Pace of Fleet Failures Slips; ‘Only a Lull,’ Analyst Says

By Rip Watson, Senior Reporter

This story appears in the Nov. 3 print edition of Transport Topics.

The pace of trucking bankruptcies slowed during the third quarter — to 785 from 935 in the second quarter — but rather than signaling a turn, the decline was, as one analyst put it, “only a lull in the storm.”

Only a 17% drop in fuel prices from July to September kept fleet failures from climbing higher, said Donald Broughton of Avondale Partners.

“Fuel surcharges were collected at a higher rate than fuel expenses. This artificially boosted margins, allowed truckers to catch up some of the shortfall experienced in previous quarters and eased cash-flow concerns for many,” Broughton said in releasing his quarterly report.

“Trucking fundamentals remained dire enough in the third quarter to push even more trucking companies out of business,” Broughton said. Third-quarter failures, about 50% more than the same period last year, climbed as fleets saw demand deteriorate from month to month, he said.

Bankruptcies triggered by weaker demand and higher fuel prices already in 2008 have culled a record 127,000 heavy-duty tractors from the nation’s fleet.

Broughton’s third-quarter bankruptcy report, published last week, said carrier closings took an estimated 39,000 trucks off the road. Combined with the 88,000 trucks removed by bankruptcies in the first half of 2008, the previous record capacity cut — 117,000 over the full year in 2000 — was topped in just three quarters of this year.

With the latest report, total bankruptcies hit 2,690 this year, and the size of the national fleet has been cut by 6.5%. That reduction will help surviving truckers to raise rates when the economy begins to grow again and demand climbs, Broughton said.

When that might happen wasn’t clear.

FTR Associates, a Nashville, Ind., freight-forecasting firm, predicted last week that tonnage will fall 1.9% next year. American Trucking Associations’ tonnage report has declined three months in sequence  and in September hit the lowest level since October 2007, even though the monthly total was a bit higher than the year-earlier level (see story, p. 1; click here for related Premium Content story).

With freight demand falling, the decline in diesel prices that has continued during the first weeks of the fourth quarter may not be enough to save fleets with marginal profits and weak cash flow, Broughton said.

He said the use of quick pay and receivables factoring rose in the quarter as fleets hunted for more immediate sources of cash to pay their bills. Quick pay gives payment when the freight is moved, but the rate that carriers receive is lowered. Fleets get cash from factoring by selling their receivables to an outside vendor for a fee.

“If the decline of fuel prices solved all of the margin and cash-flow issues at troubled fleets, the incidence of quick pay and factoring would have gone down during the quarter, not up,” Broughton said. “This suggests to us that the drop-off in the third quarter will prove to be only a lull in the storm and not a sign that the worst is over.”

Fourth-quarter totals could be similar to third-quarter levels, Broughton said, predicting that failures will climb early next year when fleets lack cash to pay annual fees such as license renewals.

There is an important distinction from a capacity standpoint between the current failures and the removal of 117,000 trucks in 2000 and 110,000 more the next year.

“In the previous cycle, some of that loss of capacity was offset by the addition of capacity by other carriers,” Broughton said. “That isn’t happening this time — at least not yet.”

Tonn Ostergard, chief executive officer of Crete Carrier Corp., Lincoln, Neb., confirmed the current situation.

“The failure of carriers has not necessarily left more loads for remaining companies,” said Ostergard. “I suspect there’s still excess capacity out there.”

“Some bad companies are going under, of course, but there are also some good companies that are still sound where the owner says, ‘To heck with it’ and closes down, and it’s amazing how quickly that capacity is absorbed into the market,” said Ray Haight, executive director of MacKinnon Transport, Guelph, Ontario, and chairman of the Truckload Carriers Association.

FTR said capacity isn’t likely to loosen further because of new equipment purchases and is predicting that Class 8 sales will hit a 30-year low in 2009.

Broughton’s data, which date back to 1990, exclude operations with fewer than five tractors.

Associate News Editor Jonathan Reiskin contributed to this story.