The chassis pool SACP 3.0 was launched in the beginning of October. Does this mark a new approach to managing chassis pools in the future?
October 2023 began in a big way for Consolidated Chassis Management (CCM).
On October 1st, CCM rolled out SACP 3.0 (South Atlantic Consolidated Chassis Pool) completing opening of the new chassis pool’s staged launch. And at almost the exact same time, it was announced that funds managed by the infrastructure investing strategy arm of Oaktree Capital Management acquired CCM from Ocean Carrier Equipment Management Association, Inc. (OCEMA).
Under the SACP 3.0 agreement with OCEMA affiliate South Atlantic Consolidated Chassis Pool (SACP), CCM will serve as the exclusive manager and sole chassis provider for SACP 3.0 under a long-term management and supply agreement. With the launch, the newly reconstituted chassis pool will offer more than 45,000 new and refurbished chassis to truckers, beneficial cargo owners (BCOs), ocean carriers and other users. SACP 2.0 was already one of the largest fully interoperable chassis pools in the US and includes over 75 locations in Alabama, Florida, Georgia, North Carolina, and South Carolina in its operational portfolio, but with the new utility model, SACP 3.0 would provide a modernized fleet to the region.
Oaktree (with over $183 billion in assets under management) isn’t the first venture capital firm to take an interest in the chassis or the dray business. Private equity firms have taken a shine to logistics companies and chassis and drayage firms have been a natural fit for VCs looking to build their infrastructure portfolio. Although many VCs have invested in the chassis dray market, and Oaktree itself had already invested in the transportation sector, this was the private equity firm’s first plunge into the chassis business.
How SACP 3.0 Came To Life
Mike Wilson, CEO of CCM when queried by AJOT on the evolution of SACP 3.0 and how it fits into the dray market eco-system, explained, “I’ll have to go back to the beginning of the SACP model in which SACP-1 was a contributory model – this cooperative -model was where the ocean carriers initially contributed their assets into a gray pool. Years later the ocean carriers sold their assets to the [chassis] leasing companies, where the leasing companies became the contributors.”
As Wilson noted, the chassis leasing companies understandably had a different business model. Their primary objective was to differentiate themselves so as to maximize their income from the chassis they owned. To the ocean carriers, the chassis were adjunct to their main business of filling ships with boxes. Hence, the service of maintaining and providing chassis were complimentary to their overarching business of shifting boxes from port-to-port. With the shift in chassis ownership, the leasing companies became the primary contributor to the chassis pools, replacing the ocean carriers.
The division in the two business models widened with economic pressures following the Lehman Brothers bankruptcy and the ensuing Recession in 2008. “They weren’t necessarily driven by those values that the ocean carriers had originally put around the design of CCM,” Wilson said. In the period leading up to the crisis, shipping demand was rising and so was the utilization of chassis. Leasing companies wanted to address both chassis fleet capacity and quality. With the ensuing crash in demand, chassis utilization fell, as did replacements and quality. As a result, when demand returned back to near pre-crisis levels with the economic rebound, there was a lack of capacity as well as quality. As Wilson explains “The chassis were aging… there were few if any chassis purchases for nearly 10 years…The volume, let’s call it between 2009 and 2015, grew into the standing fleet. There wasn’t a need to add capacity. But there also wasn’t an injection of any new assets.”
In the meantime, chassis technology was changing with innovations like antilock brakes, radial tires, spoke wheels, and heavy duty springs but the fleet remained mostly stagnant.
As SACP 2.0 rolled around (2019/2020), The Ocean Carriers and CCM wanted the pool contributors to upgrade the fleet — the argument was simple; with a fleet pushing 20-years old, the motor carriers were unhappy, and the ports also unhappy. It was agreed that the fleet upgrade had to be done.
But it never happened. According to Wilson the best that ever happened was a 43% upgrade over a two-year period. Things had to change.
As Wilson expounded the ports pushed for a new model expressing along the line “‘Look, we appreciate you guys trying, but this approach, this concept isn’t working. The fleet isn’t being upgraded and it’s still old. We [port authorities] need a new model.’ We [CCM] went back to the drawing board and came up with the SACP 3.0 model.”
A Nuanced Approach
First and foremost, designing a reboot was answering the need for having both enough chassis and having reliable chassis. The leasing company model was designed to have just enough chassis, as chassis utilization is a key to profit. As Wilson says, “Utilization is their [leasing companies] friend when it is high, it’s not their friend when it’s low.”
But what is the ideal utilization? How much should be on the road? How much should be rotated out for service? And how much should be kept in reserve for demand spikes? In SACP 3.0, an agreement was reached to move from 80% utilization to 73% utilization, which creates a buffer stock. Also, it was agreed to upgrade the fleet within four years to go from an average of 20 years to less than four years through an extensive refurbishing and a new-build injection plan.
The ambitious undertaking also required the business to be re-modeled. As Wilson explained regarding the transition, “We [CCM] designed it around a utility style model to a point where we knew that we needed to attract investors to help finance the model.” It was also clear to CCM that with the new structure that had a fixed profit of 10% per year over a decade (as opposed to a 10% profit over two or three years) would attract longer term minded investors — particularly private equity investors.
According to Wilson, CCE, the then parent of parent CCM started with around 35 potential investors and eventually whittled it down to five before choosing Oaktree. “We finally picked Oaktree as the potential partner based on that they were a good fit. They believed in the utility model. They believed in quality service. They believed in long-term investment. They weren’t going to try to flip it in five years.”
Driving the New Model
What is emerging from the launching of SACP 3.0 coupled with the Oaktree investment is a new approach to managing the chassis business. It’s often said, that as in sports, business is a copycat league. Will the chassis pool model move to be more “utility” in its operation?
It’s hard to say with only a month plus into the transition and it is worth noting, Oaktree’s new infrastructure investment in the chassis business came in the midst of a severe down cycle in the shipping business. As Wilson points out the business model was based on 73% utilization and is now running at only around 50%. And how long will it be before demand begins to push utilization up is just about anyone’s guess – sometime in ’24 or ’25 according to some economists — but with so many geo-political factors riding along with uneven macro-economic trends even Cassandra would be flummoxed.
Whether launched in an up or down cycle, SACP 3.0 coupled with the Oaktree acquisition surely changes the landscape for managing chassis pools in the U.S.
