An aging tractor or trailer is the one area that drains more cash in a way many freight carriers don’t see. Older trucking equipment requires more and more repairs to keep it on the road and worsening fuel economy can cost your shipping operation more in fuel than your competition.
So how do you determine if a tractor or trailer has outlived its usefulness and has begun the profit-drain from your operation?
A simple cost analysis will do the trick.
Maintenance vs. Repairs vs. Tires
It’s recommended that a carrier track the different costs of each piece of equipment on a month-to-month basis. This is accomplished through checking the operational costs per mile and lost revenue due to repair downtime.
In operational costs, track the maintenance, repairs, and tire costs over time. The cost of preventive maintenance for most trucks and trailers should remain fairly flat during the time you own the equipment, as long as you’re doing the prescribed care of the vehicle. Basic things like oil changes, grease jobs, running the overhead on the engine, replacing batteries, and checking for air leaks will mean fewer major repairs and longer life for your truck or trailer.
Repairs and tires are a different ball game. They become the barometers of the quality of a piece of equipment. How do you track this barometer? By amortizing, which means taking any repair and tire replacement and estimating how long the tire or repair will last until it has to be replaced or repaired again.
For example, a steer tire that cost $450 and is expected to last 12 months has a monthly cost of $37.50 for the next 12 months. If you had to replace that tire before the 12 months is up due to a road damaged tire, you’d do the same with the new tire. In that situation, your monthly cost for tires would increase to $75 for the next 7 months and then go back down to $37.50 once the first tire was fully amortized.
Your next step is to add your previous monthly maintenance costs to your amortized monthly repairs and tire costs. Divide that amount by the total miles the truck ran the previous month, and your answer will be a per-mile cost.
By looking at the changes in this operational per-mile cost from month to month, you’ll can monitor the rate your cost of operation is increasing or decreasing as your equipment ages.
A typical new truck will operate in the 8 to 10 cent per mile range, while a three- to five-year-old truck will move upwards to 10 to 15 cents per mile. Depending on the quality of your preventive maintenance program, a 10-year-old or older truck will range from 20 to 30 cents per mile, maybe even higher.
Another factor that needs to be tracked is the number of “earning” days each year that were lost due to repair stops. To figure this out, multiply the number of repair days by your average revenue per day. That figure will be your lost revenue due to unscheduled down time.
Then look at your operational cost per mile and number of repair down days. Multiply your current operational cost per mile times the total 12 month (odometer) miles driven. Then subtract the average operational cost per mile for the age of the truck with which you’d replace your current one times the same 12 month mileage. You have the 12 month increased cost of operating your current truck. Next, take the 12 months of lost revenue due to repairs and add to your adjusted 12 month operational cost. The total is what you’re losing in both additional cost of operations and revenue on that vehicle.
Crunch your numbers
Whew! To simplify, here’s an example of the whole formula:
30 cents (12-month operational cost per mile)
12 cents (Preferred truck cost per mile)
120,000 (Total 12-month miles driven)
.30 X 120,000 = $36,000 (current costs)
- .12 X 120,000 = $14,400 (preferred costs)
$21,600 (12-month adjusted cost for your current truck)
25 (12-month number of repair days)
$865 (Average 12-month revenue per day)
25 x $865 = $21,625 (total lost revenue due to repairs over the past 12 months)
This next part will hurt:
$21,600 (12-month adjusted cost for your current truck)
+ $21,625 (total lost revenue due to repairs over the past 12 months)
$43,225 (total financial loss to your carrier over the past year)
In this example, it’s painfully obvious. This particular truck is draining a lot of unnecessary cash from the carrier’s bottom line. But that fact leads to another tough question: What would be the difference between the payments of a projected replacement vehicle from the current truck?
To figure that out, multiply your current monthly payment of the truck in question plus its monthly insurance premium by 12 months. Do the same for a newer truck you’d like as your replacement. Subtract those two figures to get your 12-month difference.
$0 (Current monthly payment)
+ $350 (Current monthly insurance - comp and collision only)
12 x $350 = $4,200
$2,200 (Projected monthly payment on new truck)
+ $550 (Projected monthly insurance on new truck)
12 X $2,750 = $33,000
$33,000 (Projected truck)
– $4,200 (Current truck)
$28,800 (net 12-month difference)
So for our example, the annual drain of your current truck ($43,225) minus the potential cost of new truck ($28,800) would be $14,425, which is an actual 12-month net improvement to your carrier’s bottom line!
So, is replacement worth it?
For many carriers, $14,425 would easily represent a significant amount of total profit for a single truck. With an average 4% to 7% profit margin for the trucking industry, this example show that sometimes the the difference between hanging on to the older truck versus purchasing the newer truck can be well worth it depending on the situation.
But more importantly, the only way to determine this is through a careful analysis of the specific truck, with costs correctly tracked and formulas applied.
If it’s time to retire Ol’ Sam, the numbers will prove it.