3Q Fleet Failures Rise Slightly; Analyst Sees Danger in Used Truck Prices

This story appears in the Oct. 22 print edition of Transport Topics.

Truck fleet failures rose in the third quarter from a 25-year low but the total remained relatively small, according to a new Avondale Partners report, which warned that closures could rise if freight demand falls.

The report, provided to Transport Topics last week, showed that 115 companies operating 2,020 trucks failed between July and September, up from the record low of 70 carriers and 725 trucks in the second quarter.

In last year’s third quarter, failures calculated by Avondale analyst Donald Broughton totaled 85 companies and 1,470 trucks.

“An extremely low number of trucks are being pulled from the road by failures,” said Broughton, while he stressed the potential for trouble ahead. “If we assume that fuel costs continue to expand, and driver pay continues to be high, it would not take but a 1% or 2% downtick [in shipments] to create a large amount of mayhem, and failures, in the industry.”

Growth already is slowing, American Trucking Associations’ Chief Economist Bob Costello said, and is likely to slow further between now and the end of the year.

Failures are low right now, Broughton said, because freight demand and supply are relatively balanced, and capacity in the industry isn’t growing.

A key reason for that capacity constraint, he said, was the fact that many buyers can’t afford to add equipment and are buying fewer trucks than they trade in.

In addition to making trades such as three old trucks for two new ones, Broughton said, rising costs for driver pay, fuel and onboard equipment also are limiting carriers’ ability to add new capacity.

Costello said that equipment costs will be a key factor in future failures.

“Failures aren’t a thing of the past,” said Costello. “Diesel prices don’t drive people out [of business] the way they used to. Equipment is becoming the new diesel fuel; that expense will drive people out. But it’s not like diesel, which would drive people out of business immediately.”

Instead, he told TT, rising maintenance costs “nickels and dimes” carriers, creating financial difficulty and a longer-term route to failure.

His comments about fuel-related failures were a reference to 2008. In that year, diesel prices hit a record $4.764 per gallon and nearly 3,000 carriers went out of business.

By comparison, about 800 fleets failed last year and just 345 so far this year.

Broughton also said failures could pick up as used truck prices, which were rising strongly last year, fall into a broad-based decline.

“We expect trucking failures to begin to move upward,” he said, as used equipment prices slip and weaker demand reduces rates and profits.

A drop in used prices would hurt companies that have been able to make “a graceful exit” from the industry by selling used equipment profitably, Broughton said. As prices fall and demand weakens, those exits become more “ungraceful.”

One indicator of the weakening equipment market is that used truck prices were up 27% over 2010 levels late last year. However, in 2012, that increase, as measured by ACT Research, slipped to just 2.2%, based on August data (10-8, p. 7).

Other sources indicate that used truck prices are already on the decline.

For example, the October edition of the National Automotive Dealers Association monthly used truck report shows that prices fell in most categories and now are below 2011 levels.

The value of 3-year-old used trucks has fallen 21.5%, NADA said, though other used equipment prices are rising.

Chris Visser, senior analyst and product manager for NADA, said there has been a definite moderation in used truck prices in recent months.

He noted that sales and pricing of newer, more expensive used trucks, particularly 2- or 3-year-old tractors, are being hurt by buyers’ uncertainty about the economy.

Broughton mentioned another transitional factor for fleets — aging owners who founded their companies soon after deregulation and now are looking to retire some 32 years later.

“The demographics of the owners are as big a factor as the demographics of the fleet,” he said.

Broughton said other carriers are watching closely the strategy at truckload carrier Celadon Group Inc., which capitalizes on the exit strategy of some struggling businesses.

Celadon has made seven acquisitions of equipment and drivers in the past six quarters and has turned those acquisitions into profits that could be 50% higher in the latest quarter, he said. Meanwhile, other fleets are struggling to match 2011 third-quarter results.

“Market prices for Class 8 units have remained relatively flat,” Doug Olive, vice president for pricing and appraisals at Ritchie Bros. Auctioneers, told TT. “There is no real price variance to highlight at this moment.”

All of this is taking place as the nation’s truck fleet remains at near-record age levels.

Steve Tam, vice president of ACT Research, said the U.S. Class 8 fleet average age has barely moved from 6.69 years in 2010 to 6.61 years in 2012.