How Tier 4 Final Will Affect Your Rental Business

Lately I’ve been thinking a lot about the impact Tier 4 interim and Tier 4 Final engines will have on the rental industry, not only operationally but also from an investment point of view. How will decisions about the composition of rental fleets be affected? Operating a rental company gets down to deciding which machine, or combination of machines, is more profitable. The only thing we know for certain about the new engines that are beginning to show up in the marketplace is that they’re more expensive to purchase, and also more expensive to operate.

There’s an operational cost component in the switchover to Tier 4 engines that’s not too easy to anticipate. It’s anyone’s guess what those engines will cost to operate. It will take some time to build operational experience with the engines. Most of the manufacturers are saying operation costs are equal to or better than the machines they are replacing. Maybe the fuel economy is about the same, or slightly better, but in my estimation, operating them will cost more, just for filters and other engine maintenance as well as for the ultra Low Sulphur Diesel (uLSD) fuel needed to operate them.

For example, most of the engines use common-rail fuel injector systems set at very high pressures — north of 25,000 psi. To achieve those pressures, the injector nozzles require 2-micron fuel filters. I’m expecting to hear that fuel filters have to be changed out much more frequently than in the past, and that the filters themselves are more expensive. To put the 2-microns in perspective, remember the average human hair is 50 microns. Preventing fuel contamination on jobsites will be a major problem.

Effects on performance and price

Most manufacturers are saying their machines will perform as well as or better than the Tier 3-equipped models. I not so sure about whether that is true about all brands and models. Rick Clauss, president of Management Service Partners, told me, “I understand the decline in digging performance [of backhoe-loaders] is noticeable with the interim and final Tier 4 engines.”

There is an investment component to the switchover that’s easier to anticipate. I recently looked at the MSRP prices for backhoe-loaders that dig 14 to 15 feet. The MSRP for those babies, with bare-bones accessories and Tier 4 interim engines, is more than $100,000. That price is about 12% higher than a similar Tier 3 model. I am anticipating that Tier 4 Final engines will add another 12% or so to the price. It wasn’t that long ago that a backhoe of this size cost $65,000.

For example

I put together a hypothetical investment model for a rental operation that has a fleet comprised of 100 backhoe-loaders. I estimated the return on investment (ROI) starting in 2008. Initially, I assumed the whole fleet would consist of machines with Tier 3 engines and the average price for them was about $55,000 — a total investment of about $5.5 million. I also assumed the rental company owner would operate those machines for three years and then in 2012 would begin replacing them with machines equipped with Tier 4 interim and eventually Tier 4 Final engines. Approximately 10% of the fleet would be replaced every year and by 2015 the fleet would be 50:50, half with Tier 3 engines and half equipped with Tier 4 interim and higher machines.

It should be noted that rental companies operating in or near urban areas the EPA has designated as “non-attainment zones,” or places where air pollution levels are unacceptable, might have to provide customers with Tier 4 or higher machines. There’s no choice. The use of Tier 4 engines is often mandated on certain jobs paid for by state governments and is almost always required on federally funded jobs. In those situations, it will not be possible to operate a blended fleet — that is, a mix of Tier 3- and Tier 4-equipped machines.