Fleet Failures Idle More Trucks in 4Q as Freight Levels Decline

This story appears in the Jan. 21 print edition of Transport Topics.

The number of trucks idled because of truck fleet bankruptcies rose 28% in the fourth quarter, driven by weakening used-truck prices, lower freight demand and higher costs, according to a new report.

Avondale Partners analyst Donald Broughton, who publishes the quarterly report, told Transport Topics last week that a total of 2,515 trucks operated by 150 fleets left the industry in the fourth quarter last year. In the same 2011 period, 180 fleets failed, idling 1,965 trucks, “Fleet failures picked up a bit in the fourth quarter,” Broughton said, “but there is the good news that 2012 failures were at a record low.”

The yearly total was 495 fleet failures encompassing 7,370 trucks and included the second quarter, when the lowest totals ever were recorded — 70 fleet failures and 725 trucks. The previous low was in 2011, when fleet failures totaled 800 and fewer than 13,000 trucks were idled.

The latest results are far below 2008 and 2009 totals, when nearly 200,000 trucks were put out of operation and about 5,000 fleets failed — crushed by skyrocketing fuel prices and the recession.

Fleet failures have increased since the second quarter, Brough-ton said, with the fourth-quarter total 24% above the third quarter’s, based on the number of trucks that are idled.

Bob Costello, American Trucking Associations’ chief economist, also raised the prospect of in-creased carrier failures in the future.

“More fleets could leave the industry” as higher equipment costs become too much to bear, Costello wrote in a recent report.

Weakening used-truck prices were cited as a key reason for the recent increase. In April, used-truck prices peaked at more than $20,000 above residual value when paid off.

“We’ve gone from that peak to a slight discount to residual value,” Broughton explained, “which means there are fewer ways for struggling fleet owners to exit the industry gracefully.”

A weakening used-truck market was mirrored in other reports. ACT Research last month said sales of used trucks slumped 16% in November, while a report from the National Automobile Dealers Association on commercial trucks earlier this month also noted price declines.

Broughton, who has compiled the failure report for more than two decades, believes, “There is a very real possibility that there is going to be a very mild recession in the first half of 2013.”

He forecasts an economic contraction of 0.4% this quarter and 1.7% in the second quarter. Broughton based his prediction on tax increases for truck operators and individual consumers.

“Depending on how bad the cycle gets, we could see the worst round of failures we have ever had,” Broughton said. As demand drops further, rates decline, costs keep rising and new regulations take hold.

“No matter what end of the economic scale you look at, taxes are going up 2% or more; those in higher tax brackets will pay 3% or 4% more,” Broughton noted. “If business and consumer spending are going to go down,” he asked, “how does the economy grow?”

However, ATA’s Costello last month forecast economic growth of 2% or less in the first half of 2013, as the economy is helped by auto sales and housing markets that continue the improvement shown during 2012.

Broughton said, “The preponderance of the industry hasn’t invested in their own companies.”

Carriers’ decisions to keep trucks longer sets the stage for failures whenever fleets can’t afford the newer equipment they need to stay in business, he said.

Failures could rise for other reasons, Broughton said.

“Pricing power still is fading for truckload carriers,” he said. Those companies now are struggling to raise rates 2% to 3%, he said, following earlier pricing growth of 4% or more.

At the same time, Broughton added, costs are mounting at a 6% annual pace. Rising truck costs include fuel, tires and insurance.

Still another factor in the failure picture is increased government regulation — such as electronic onboard recording devices — that raise costs by constraining driver and equipment productivity, the Avondale analyst added.

Broughton held out some hope that the U.S. economy could be buoyed by a recovery in the European and Asian economies that triggers more U.S. exports.

Another positive factor is technological change such as hydraulic fracking, which has led to a doubling of oil shipments from the North Dakota-centered Bakken oil field.