405 Fleets Fail in 3rd Quarter

This story appears in the Dec. 14 print edition of Transport Topics.

Trucking company failures during the third quarter markedly trailed the record pace for last year, as freight demand stabilized and showed early signs of a coming improvement in rates, according to a new report from Avondale Partners.

The number of fleets that failed fell to 405 in July, August and September, down from 785 in the third quarter of 2008, Avondale analyst Donald Broughton said in the report.

“Although this is not a [failure] rate sufficient to offset the dramatic drop in demand that started in the fall of 2008, coupled with the steady stabilization in demand sequentially, it is enough to suggest that the weakness in contract pricing soon will be over,” Broughton said.

A total of 14,135 tractors were taken off the road in the third quarter of 2009, compared with 39,030 in the corresponding 2008 period.

Through the first three quarters of 2009, about 1,300 fleets have closed their doors in a freight market that bottomed out earlier this year and has been more stable the past four months, according to American Trucking Associations’ tonnage index.

The 2009 failure total so far is less than half of the 2,690 failures for the first nine months of 2008.

Record fuel prices and the recession forced 3,065 fleets out of business last year, according to Avondale’s survey, which dates to 1990.

Broughton based his prediction that pricing would improve on trends in a spot market index developed by Avondale and on historical trends, which show that an increase in contract rates between carriers and shippers will follow price changes that narrow the gap between spot and contract prices.

Earlier this year, spot prices were as much as 35% below contract rates and now are 15% to 20% lower than negotiated prices.

A prominent industry official said he sees evidence that the gap between supply of trucking capacity and freight demand is narrowing.

“There has been a lot of excess capacity in the [truckload] industry, and we’re closer to parity, but we’re not there yet,” Patrick Quinn, president and co-chairman of U.S. Xpress Enterprises, Chattanooga, Tenn., told Transport Topics. “Owners of troubled companies will either have to put in personal capital or give up.

“I think the lines will cross at the end of the first quarter or the beginning of the second,” Quinn said, referring to when the supply of trucks will match with demand for hauling services at a profitable level.

Major fleets as a group have parked about 10% of their trucks, waiting for demand to improve, Broughton said.

“The idling of capacity by existing fleets has helped,” he added, “but it has not been sufficient to stave off the slowdown in asset utilization and weakness in pricing.”

Fuel prices have continued to play a role.

“As was true in the second quarter, in the third quarter fuel stopped falling sequentially and hence did not benefit trucking companies trying to stay in business,” the report stated.

Trucking company failures in the third quarter rose from the second quarter total of 370 fleets with 6,725 trucks, as the average price of diesel rose almost 12% to $2.62 a gallon in the third quarter from an average of $2.35 a gallon in the second quarter, according to the Department of Energy.

Broughton said he expects a cash squeeze will accelerate failures next year.

“The level of deferred maintenance and the cash demands of relicensing will force a larger number of fleets and trucks off the road in the first quarter” of 2010, Broughton told TT. “There is no fair angel in the wings out there with a boatload of cash to save” troubled fleets.

During the first quarter, the added burden of licensing and insurance that can’t be postponed may reach $1,800 for licensing alone per tractor, he said.

Fleets also will be faced with higher maintenance costs in 2010 that could be “catastrophic,” if fleets have to pay those costs all at once.

Marginal fleets were kept alive by the first-quarter drop in fuel prices to an average of $2.10 a gallon and lenders’ loan forgiveness in the second and third quarters, Broughton said. One lender he didn’t identify now has given a fourth 90-day forbearance on payments due.

“Fuel isn’t going to save them anymore,” he told TT. “Lenders are not going to save them anymore. Bankers are foolish at times, but they are not stupid enough to keep throwing good money after bad.”

Fleets have conserved cash this year by parking trucks and cannibalizing some units for parts.

Broughton said reactivating idled trucks doesn’t necessarily generate cash, because operating costs such as driver wages and fuel eat up available funds.

To illustrate how far parts cannibalization can go, Broughton recounted the story of a veteran executive who repossessed a carrier’s truck and found a steel cafeteria chair bolted in place where the driver’s seat should have been.

Banks also could add to the pressure by curtailing loan forgiveness, if an improvement in used truck prices allows them to repossess and resell the equipment at a smaller loss, he said.

Associate News Editor Jonathan S. Reiskin contributed to this report.