Fleet Failures Increase in Third Quarter As Costs Rise, Demand Slips, Report Says

This story appears in the Oct. 28 print edition of Transport Topics.

ORLANDO, Fla. — Cost pressures, weak rate growth and sluggish freight demand pushed third-quarter trucking fleet failures higher, more than doubling the pace of the year-earlier quarter and topping the full year totals recorded in 2011 and 2012, according to a new analyst report.

Failures climbed to 235 fleets operating 4,985 trucks, compared with 115 fleets and 2,020 vehicles in last year’s third quarter, said Donald Broughton, an Avondale Partners analyst in St. Louis, who discussed his latest report with Transport Topics during American Trucking Associations’ Management Conference & Exhibition here. So far this year, his report showed, more than 14,000 trucks have been taken off the road, compared with 7,250 last year and about 10,000 in 2011.

“The combined headwinds of cost inflation outpacing rate increases, soft demand and ever-greater competition from intermodal, have taken their toll on the remaining marginal carriers,” said the report. Broughton said costs have risen two or three times faster than inflation, meaning, “Margins have come down for almost everyone. Last year at this time, pricing was stronger and costs were just starting to accelerate faster.”

He told TT the report shows an additional trend: “The latest number runs counter to seasonal patterns. The third quarter was worse than the second quarter. Normally, fleets are less likely to fail in the third quarter.” And, he said, failures could soon spike upward.

“The fact that we saw the [failure] number rise indicates that underlying conditions are getting more difficult,” he added. “It’s a signal that in the first quarter [next year], we might finally be talking about a significant number of fleets exiting the industry again,” he said, in a season when low freight levels constrain revenue and costs such as those caused by inclement weather are higher.

ATA Chief Economist Bob Costello offered another bankruptcy scenario, saying failures could accelerate for marginal, smaller fleets that can’t afford to create programs to help their contractors drive newer, more fuel-efficient equipment.

“If there isn’t economic growth,” Costello said, “they go out of business because they are being nickel-and-dimed to death on maintenance.”

“Demand is neither too hot nor too cold,” Broughton said, in a market where intermodal freight has risen about 4% and taken some market share. ATA data show freight volumes that are less than 1% higher for truckload carriers, which represent the industry’s largest sector. At the same time, rates generally have only kept pace with inflation.

“While we had more companies exit the industry, it is not enough to move the needle enough to drive pricing up,” he said, allowing surviving fleets to buttress their ability to raise rates and profit margins.

The recent regulatory change to require brokers to have a $75,000 surety bond instead of the previous $10,000 level also could change a long-term trend, he said. The increase continues to be challenged in court.

Until now, failures have been driven by operators’ ability to run a profitable business and not by fleet size, Broughton said.

He reasoned that smaller brokers who can’t afford the higher bond will not be able to move as many loads, hurting smaller carriers whose revenue stream is constricted as a result.

As costs such as maintenance and driver wages rise for an industry whose average fleet age remains near record levels, Broughton said fleets that can afford to buy new trucks are benefiting from greater fuel efficiency.

“The real stair-step up in fuel economy means that while the cost of the truck is more expensive, operating costs are lower,” he explained. “That is driving a deeper wedge between the stronger and weaker fleets.”

Broughton also said it was too early to tell whether the July 1 hours-of-service changes had any effect on fleet failures. While some fleets, such as Werner Enterprises, are reporting lower productivity, others haven’t yet determined how much their operations have been affected.