Fleet Failures Slow in 2Q as Freight Market Tightens

This story appears in the Aug. 16 print edition of Transport Topics.

Fleet failures slowed sharply in the second quarter after a bulge earlier in the year, dropping to the lowest number in nearly four years because the trucking business is gaining strength, an Avondale Partners report said.

The number of failures dipped to 355, the lowest since fourth quarter of 2006. The total reported by analyst Donald Broughton was less than half of the 730 in the first quarter and below the 375 in last year’s second quarter.

“Business is better for trucking,” Broughton told Transport Topics on Aug. 12. “We have taken enough capacity out of the market and demand has improved enough that we have at least reached equilibrium in the market.”

Freight demand may be exceeding capacity, he said, based on recent spot market trends, because fleets have cut capacity by a total of 15% since the recession began.

His report was reinforced by two index reports for July that showed continued freight growth.

The Ceridian-UCLA Pulse of Commerce Index, or PCI, which is based on fuel purchases at truck stops, showed 8% year-to-year growth in a report released Aug. 11. The Cass Freight Index, which measures shipments, rose 8.9% in July, also year-over-year.

The indicators were released as some economists worried that Americans faced a return to recession. That gloomy outlook was based on continued high unemployment, chronic weakness in retail and housing markets, as well as the tepid 2.4% second-quarter growth rate in the gross domestic product.

“There is nothing about the PCI that is supportive of the pessimistic ‘double-dip’ view,” said Ed Leamer, chief economist for the index and a professor at the University of California, Los Angeles. “The economy continues to recover — which is encouraging — but the pace needs to substantially pick up to put people back to work.”

Leamer cautioned that the index has to rise between 10% and 15% on a year-to-year basis for employment to grow meaningfully.

Other economists were more pessimistic.

“An unstable economic environment has rekindled talk of a ‘double-dip’ recession,” Oscar Jorda, a visiting scholar at the Federal Reserve Bank in San Francisco, told Bloomberg News on Aug. 9.

Jorda said he envisions a “significant possibility” of another recession in 2012.

Broughton agreed with Leamer.

“We are out of the depths of the recession, but the rates at which demand has been improving can’t continue,” he said. “It is not unreasonable to think that the demand for freight will flatten out. That doesn’t mean we’re going to have a double-dip recession.”

Broughton said the number of trucks taken out of the fleet also slowed on a quarter-to-quarter basis, dropping from 33,660 in the first quarter to 11,060.

With supply and demand in balance, Broughton said, the industry’s focus on capacity reduction in response to falling demand now has shifted to maintaining an adequate supply of drivers.

“It’s not about failures anymore,” he said. “It’s now about drivers. Going forward, the most important factor will be to find, train and retain enough drivers for fleets to first fully seat and then grow their fleets.”

“Finding drivers already is tough,” Broughton added. “It is going to become tougher because there are fewer individuals who will be qualified under the CSA 2010 rules.”

On a month-to-month basis, the July PCI index rose 1.7% in July from June after falling 1.9% from May to June. The PCI index is based on millions of annual purchases using the Comdata fuel card. Comdata is a Ceridian Corp. subsidiary.

“Freight is still moving at levels nicely above last year,” Ceridian Senior Vice President Craig Manson told TT, noting that July was the eighth consecutive monthly increase based on the three-month moving average. “We had an acceleration of activity in the second half of June that continued into July.”

The Cass index, derived from $17.5 billion in freight bill payments by a St. Louis bank, fell 8.9% from June to July.

Deutsche Bank analyst Justin Yagerman said in an Aug. 6 report that the Cass index typically declines from June to July because June typically is one of the stronger months in terms of freight volume.

However, Yagerman cautioned that the 8.9% drop in the payments index exceeded the average decline of 4.7% in the prior five years.