Fleet Failures Remain Low

Trucking company failures reached the second-lowest level ever during 2011’s fourth quarter, reflecting the industry’s improving financial fortunes, according to a new report.

A total of 180 fleets shut their doors during the period, the smallest number for any quarter other than the previous quarter of last year, said a new report from Avondale Partners analyst Donald Broughton, who began tracking carrier failures in 1998. The third-quarter total was 85 failed fleets, far below the total of 380 fleets in the fourth quarter of 2010.

“The latest report is a reflection of an industry that is getting better,” largely because of rate increases, Broughton told Transport Topics.

Industry profits now have risen for nine consecutive quarters, based on the results of 29 publicly traded companies whose collective earnings are expected to rise 40% in the fourth quarter (see story, p. 3).

“Very few companies are exiting the truckload sector via bankruptcy,” because companies that survived tough times during the recession have the ability to prosper now, Broughton said.

The fourth-quarter bankruptcies reduced the overall fleet by 1,965 trucks, representing just 0.1% of the total truck population, far below the peak of 45,000-plus trucks removed in the second quarter of 2008. Broughton said he believes 8,500 companies and 325,000 trucks left the industry between 2007 and 2010.

Although fleet failures are declining, industry capacity still is under pressure from multiple directions, said both Broughton and Bob Costello, chief economist at American Trucking Associations. They spoke separately with TT on Jan. 9.

“I think, in terms of capacity, the interesting thing going forward is not as much failures as it is merger and acquisition activity,” Costello said.

“I think some carriers that want to grow will have to do it through acquisitions,” Costello added. “They can’t sit around and wait for failures because they simply aren’t happening.”

“Due to the driver shortage, I think it will be difficult, not impossible, but difficult, to grow organically,” Costello said.

“Therefore, will some carriers start buying other carriers for their drivers? I think that is a distinct possibility.”

Industry experts expect mergers and acquisitions to rise sharply this year because of increased interest from private equity firms and higher trucking profitability (1-9, p. 1).

Tighter monitoring of driver performance through the federal government’s Compliance, Safety, Accountability program is squeezing supply by eliminating unsafe drivers, Broughton said.

At the same time, he said, wider use of electronic onboard recorders is inflating the number of drivers needed to perform the same amount of work through steps such as catching those who cheat on their logbooks.

Another driver-related factor is the potential for a trucker to go back to other occupations, such as construction, when employment opportunities arise, Broughton said.

Still another indicator of tight capacity was a survey released by Transport Capital Partners on Jan. 10 that found almost three-fourths of carriers expect to add no more than 5% capacity this year. Despite increased earnings, the report said, carriers believe new truck prices are too high.

Equipment prices play other roles in the capacity picture.

Trucks that were worth $25,000 less than the amount owed on them two years ago now can be sold for a profit of $15,000 apiece, Broughton said, allowing some owners to make a graceful exit from trucking, instead of going bankrupt as they would have in 2009.

Carriers seeking to stay in business face a different situation.

“Carriers needing to refresh their fleets are finding that due to higher equipment prices, they have to trade in more trucks per new truck purchased,” Broughton’s report stated. That means a fleet that trades in 10 older trucks now can afford only seven or eight new ones, he explained.

Another equipment influence is the fact that 8- to-10-year-old tractors built during a surge before tighter federal emissions in 2003 finally are finally exiting the fleet after multiple resales, Broughton said.

His report also noted that failures tied to fuel prices during the first half of 2011 were averted because more fleets were well-capitalized.

Higher diesel prices are helping capacity in one way, Broughton said, by prompting shippers and carriers to shift to intermodal.

He also forecast further capacity tightening when business levels pick up next spring, which is prompting shippers to lock up equipment and driver capacity in advance (11-21, p. 1).

“That is a very rational and reasonable business decision on their part,” said Broughton, a former corporate traffic manager. “That is exactly what I would be doing if I were still routing freight for a living.”