Fleet Failures Hit Lowest Level In at Least 25 Years, Report Says

This story appears in the July 30 print edition of Transport Topics.

Trucking bankruptcies reached their lowest level in at least 25 years during the second quarter as freight demand and pricing remained strong enough to sustain virtually every fleet, a new Avondale Partners report said.

The report, provided to Transport Topics last week by its author, Donald Broughton, said just 70 carriers with a total of 725 trucks failed during the second quarter, far below last year’s second-quarter total of 240 companies with 3,955 trucks, and the first-quarter’s tally of 160 companies and 2,110 trucks.

Fleet failures have been declining on a year-over-year basis since the first quarter of 2010, when freight began to increase as the recession eased.

The latest numbers indicate that failures removed about one of every 2,500 trucks on the road. At the height of the industry’s failures during 2009, that number was one in every 85 trucks as 21,110 trucks exited the freight fleet. “An extremely low number of trucks are being pulled from the road due to failures,” Brough-

ton’s report said. “Unfortunately, the rate of demand growth is waning, which, coupled with the lack of capacity reduction [from failures], causes us to lower our pricing [increase] expectations to the low single-digit range for the remainder of the year,” his report said.

That means second-half year-over-year truckload rate growth could be scaled back to the 3%-5% range, compared with first-half increases of up to 8%, Broughton’s report said.

The lowered pricing expectations are consistent with the latest tonnage projections by American Trucking Associations Chief Economist Bob Costello.

Costello last week said that a weakening economy will cause second-half freight growth rate to top out at 3.5%, less than the 3.9% rate estimated in June, and growth could be as low as 3%.

“The slowdown in freight has me concerned,” said Costello, who believes that current capacity is in line with demand. As long as supply and demand remain in balance, he said, failures will stay low.

“The market is close to equilibrium,” Richard Stocking, president of Swift Transportation, said  on July 20, matching Costello’s view. “That manifests itself as markets improve and capacity tightens very quickly. Customers are still concerned about the peak season as it relates to obtaining sufficient capacity.”

Capacity also was a key issue for Swift’s truckload competitor, Werner Enterprises.

“Freight demand trends are being helped both by supply-side constraints limiting truckload capacity and demand generated by economic activity from our customers,” Werner said in a July 18 statement.

“Thankfully, a number of other factors continue to constrain capacity,” Broughton said, including equipment.

Some carriers that are buying smaller rivals are retiring 10% to 20% of the trucks they buy, he explained.

In addition, Broughton said, some poorly capitalized fleets can afford only one new truck when they trade in two old ones because new truck prices have risen about $25,000. Costello also focused on the link between equipment, capacity and failures, telling TT those expenses are “a wild card.”

“Many small fleets are struggling getting financing for new equipment, yet running older equipment is nickel-and-diming them,” Costello said. “If they don’t keep their equipment/ maintenance costs in check, we could see failures rise.”

At the same time, driver supply is an issue.

Broughton noted that capacity is being constrained as drivers leave trucking to take more-attractive manufacturing and construction jobs as conditions in those industries improve.

“Jobs that provide more home time and a better lifestyle and also offer more pay are becoming more plentiful, so truck drivers are increasingly leaving the industry,” he said.

The scarcity of drivers has left some fleets with more unseated trucks.

For example, USA Truck earlier this month said there was no driver available for 12% of its tractors, more than the 10% in the first quarter of 2012.

Another factor also helped to keep failures down: fuel.

Diesel prices during the quarter dropped more than 10%, allowing carriers to reap the benefits of fuel surcharge payments from shippers that didn’t fall as fast as fleets’ fuel prices.

“This contributed to the very low failure rate during the quarter and will certainly be a tail wind for financial results in the second half of 2012 and in 2013,” Broughton said.

Though demand still is growing slowly, fleets are facing pressure on two other fronts: driver pay and turnover, both of which have been rising for the past year.

Broughton estimated driver pay is rising about 5% annually. ATA earlier this year said first-quarter turnover at smaller fleets rose the fastest in seven years (6-16, p. 1).

“The coincident increase in driver pay and spike in turnover at smaller fleets is a sign of the increasing difficulties that small fleets face in today’s industry landscape,” Broughton said.

Smaller fleets are feeling more pain than larger ones because bigger fleets tend to be financially stronger, he observed.