Fleet Concerns for 2023 – Issue #1: Inflation/Interest Rates

Last month, Dean Vicha President of NationaLease, posted a blog, The 7 Top Issues for Fleets in 2023 and Beyond. These are all very important issues that merit expansion. One of the things to note is that many of the concerns overlap. For example, fewer allocations will, by default, lead to fleets keeping older assets longer than they might have in a “normal” truck availability environment and that means a greater dependency on maintenance.

As Dean noted, every business is trying to anticipate whether there will be a “hard” or “soft” landing when it comes to a potential recession. What’s clear is, regardless of the outcome, the Fed will continue to raise interest rates for the foreseeable future, albeit at a slower rate if conditions improve. As asset costs continue to rise, higher interest rates make purchasing new assets prohibitive for small- to mid-size fleets.

Good news or bad news? Not knowing which is coming makes taking necessary steps difficult
A recent TruckingInfo article offers very detailed analysis on how both inflation and interest rates might impact the trucking industry. The article notes that inflation, in some sectors, is beginning to subside; however, it’s still too early to let your guard down. For our industry, fuel rates are incredibly volatile and at the mercy of global situations: natural disasters that impact and slow down refineries; OPEC decisions to reduce the amount of oil pumped; the war in Ukraine affecting the EU and by extension, all of us. All of these lead to an increase in prices. Even though the prices go up and down, fleets need to be able to forecast costs and budgets and fuel price volatility makes that difficult.

That price volatility also relates to parts and components. Certainly, during the worst of the pandemic, supply chain shortages were disastrous. That was especially true as the country essentially shut down and relied, more than ever, on trucking to deliver necessary goods. Yet, the parts and components shortages along with severely reduced new truck allocations meant fleets had to push their existing assets, which in turn meant more maintenance needs.

The TruckingInfo article concludes with the following: “Lastly, with higher interest rates, financing costs will be rising as well, as used-truck equipment prices are likely to decline further in 2023. This is likely to continue to put pressure on truck fleet profit margins for much of this year, at least until labor wage rates grow slower than customer rates, which may not be until 2024.”

One of the impacts higher inflation and interest rates is having is on merger and acquisition activity. A Trucknews.com article quotes Spencer Tenney, president and CEO of Tenney Group, M&A advisors to the transportation industry. According to Tenney, “It’s going to be a very active M&A year. What will be different compared to 2021 and the first half of 2022 is that there’s a very different risk in the market. This will be reflected in the size and shape of transactions that get done. We won’t see as many transformation-type mergers and acquisitions as we did in 2021 and 2022. But small- and mid-sized transactions will be abundant.”

NationaLease can help mitigate some of the biggest concerns
As Dean makes abundantly clear in his blog cited above, there’s never been a better time to lease rather than purchase fleet assets. As a leader in the truck leasing industry, our size and aggregated buying power enables us to weather the impact of inflation and rising interest rates, which smaller fleets would not be able to do. We also have significant leverage when it comes to asset allocations as well as parts and components availability. Our customers get the advantage of this leverage by realizing advantageous contract pricing on a national level. Having confidence on what costs and cash flow will be enables companies to make better decisions when it comes to working capital. If transportation is a means to an end (for example, getting your product to its destination) rather than your core business, and with the economic future so uncertain, this may be the optimal time to turn to a third party to handle all your transportation needs.