Fleet Failures Double in 1Q as Costs Outpace Rate Hikes

This story appears in the April 15 print edition of Transport Topics.

Trucking failures doubled in the first quarter of 2013, reaching the highest level in nearly two years, and will keep rising because fleets’ costs are increasing twice as fast as revenue, according to a new investment report.

Using the measure of trucks taken off the road, the Avondale Partners analysis provided to Transport Topics last week by analyst Donald Broughton showed 4,330 trucks were idled in the first quarter, compared with 2,110 in last year’s first quarter and 2,515 in the fourth quarter.

It was the highest failure rate since the second quarter of 2011.

“We do expect to see higher failure rates in 2013 after 2011 and 2012 set back-to-back records for all-time lows,” according to the report from St. Louis-based Avondale.

“One of the main reasons for the uptick in failures — cost pressures outpacing pricing gains — will remain in place for most, if not all, of 2013.”

However, the number of idled fleets was far short of the record pace set between 2007 and 2010, when drooping demand and overcapacity sweated 18% of trucks out of the industry’s fleet. Over each year of that period, about 80,000 trucks were pulled off the road, far exceeding the 17,320 trucks annually at this year’s first-quarter pace.

“The real key is that the truckers’ costs are up 5% to 7% per mile and pricing power up 2% to 3% per mile,” Broughton told TT. “Sooner or later, there is going to be a catch-up, and more trucks are going to get pulled off the road.”

“While I don’t forecast failures, I wouldn’t be surprised if indeed they increase, certainly in the current quarter and the next quarter,” said Bob Costello, American Trucking Associations’ chief economist.

“There will be pressure on fleets as freight isn’t expected to be robust this year,” Costello said. “Economic growth will be limited in Q2 and Q3.”

Incentive pay packages, such as bonuses for miles traveled per month, are raising costs as much as 5%, while tractor prices have climbed 30% and trailers cost 20% to 30% more, Broughton said.

Capacity also is being restrained by factors not directly related to operating costs and drivers, the report noted.

One factor is fleets’ acquisitions aimed at adding drivers, whose old trucks are banished to the scrap heap. Another is fleets that buy fewer trucks than they trade in, the report said.

Government regulations such as the Federal Motor Carrier Safety Administration’s Compliance, Safety, Accountability program and hours-of-service revisions also play a role.

There is still plenty of room for an increase in failures before truckers actually achieve higher margins, Broughton said.

He estimated that the number of trucks idled because fleets failed could at least double before the surviving fleets will be able to raise rates faster than the current 2% to 3% pace.

One constant is the availability of drivers as the primary capacity constraint, Broughton said, continuing a trend that began almost three years ago.

“The driver availability issue will be a permanent feature of the trucking landscape until Google takes over and there are trucks without drivers, or we significantly change our immigration policies, or there are more substantial driver pay increases,” Broughton said.

His Google comment was a reference to the software vendor’s vehicle tests that replace drivers with computer-generated commands. Truck makers and universities also have tried similar tests and experiments.

“We need either a new supply of qualifiable, insurable drivers who are willing to do a hard job for not a lot of pay, or we need to raise pay — or both,” he added.

Costello agreed that drivers will continue to be the main capacity constraint.

“Driver availability is likely to be worse this year than last year despite only moderate freight growth,” the ATA economist said. “This is because construction employment should be robust, giving an alternative to blue-collar workers looking to enter the industry.”

Broughton also noted that driver supply continues to be tightened by an improving economy that has brightened the prospects in industries such as construction and manufacturing for experienced workers.

Avondale’s report also highlighted some different dynamics in today’s market, saying that in past cycles fleets added equipment when rates and profits rose.

“Although we are seeing a few large fleets add modest amounts of capacity, most are content to maintain their current fleet size and improve margins and returns by operating their truckload division more efficiently,” Broughton said.

Avondale’s report also measures the number of fleets that failed: 195 companies dissolved in the first quarter, up from 160 in last year’s first quarter and 150 in the final 2012 three-month period.

A different report from consultant FTR Associates of Nashville, Ind., was more optimistic.

FTR Associates concluded that tighter capacity soon will lead to higher rates.

“Volumes, prices and margins are likely to be in a solidly favorable range for trucking companies” as the year progresses, the report said. “Improving freight will tighten capacity, allowing truckers to push rates higher.”