There's an old saying among boaters: "The two happiest days in a sailor's life are when he gets his boat and when he trades it in." The same can be said for owner-operators and their trucks. The question is – when should you trade?

Major fleets have formulas to answer that. Not surprisingly, formulas and answers differ widely from fleet to fleet. Many factors enter the decision, but they can be categorized as financial, operational and external.

Financial considerations involve purchase price, trade-in value, interest rates, revenue and cost of ownership.

Operational considerations include revenue generating ability and maintenance costs. If you are a small fleet operator, you may include costs of hiring and retaining drivers in this category.

External factors include changes to the economy such as we car now experiencing, and government actions such as the new EPA Emissions Regulations that will be effective October 2002.

Financial Considerations

You own and operate a truck to make a profit – the excess of revenue over costs and expenses. You can figure revenue based on current experience. Or you may need to factor in changes you could reasonably expect if you get a new truck and are eligible for a more rewarding lease, or if, by exceeding truck age requirements, you are forced to leave your present carrier.

Costs and expenses may be fixed or variable. Even fixed costs vary from truck to truck and continue whether you run 20,000 miles a month or leave it parked. They include insurance, principal and interest payments, license and registration fees and permits.

Variable expenses depend on miles traveled. They include fuel purchases and preventive maintenance (PM) such as lubrication, oil and filter changes, cooling system service and inspections. Tire and brake wear are variable expenses and should be pro-rated in your calculations, but they cannot be listed on your profit-and-loss statement until the work is actually performed.

The newer the truck, the higher the fixed costs and the lower the variable costs. Depreciation will be greater on a newer and higher priced truck (see table page 20). Insurance on a newer truck will also be higher, since replacement value is greater. Variable costs will be lower due to better fuel economy and less need for maintenance.

Operational Considerations

Let's assume your current truck is five years old. A new replacement truck will have a more advanced engine computer and will probably deliver a few more tenths-of-a-mile per gallon. Newer trucks, at least through the 2002 models, offer extended PM intervals, reducing PM cost per mile. Some operators have gone from monthly maintenance to doing PMs every four to six months. They take advantage of more durable components, better oils and auxiliary filters.

Extended service brakes, more durable shocks and better manufacturing methods have all contributed to greater product durability, so fewer parts changes will be needed with newer trucks. All these reduce the need for, and cost of, what was once considered routine maintenance.

Here are some examples. Older equipment usually has bulb-replaceable or sealed incandescent lighting with wiring grounded to the chassis. According to studies done by the Technology and Maintenance Council (TMC) a few years ago, replacing lighting was the most frequent repair done, and the second highest cost maintenance item behind tires. With new tractors and trailers equipped with LED lights and sealed wiring harnesses, lighting and wiring maintenance costs have greatly diminished. One supplier, Truck-Lite, even offers a lifetime warranty on trailers equipped with its LEDs and sealed wiring.

In 1996 and 1997, many operators were getting up to 6.5 mpg. Today, 7.0 mpg is not an unreasonable expectation, and many skilled drivers are approaching 7.5 with aerodynamic tractors and smooth-sided van trailers. Clutches that once needed replacement at 100,000 to 200,000 miles are running double that life today, spreading the roughly $1,000 replacement cost over many more miles.

Blaine Johnson, former general chairman of TMC and retired maintenance director of Ryder, examined life cycle costs of trucks in 1993. He observed that maintenance costs per mile increase dramatically with a truck's age. While the numbers will vary with different service, and inflation has increased overall costs in eight years, the relationships of cost to age remain valid.

External Factors

Lease/purchase/trade decisions are influenced by more than just financial and maintenance considerations. Changes in legislation, environmental regs and economic conditions are as important as new technologies.

For example, until the early '80s, most trucks sold east of the Mississippi River were cabovers, to meet restrictive length laws. When the Surface Transportation Assistance Act of 1982 went into effect, the Class 8 cab-over almost died. Today, fewer than 1,000 are sold annually. Most manufacturers dropped them from their build lists. Without considering that external factor, an otherwise prudent operator might have continued buying cabovers well into the '90s.

Today, we are faced with uncertainty about the effects of the emissions regulations due this October. As this is written, engine manufacturers have not finished fine-tuning their strategies to meet them. At the last Society of Automotive Engineers Truck and Bus Meeting in November, concerns were raised about dramatic increases in under-hood heat due to exhaust gas recirculation (EGR). It is used to reduce formation of oxides of nitrogen that contribute to smog.

Future technologies, now under development, involve separating oxygen from air and using the remaining cool nitrogen to control combustion, not hot exhaust gas. Should a prudent buyer advance his purchase decision to buy a truck before the new trucks come out, or delay the purchase until the bugs are worked out of the new technologies?

Should a buyer stay with current transmissions, or get an automated manual? The purchase price is higher, but experience to date indicates a significant reduction in vehicle maintenance due to reduced driveline shock, and several tenths of mpg fuel economy improvement due to computer timing of shifts. Automated transmissions also seem to increase resale value.

These decisions may seem like a guessing game, but educated guesses are far better than seat-of-the-pants feelings. The proper decisions will vary from operation to operation, but with some structure to your deliberations, you stand a far better chance of reaching the best decision. *

Learn to Appreciate Depreciation

If a product is useful after the year in which it is purchased, the IRS will not allow you to deduct its full cost all at once (expensing the item). Instead, you can deduct a portion of the cost each year over its useful life, according to one of several formulas approved by the IRS.

According to those formulas, your truck may be fully depreciated, (100% of your purchase price deducted for tax purposes) while the truck still has useful life remaining. In that case, you can continue to operate the truck but you won't be able to deduct any more depreciation.

You can also sell the truck. If you do so after the truck is fully depreciated, you'll have to add what you get to your income. Meanwhile, whoever purchases your used truck can begin taking their own depreciation based on allowable formulas. (Be sure to check with your accountant or tax professional.)

If you lease your equipment, you do not take title, and therefore, you cannot depreciate its value. But every payment is a direct expense, and may be fully deductible. There are a number of different types of leases, each with its own terms and conditions, advantages and disadvantages, and its own tax treatment.

Again, check with a pro.

To learn more, send for a copy of the minutes of TMC's Technical Session, "A Fleet Manager's Guide to Truck Financing and Leasing" from the June 1999 Trailblazer. Call TMC at (703) 838-1763 or go to http://tmc.truckline.com.