More Fleet Failures Expected as Carriers’ Rates, Volumes Fall

This story appears in the March 9 print edition of Transport Topics.

Falling freight rates and volumes likely will produce a new wave of bankruptcies in the first quarter that could set the stage for rapid industry consolidation, several industry experts have said.

Truck tonnage fell 10.8% in January, according to American Trucking Associations, and several sources estimated that rates have fallen 5% to 15% from this time last year.

The tonnage and rate drops offset gains fleets reaped last quarter from the steep drop in fuel prices, which kept many marginally successful fleets in business. The number of trucking bankruptcies fell to 375 in the fourth quarter of 2008 after 2,690 fleets failed in the first three quarters when diesel soared, according to Avondale Partners.

“There will be an increase in first-quarter bankruptcies because of difficulty getting access to credit,” Lana Batts, managing partner of Transport Capital Partners, told Transport Topics on Feb. 26. Her firm surveyed fleets in February and found more than half had major customers that went bankrupt and were being paid more slowly by shippers in financial distress themselves.

She said some fleets also will fail because they won’t be able to afford license and registration fees that are due at this time of the year.

“We will see a meaningful increase in first-quarter bankruptcies over the fourth quarter, owing to the virtual disappearance of fuel-surcharge revenue,” Steve Tam, vice president at A.C.T. Research, told TT on Feb. 24. Licensing and insurance costs “will put a serious cash crunch on marginal carriers that got a brief reprieve in the fourth quarter of 2008.”

“We expect that there will continue to be liquidations; it is a rare motor carrier that ever emerges from bankruptcy, unless they are prepackaged,” Batts said, citing the survey’s finding that 22% of companies would consider liquidating in the next six months.

Among the major fleets that filed for bankruptcy last year, Greatwide Logistics Services and JHT Holdings have exited bankruptcy and are still operating after reorganizations were arranged. Jevic Transportation and Performance Transportation Services closed. Gainey Transportation remains in business while its reorganization works its way through the court system.

Others weren’t ready to say when fleet failures would begin to surge again.

“I know everybody wants their competitors to go out of business and right-size industry capacity,” said Avondale Partners analyst Donald Broughton. “We’ll see what the first-quarter survey results show. If a higher rate of bankruptcy doesn’t happen in the first quarter, then certainly with the persistent lackluster rate environment, we will get another wave of bankruptcies later.”

Broughton said it was possible some fleets that had available cash when the first quarter started because of the fuel price decline could pay licensing fees of up to $1,800 per truck, enabling them to survive until spring.

Stephens Inc. analyst Thom Albrecht said falling rates and declining equipment utilization have wiped out those fuel savings. At the same time, fleets’ financial problems are mounting because banks are seeking tougher terms for letters of credit, constricting borrowing capacity.

“Combine the adverse impact of freight rates with extended receivables and higher letters of credit, and it becomes clear the environment is ripe for consolidation to dramatically increase,” Albrecht said.

Batts said she believes the acquisition pace will pick up because fleets recognize that they have to grow, find a new line of business or exit the industry.

Transport Capital Partners’ survey found 40% of fleets would pursue an acquisition if demand picks up in 18 months, while 27% said they would consider selling in that period when company values are higher.

Fleet executives said at a mid-February investor conference that financial pressures are rising, and some signaled their intention to take advantage of the situation.

Henry Gerkens, chief executive officer of Landstar System Inc., expects a new round of capacity reductions that will take another 6% out of the national freight fleet this year after a similar drop in 2008, partly because carriers won’t be able to come up with cash to pay for licenses.

Some fleets at the BB&T Capital Markets investor meeting signaled they are ready for consolidation.

“We anticipate small carriers will merge themselves together, be acquired or go out of business,” said Earl Congdon, Old Dominion Freight Line’s chief executive officer, opening the door for acquisitions.

“The worst of times can be the best of times for others,” said UPS Inc. Chief Financial Officer Kurt Kuehn. “We will keep our eyes out for acquisitions.”

“There will be prosperity for those left standing,” said John Larkin, an analyst for Stifel, Nicolaus & Co., adding that smaller fleets that focus on longer-haul traffic with an operating ratio of 95 or above in a stronger market stand the greatest risk of failure.

“The question is: Who will be left standing?” Larkin said.