Failures Hit 2-Year High as Fleets’ Costs Increase

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

U.S. trucking bankruptcies reached a two-year high of 205 during the second quarter, nearly triple the failures in the corresponding period last year, as fleets battled steadily rising costs, according to a new report.

The report, by Avondale Partners analyst Donald Broughton and provided to Transport Topics last week, showed that failures took 4,745 trucks off the road in the second quarter. Bankruptcies in the second quarter rose on a sequential basis, topping the first-quarter failure totals of 195 companies and 4,330 trucks.

In last year’s second quarter, 70 fleets operating 725 trucks failed, the lowest since Broughton began compiling the report more than two decades ago.

“The last time that failures rose sequentially in the second quarter was in 2008,” Broughton told TT. “This is the result of the fact that cost inflation is running at a pace that is roughly twice that of pricing power. For those fleets that are slightly unprofitable or marginally profitable, those costs put continued pressure on their business, pushing them toward potential failure.”

Broughton said the current failure rate, which is below one-half of 1% of the overall trucking fleet, isn’t enough to change current market dynamics.

Bob Costello, chief economist of American Trucking Associations, in June gauged the amount of excess trucking capacity between 3% and 4% in the truckload market.

Broughton estimated that truck rates are rising at about a 2% pace annually, putting cost increases such as new trucks and higher driver pay in the 4%-to-5% range. ATA statistics through May show truckload rates rising more slowly, though less-than-truckload fleets are faring better.

Last week’s initial round of second-quarter earnings showed trucking rates in revenue-per-mile changing less than 1% at Marten Transport.

“The last two quarters have seen a modest uptick in failures as we believe the combined headwinds of cost inflation outpacing rate increases, soft demand and even greater competition from intermodal have taken their toll on many of the remaining marginal carriers,” the Avondale report said.

That trend was reflected in J.B. Hunt Transport Services’ 12% second-quarter increase in intermodal volume and revenue.

Intermodal providers “are being increasingly aggressive at stealing market share from longhaul truckload carriers,” Broughton said.

As intermodal share grows, truckload fleets shift to shorter haul freight lanes, increasing capacity there and serving as “an additional impediment to truckload pricing power,” the report said.

“Given the cost pressures that carriers [particularly small fleets] are currently facing, we would continue to expect failures to remain above the levels seen in 2011 and 2012,” the report said.

Failures remain far below the recessionary peaks seen in 2001 and 2009, when more than 900 fleets shut their doors during three-month spans.

Other factors continue to pressure marginal fleets, such as acquisitions that reduce capacity by idling older trucks and government regulations such as the Compliance, Safety, Accountability program, Broughton said.

One area where Broughton departed from broadly held industry views was the effect of the July 1 hours-of-service rule changes.

He said he believes that the HOS changes won’t lead to more bankruptcies because any drivers who were cheating on their logbooks are unlikely to change their habits because of the new rules.

“If drivers are cheating on logbooks, then hours of service is irrelevant,” he said.

American Trucking Associations, fleet executives and industry analysts have predicted significant productivity losses because new requirements require more driver rest.

Analyst John Larkin at Stifel Nicolaus said in a July 17 report that while trucking rates are weak, there are several reasons there could be a pricing turnaround soon, including growth in the manufacturing, housing and automotive industries, and implementation of federal rules that will reduce the size of the driver pool or limit driver productivity.

“We appear to be within striking distance of a capacity shortfall in the truckload industry,” he said. “Only then will rate increases outstrip the rate of cost increases.”

Broughton didn’t pinpoint when the market would turn, saying only that a sharp spike in failures or a surge in demand will generate the needed increases of 5% to 7%.

“In a slow-growth economy, most companies are trying to increase profits by raising margins rather than revenue,” Broughton said. “Unless you are in fracking [for oil or natural gas], e-commerce or intermodal you are focused on margins today.”

One factor that could reduce capacity, Broughton said, is a California state requirement in 2014 that bars trucks with pre-2007 model engines. That change could squeeze capacity because Broughton believes fleets won’t invest $20,000 to achieve compliance by retrofitting an older truck with market value of around $25,000.