received, he said,
“The Springfield plant will be a key part in us growing revenue and market share,” Sass said.
In a conference call with investors earlier this year, Navistar officials boosted revenue projections for 2018 between $9.75 and $10.25 billion, up from previous projections of $9.25 billion and $9.75 billion due to high demand.
Other businesses benefit locally
The strong market is also benefiting other firms tied to the industry, including Pentaflex. The Springfield manufacturing firm specializes in producing complex parts for the auto and trucking industries, including customers like Navistar.
Executive Vice President Ross McGregor cautioned that demand for heavy trucks is cyclical and will eventually ease. In the meantime, he said his company is doing its best to keep up with the demand for parts.
“It’s like drinking from a fire hose,” McGregor said.
Several factors are combining to boost demand for new trucks, Vieth said. Industry experts were already expecting a solid year this year and the federal tax cut at the end of last year added fuel to the economy, he said. In addition, many companies are looking to replace aging trucks for newer models with better technology and fuel efficiency. Those firms are also buying more trucks as demand increases to ship products in industries like construction and manufacturing.
Industry-wide, Vieth estimated truck makers have a backlog of about 220,000 orders. That’s a roughly 9.6-month backlog.
“The corporate tax windfall took what was a very good demand environment and basically supercharged it,” Vieth said.
Wheeler, of Wheeler trucking, said his company is looking for between 40 and 60 new drivers company-wide to keep pace with the additional workload.
“I’ve been in this industry 30 years and I have never seen it this busy,” Wheeler said. “This is absolutely crazy.”
Finding workers to fill demand
One of the challenges facing local firms is finding qualified workers while demand is at its peak, McGregor said. The trucking industry has struggled to attract drivers for several years, particularly those willing to work a third shift needed to keep up with demand.
The lack of drivers comes at a time when fewer people are out of work, according to a near-record low unemployment rate.
The trucking industry has faced an aging workforce for several years, said Kevin Burch, president and partner of Jet Express in Dayton and immediate past chairman of the American Trucking Association. He said the industry could be even busier, but many companies are struggling to find qualified drivers to complete routes. Many trucking firms are reluctant to order new vehicles if they can’t find someone to drive them, Burch said.
“There’s nothing worse than having a brand new truck sitting against a fence,” he said.
Turnover is also a challenge in the industry, with a turnover rate nearing 100 percent as truck drivers jump from one company to the next for slightly better pay or an earlier shift, he said. Many drivers don’t want to work overnight or over long distances, but trucking firms still need a way to fill those shifts.
“The U.S. economy works around the clock,” Burch said. “Everyone wants to work nine to five, and that’s one of the biggest challenges we face.”
Lawmakers are working on some changes to help alleviate the shortages, including allowing younger drivers under supervision from more experienced drivers to work across state lines, he said.
McGregor also noted that the demand in the truck industry is cyclical and will wear off, whether that begins next year or 2020. In the meantime, he said high demand is a good problem to have.
“The cycle is typical,” McGregor said. “The high points we’re reaching are really significant compared to previous cycles.”
Vieth said the current levels of demand will likely carry at least into next year.
“Our crystal ball says barring unintended consequences, we think the strength exhibited in the marketplace right now should be in evidence into the middle of 2019,” he said.
The Springfield News-Sun has provided award-winning coverage of Navistar and its impact on the region’s economy. For this story, the paper spoke to analysts and local businesses about a recent spike in demand for heavy and middle-duty trucks and how that is impacting local businesses.
By the numbers:
$9.75 to $10.25 billion — Navistar’s estimated revenue range for 2018
376,000 — Estimated record for trucks manufactured in a year