The following article is reprinted with the permission of CCJ

March 2002

Crunch Time

As October fast approaches, carriers ask: How much will the new engines cost? How will they affect my operation? And most importantly, will manufacturers be ready?

By Linda Longton

This is the biggest issue trucking has faced in more than 10 years," says Don Schneider, president of Schneider National, Green Bay, Wis.

Schneider is talking about the impending deadline for engine makers to introduce engines that meet new, lower emissions levels. While Schneider, who heads the largest truckload carrier in the United States, has been the most vocal critic of the push to meet the deadline, most fleet executives surveyed by CCJ share his view. In fact, nearly 90 percent said they were concerned about adding trucks with EPA-compliant engines to their fleets.

The deadline, which came out of a 1998 consent decree, put engine makers on an accelerated schedule: They agreed to start making cleaner engines by October 2002 - 14 months ahead of the agency's original deadline. All but one of the engine makers plan to meet the deadline using cooled exhaust gas recirculation. Caterpillar, which has said it will not have emissions-compliant engines ready until 2003, is using a technology called ACERT, which it believes is a better long-term solution (see "Caterpillar still ACERTS it won't need EGR," CCJ, February 2002).

The consent decree has fast-forwarded more than just engine technology. Truck makers have also been working feverishly to ensure their chassis designs can accommodate the new engines with little or no impact on overall vehicle performance.

And therein lies the problem, say industry observers. Although Cummins, Detroit Diesel, Mack and Volvo have all said they will meet the deadline, many fleet executives fear the resulting engines will not have undergone sufficient real-world testing before they hit the market.

Fleet executives surveyed by CCJ voiced concerns ranging from reliability and fuel economy issues to increased purchase price. Most are studying their options to determine whether they should pre-buy new trucks before October, buy used or extend their trade cycles until the new engines have a proven track record on the road. Meanwhile, anxious truck and engine makers are holding their breath to see just how their customers respond.

Will they be ready?

Schneider said in December that he planned to buy used rather than risk buying trucks with unproven engines. "With margins at 2 percent to 5 percent, vehicle downtime is a critical issue in our financial soundness and profitability," he says.

Steve Duley, director of equipment purchasing and disposal for the company, echoes Schneider's concerns. "We're eight months away from implementation, and we've been unable to obtain any engines to evaluate," he says. "We have no internal data or experience on how they will operate. [Engine makers] claim they have done testing, but as we've reviewed it it's quite limited and in different applications than we run."

When Schneider talks, other carriers listen.

"If Don doesn't have any even to test out, it doesn't bode well for any of the small guys," says Jeff Wilmarth, president of Silver Arrow Express, a 25-truck fleet based in Rockford, Ill.

Carl Tapp, director of maintenance for P.A.M. Transport, Tontitown, Ark., also worries that he's been unable to evaluate the new engines' performance. "I know of no fleets that have tested it or even seen it," Tapp says. "For something to be out in October and in production now, some of us better be field testing them. When none of us know about an engine running a field test anywhere, who's going to be there in October?"

Duke Drinkard, vice president of maintenance for Southeastern Freight, Lexington, S.C., says he won't be. Southeastern, which currently runs just under 2,000 trucks, typically buys between 200 and 350 new trucks each year. But this year, "I'm going to hold off until somebody plays with the toys before I buy them," he says.

Such concerns are unfounded, says Martha Brooks, Cummins vice president, engine business sales & marketing. "The industry hasn't paid much attention," she says. "Now that it's upon us, there are some who are overreacting."

Cummins will have engines available by October, Brooks says. "We are ready on time - in the nick of time - but on time," she says. Cummins, which has applied for EPA certification of its new engines, began field testing them in late 1999; by October they will have undergone 115,000 hours of lab testing and 6.4 million miles of road testing, Brooks says.

Mack has also applied for certification, says Steve Homcha, Mack executive vice president, Class 8 engine programs. Mack had a factory prototype of its new engine available in the first quarter of 2001. "If our application's approved, we'll begin building engines in March," he says.

Detroit Diesel has put more than 3,000 EGR-equipped Series 50 engines into service since 2000, says Tom Friewald, vice president of marketing. "We recently provided fleet engines to one of our major customers," he says. "Additional engines are being assembled for delivery to other customers." The company will have emissions-compliant Series 50/60 engines ready in October, he says.

Despite its competitors' confidence about meeting the deadline, Caterpillar remains skeptical. "'02 is tremendously uncertain for anything," says John Amdall, Caterpillar director, product regulation. "EPA's been expressing concerns over the ability to certify because of the possibility the engines have defeat devices."

But Don Kopinski, senior project manager with EPA's Office of Transportation and Air Quality, dismissed this notion. "We're confident these issues can be resolved in the near future - well before production date," he says.

As for truck makers, Volvo and Mack both say they are confident they will have trucks with '02-compliant engines ready by the deadline because they have their own, captive engine lines. "We've geared for it. We've planned for it. We've allocated resources," says Volvo spokesman Randy Bolinger. "We think we have an advantage by being able to design the engine and chassis together."

Steve Keate, president of International Truck & Engine Corp.'s Truck Group, is equally confident. International has spent "tens of millions of dollars to create a smooth transition," he says. "We will be in an excellent position to meet all the requirements." The process has included road tests to prevent cooling problems, he reports. International will offer Cummins and Caterpillar engines, but will no longer offer Detroit Diesels as of October, Keate says. "We felt we needed to focus and decided that it didn't make any sense to invest that much into a company controlled by a competitor." Detroit Diesel is owned by Freightliner parent DaimlerChrysler.

Other truck makers remain cautious about commenting on a situation over which they do not have complete control. "We have to wait until the engine manufacturers provide us with more detailed info about what their solutions are going to be," says Kenworth spokesman Jeff Parietti.

"We will be prepared to install the engines that the engine manufacturers have available on that date," says Peterbilt General Manager Nick Panza. "We're giving our customers the most consistent information that we can, but we don't have final details from engine manufacturers."

"We are just testing engines as they become available," says Michael von Mayenburg, senior vice president, engineering & technology for Freightliner LLC. He suggests carriers buy a few EGR-equipped engines to try them out. "This is a fence, and there's no going around it," he says. "Sooner or later, we'll all have to jump over."

Increased costs

Even if the engines are certified for sale by October, cost concerns may leave many carriers reluctant to buy them.

"I don't know what the hell I'm going to do this year," says Keith Harring, owner of KL Harring Transportation and Warehousing, Bethel, Pa. "I've heard prices anywhere from $3,000 to $7,000 more [than current models]," Harring says. His company usually buys between seven and 10 new Cummins-powered Kenworths each year on a three-year trade cycle. Based on what he knows right now, he will probably buy before October, he says.

On the other end of the scale are leasing companies such as Penske. "We have 70,000 trucks on the road," says Ken McKibben, Penske senior vice president of field maintenance, based in Redding, Pa. "Eventually we'll have to replace all of them." Although truck and engine dealers have contacted McKibben about the new engines, he says they don't know enough yet to answer his questions. "I don't know what the investment is going to be - whether $700 or $7,000," he says.

"I do think definitely that the cost of trucks and engines is going up," Peterbilt's Panza says. "What we can't tell the customer is how much."

International's Keate says he "expects an increase of $3,000 to $5,000 in the delivery price. We also anticipate some deterioration in fuel economy, on the order of 2 percent to 5 percent, depending on the application and engine."

Maintenance costs pose additional concerns. "The interval you're changing your oil at has to be smaller," Harring says. "And it's going to be expensive to maintain the system."

But Cummins "doesn't view such maintenance fears as a sky-is-falling-type issue," Brooks says. The new Cummins engines will have unchanged durability and minimum maintenance increases - oil change intervals will be 25,000 miles with CI-4 oil, she says, while fuel economy will be comparable to current products.

Other engine makers are also quick to allay carriers' fears. Detroit Diesel does not expect oil and filter change intervals to be impacted by the new engines, says John Morelli, vice president, Series 60 engine program. Mack's goal is to maintain its current oil change interval and there will be no change to drain intervals with the Volvo engines, according to the companies.

New, used or not at all?

Concerns about the new engines have left many carriers looking for alternatives. "Our customers' requirements for service and cost are critical," Schneider's Duley says. "We can't afford to take risks. That leaves us with either keep our old trucks and run them longer or buy used. We'll probably do some of both," he says.

Duley says his company may also buy a small quantity of trucks with the new engines so that they can evaluate them. Beyond that, "we will buy as many trucks as we can between now and October to make sure we're positioned," he says.

If there's an upside to market concerns over the new engines, it's that many carriers are buying up some of the used truck surplus, says Eddie Walker, president of the Used Truck Association and co-owner of Best Used Trucks, Fort Worth, Texas.

"I've got some customers who have given me a standing order: Give me two or three trucks a month - the latest model you've got - because I want to stick with these old engines until I see what they're doing with the numbers," he says. Consequently, late model, low mileage, owner-operator-style trucks are becoming increasingly hard to find and prices for such trucks are rising. Fleet-spec'd used trucks remain low-priced and plentiful, he says.

Walker says other carriers are ordering new trucks before October with the current model engine. "The new truck buying process [after October] will slow down until the new engines prove themselves," he says.

P.A.M. Transport's Tapp says his company is ordering 500 trucks - all before October. In the past, attractive pricing has led P.A.M., which runs 1,500 Freightliner Century Class trucks with Detroit Diesel Series 60 engines, to look at buying used. While the company prefers buying new, the engine issue has Tapp once again considering adding used trucks to the fleet. "I'm confident Detroit, Cat and Cummins will build decent equipment," he says. "I just don't want to be the first one to buy it."

Neither does Silver Arrow's Wilmarth, who is considering extending his trade cycle until he learns how the engines have performed in other fleets.

"I lost 50 percent of the value of my fleet last year, so maybe I'll end up keeping mine," says Wilmarth, who runs Peterbilts and Kenworths with Detroit Diesel engines. "I'd refinance and keep driving them. I could wait until 2003 and go from there."

Freightliner customers can also consider buying trucks with Mercedes-Benz engines, which were not covered under the consent decree. But Freightliner's von Mayenburg hasn't seen much interest in the 12.8-liter MBE 4000, which is available in ratings up to 435 hp. "Over-the-road operators want 14-liter power," he says. And there's another reason. "Our research indicates that engine brand loyalty is even stronger than truck brand loyalty."

As the clock ticks on the introduction of cleaner-burning diesels, many carriers question whether manufacturers will be ready. Assuming trucks with EPA-compliant engines are available on Oct. 1, as most truck and engine makers promise, carriers still struggle with concerns over cost, fuel efficiency and reliability. How their concerns will factor in when it comes to buying trucks is anyone's guess. 2007, here we come.

- Aaron Huff, Sean Kelley, Paul Richards and Avery Vise contributed to this article.

Analysts doubt fleets will pre-buy

More than one-third of fleet executives surveyed by CCJ say they plan to avoid the new engines by buying new trucks before October. But industry analysts don't believe carriers will pre-buy many trucks.

"Profits are low so carriers don't have the internal funds to support a large increase in capital expenditures, and they're not likely to take on debt," says Chris Brady, president of Commercial Motor Vehicle Consulting, Manhasset, N.Y. Weak profitability in the trucking industry also means lending by financial institutions will be relatively light, he says.

Carriers won't add capacity until utilization of existing equipment improves, says Michael LaTronica, senior analyst and managing director of investment banking firm Morgan, Lewis, Githens & Ahn. That won't happen until the economy picks up and rates increase, he says. LaTronica says better rates should be coming, since capacity has dropped 10 percent a year in each of the past two years and will likely drop another 10 percent this year.

So far, an economic slump has hidden this capacity drain, LaTronica says. "Once the economy stops contracting at a rate that masks the loss of capacity in the system, rates will start to firm. And then there will be a mad rush for capacity by shippers."

When that happens, LaTronica says savvy trucking company executives, who have learned a hard lesson, will add small amounts of capacity through new and late-model used trucks. Fleets may also take on short-term leases or add owner-operators, Brady says. "I don't think there will be any one scenario that plays out," he says. "Every carrier has its own business model."

Will EPA delay?

More than 70 percent of respondents to a CCJ survey say the Environmental Protection Agency should push back the October deadline for engine makers to begin producing lower emission-engines. The nation's largest truckload carrier agrees.

"The wisest thing would be for the EPA to back off until we can test the engines," says Don Schneider, president of Schneider National, Green Bay, Wis. Schneider is concerned that the engines will not have received adequate testing prior to hitting the market.

"We've met with the EPA, met with groups of fleets and manufacturers, and written a number of letters to other fleets, suppliers and state trucking associations, trying to educate the industry on just what the risks are," says Steve Duley, Schneider director of equipment purchasing and disposal.

Schneider is trying to hit EPA where it lives by pointing out that because carriers will probably keep existing trucks or buy used to avoid the new engines, the level of emissions may actually increase. "The environment doesn't win, the industry suffers from more negative purchase cycles, and fleets will suffer from running old equipment," Duley says.

But industry observers say a delay is unlikely, especially since the deadline was set in a consent decree to which all affected engine makers - Caterpillar, Cummins, Detroit Diesel, Mack and Volvo - agreed. Furthermore, all but Caterpillar have said they will meet the deadline.

To further complicate matters, the decision to relax the decree is not completely up to EPA. The final decision would come from a federal judge.

Because Caterpillar has said it will not begin building EPA-compliant engines until 2003, the company may be subject to nonconformance penalties (see "What price nonconformance?," CCJ, February 2002) if it continues to build engines.

"Penalties are one of several options," says John Amdall, Caterpillar director, product regulation. "There's no requirement we have to build engines. We think the EPA is probably going to do an assessment."

Congressional involvement is another possibility. A provision in an appropriations bill could bar EPA from enforcing the decree much as a similar move blocked the hours-of-service rewrite almost two years ago. Don't expect a congressional hearing, however. Such a forum would open the door to additional testimony from environmentalists and others who have a stake in holding fast to the deadline.

"I'm not sure EPA is going to cave on an extension," says Carl Tapp, director of maintenance for P.A.M. Transport, Tontitown, Ark. "It's an election year and they've got all these greenies out there shouting at them."