Fleet Failures Up in Early 2010, But Survivors May See Benefits

This story appears in the April 26 print edition of Transport Topics.

Trucking company failures leaped to 730 during the first quarter, the largest number since the third quarter of 2008, as the recession continued to take a toll on freight carriers, said Donald Broughton of Avondale Partners.

But the three-year accumulation of the nearly 7,100 firms that have gone under means surviving companies already are enjoying better freight rates, which should transform into greater earnings soon, Broughton said.

The carriers that closed their doors in the first quarter of 2010 had an average of 46 trucks each, cutting overall capacity by 33,660 heavy-duty vehicles, according to the Avondale Partners survey. The current total was a large jump from the 445 carriers that closed in the fourth quarter of 2009 and the 480 that failed during the first three months of last year.

Broughton’s report cited pricing data from the TransCore 3sixty Freight Match load board, showing a sharp increase in spot-market pricing for truckload transportation.

“We believe enough capacity has been reduced to bring the truckload marketplace into equilibrium,” Broughton said. “This is especially bullish, since it was accomplished in the seasonally weakest part of the year. As the seasonal and cyclical improvements in freight demand continue, fundamentals for truckers will only get better.”

Demand for transportation services is also on the rise.

“Beginning with the fourth quarter of last year, there was a significant increase in freight volumes,” said TransCore Senior Vice President David Schrader. “It’s accelerated or gathered steam and, in the last 10 weeks, it’s really become very notable.”

Schrader said the number of loads posted on his board in March was three times greater than a year ago and could rise to four times greater in April.

“This is very robust. It’s not just a comparison to a weak period a year ago,” he said.

“It’s been a historic drop in supply, but it was accompanied by a more historic drop in demand,” said Bob Costello, chief economist of American Trucking Associations. “When this is all settled, we could be looking at the industry’s tightest supply situation ever.”

Asked about current operating conditions, a major truckload executive said he sees an alignment of three forces to keep freight-hauling capacity from returning quickly. Scott Arves, CEO of Transport America, said he expects bank lending to remain tight, the driver shortage to return and trucking productivity to decrease from changes in federal regulations.

“In 2006, there were 9% profit margins, or operating ratios of 91,” Arves said. “ORs migrated up from then until, in 2009, they were bumping up against 100 on average. There were very few companies making enough to reinvest in the business.”

Operating ratio measures expenses as a percentage of revenue, and at 100, the two are equal and there is no profit.

“The small guys, I think, will still have difficulty accessing capital, and the big carriers are growing their asset-light [brokerage] models,” Arves said. “Banks are not all that interested in lending to carriers until they see better balance sheets.”

Werner Enterprises offered similar observations in its April 19 earnings report.

“Pricing for our spot market business in one-way truckload, a small percentage of our total revenue base, improved significantly during first quarter 2010,” Werner said in its report.

“Pricing for the much larger book of contractual business remains competitive but is clearly beginning to improve. We are in the early stages of upgrading our freight mix and are becoming more selective with our freight choices.

“We intend to keep our fleet size constant at approximately 7,300 trucks for the foreseeable future and focus on improving our returns on assets and invested capital,” the Omaha, Neb., carrier said in its report.

The first quarter is usually a slow time of the year for freight movement, and it also can be difficult for carriers because many of them have to make large annual payments for insurance and vehicle registration, thereby forcing some companies to close.

Carrier failures hit a relative low point of 305 in the final quarter of 2006, and then rose steadily through 2007 before soaring to about 950 a quarter during the first half of 2008 as diesel prices climbed past $4.60 a gallon. Last year, failures leveled off to fewer than 500 per quarter.

The cumulative weight of this streak is that for the 12 quarters ended March 31, the Avondale Partners data show that 7,065 carriers with at least five trucks went out of business, or an average of 2,355 a year. The average number of trucks per company during a quarter usually has been in excess of 40, Broughton said.

The strength of a carrier’s balance sheet will determine its future at this point, Broughton said. Firms with manageable debt loads that have kept current with their equipment payments should prosper handsomely from seasonal and cyclical freight volume improvements and pricing that is strengthening quickly.

However, carriers that have depended upon numerous forbearances from equipment lenders soon could be joining the ranks of the bankrupt, Broughton said. His report predicted that rising used-truck prices will prompt lenders to change course and repossess equipment that is covered by nonperforming loans.

Operating capital also will be a problem for some carriers.

“You have to have cash now,” Broughton said. “More equipment utilization means you have to pay more for diesel, more for drivers and more for maintenance — all of which require cash.”