Fleet Failures Increase in 4Q; Pace Could Accelerate in 2016

Fleet failures increased sharply in the fourth quarter of 2015 and are likely to keep climbing this year as freight demand softens, a new report said.

Avondale Partners analyst Donald Broughton told Transport Topics that 1,380 trucks were taken off the road as fleets shut down between October and December, more than double the 605 trucks in the final quarter of 2014. Despite the fourth-quarter increase,  the total number of failures during 2015 was 4,405 trucks, the lowest since Broughton began tracking bankruptcies more than two decades ago. The previous low was 7,370 in 2012.

“Conditions overall were still pretty good, but a little worse than the third quarter,” Broughton told TT. The third-quarter tally was 1,005 trucks.

This year, Broughton said, “It’s easy to predict that the failures will be higher than they were in 2015, since last year was a record low. It appears that freight demand is getting weaker, and it is hard to believe that fuel is going to go lower than where it is now.”

In spite of generally steady demand and lower fuel prices in the fourth quarter, fleets failed because “people still made bad business decisions, ran out of cash and were required to shut down,” the Avondale analyst said.

“Fourth-quarter demand was adequate. The single largest culprit in the fourth quarter was the decline in the spot market,” Broughton said, which hurt marginal fleets that were counting on a repetition of the late 2014 surge in spot rates and volume during the quarter to stay afloat in 2015.

Instead, rates in the spot market, which comprises an estimated 15% of all truck moves, fell about 16% in the quarter, according to analyst estimates. Spot market volume was 42% lower than the final 2014 quarter, according to load board operator DAT Solutions.

Bob Costello, chief economist at American Trucking Associations, said he generally agreed with Broughton’s assessment of the fourth quarter.

One indicator of the weakening demand was the Institute for Supply Management report in January that slipped into negative territory, which historically is a strong indicator that truck tonnage will follow suit, he said.

“There are several factors to suggest that 2015 was the low in trucking company failures,” Costello said. “For example, outside of fuel, most costs are on the rise, especially around the driver. Fuel is likely to go higher through 2016 as well.”

Broughton was reluctant to predict how much 2016 failures will rise, saying the pace will be tied to the extent of a drop-off in freight demand and changes in fuel prices.

“Those two levers are strongly linked to failures,” he noted. “Failures increase and have peaked in the past only when demand contracts and fuel prices rise at the same time.”

Failures are still historically low because overall freight demand is steady and fuel prices are falling.

“Whatever inadequacies a company had usually didn’t matter because the incremental cost of fuel fell throughout last year,” Broughton said. “The result was a cash flow windfall because the fuel surcharge collections were based on a higher price than fleets actually were paying.”

During the fourth quarter, diesel averaged $2.44 per gallon, according to the Energy Information Administration, down more than 30% from the 2014 quarter. For a fleet whose trucks averaged 9,000 miles monthly at 6.5 mpg, the savings compared with the 2014 quarter was about $5,000, or 18 cents per mile, per truck.

Lower used-truck prices and a lackluster spot market also could further hurt struggling fleets.

“Fleets weren’t getting the residual prices they were counting on, which put them in a tighter position with their bankers,” Broughton said.

A report published by ACT Research, based on a sampling of transactions, showed a 6% year-over-year decline in prices for used trucks, or about $2,700.

Used-truck prices could fall further, ACT Vice President Steve Tam said, with a decline of as much as 10%.

“Dealers are reporting that demand for used trucks is slowing, which means that dealers will be reducing prices further to move used trucks,” he said.

Early in 2016, DAT’s spot market trends continue to weaken.

Broughton believes one factor — the federal mandate to install electronic logging devices by late 2017 — will not affect failures this year because many fleets will wait to purchase them.

On the other hand, Costello said, small carriers’ reaction to the ELD mandate remains to be seen and could be a cost factor this year.

Broughton also noted that tight credit, a past villain in fleet failures, generally won’t be an issue this year because “credit is readily available for those who are creditworthy.”