Bankruptcies Rise as Operating Expenses Grow

By Daniel P. Bearth, Staff Writer

This story appears in the Nov. 26 print edition of Transport Topics.

Trucking bankruptcies rose 11.5% in October from the previous month as carriers struggled with weak freight demand and sharply rising costs for fuel and other operating expenses, according to data from investment bank Credit Suisse in New York.

Jason Seidl, a trucking equity analyst at Credit Suisse, said he expects bankruptcies to continue rising as cash-strapped truckers are forced to come up with money to purchase annual permits and licenses and renew insurance policies during the usually slow first quarter.

“Hope for a traditional peak season has passed, and there is no end in sight to rising fuel prices,” Seidl said in a recent report to clients.

 The investment bank reviewed all filings under Chapter 11 of the U.S. Bankruptcy Act to determine the rise in fleet failures.

Although the number of bankruptcy filings is down from October 2006, industry executives see the latest data as a sign of things to come.

“We’re going to see significant bankruptcies, particularly among small carriers going into next year,” said Ray Kuntz, chairman of American Trucking Associations and chief executive officer of Watkins and Shepard Trucking in Helena, Mont. Kuntz spoke to delegates at the Ontario Trucking Association annual meeting in Toronto on Nov. 16.

Trucking business failures for fleets with more than five vehicles have been climbing since the third quarter of 2006, Bob Costello, ATA’s chief economist, said.

There were 445 trucking business failures in the second quarter of 2007 — the most recent period available — up from 385 in the first quarter and 305 in the fourth quarter of 2006, Costello reported, based on data from investment banking firm A.G. Edwards & Sons Inc.

The number of trucking failures reached a peak of 685 in the third quarter of 2005.

A spokeswoman for A.G. Edwards said the release of more current reports has been delayed because, as announced in September, Wachovia Corp. is acquiring the firm.

Costello said that while more carriers will go out of business, others have scaled back truck purchases and reduced the size of their fleets to better withstand a downturn.

“We’re not seeing the same level of financial distress had the same slowdown occurred 10 years ago,” Costello said. “The industry has matured, and carriers are making decisions much quicker.”

A deteriorating freight outlook, however, is forcing some lenders to take a tougher stance on extending credit to trucking companies.

“Banks are taking a hard look at their trucking portfolio, and they are not comfortable,” said DiAne Reed, national sales manager for Marquette Transportation Finance in Charlotte, N.C. “What they see are carriers that are not cash-flow positive.”

Dan McDonough, president of Consolidated Credit Group, a commercial lender and equipment leasing company in Charlotte, said delinquency rates are on the rise but so far are “not out of line.”

A loan is considered delinquent when payments are more than 60 days past due and, McDonough said, the average delinquency rate for commercial lenders is about 2% of loan volume.

“Generally, bankruptcies are event-driven and not the result of a general deterioration [in finances],” McDonough said. “It’s been a very good market, but times are changing.”

Companies that specialize in lending to individuals with poor credit  “are definitely tightening up,” said Todd Amen, president of American Truck Business Services, which provides book-keeping services for about 40,000 owner-operators.

“It’s not going to be as easy to get a truck over the next 12 to 18 months,” he said.

Among the carriers that have recently filed for bankruptcy protection is Merit Transportation, Omaha, Neb. A spokesman for the refrigerated truckload carrier said the company plans to continue operating with about half its 250 trucks.

At Trinity Express Inc., a freight brokerage firm in Lewisville, Texas, owner Barbara Ricehouse said she lost the services of a carrier that had been picking up several loads a week because the operator said he couldn’t afford to pay a $50,000 fuel bill.

“It’s all about cash flow,” Ricehouse said.

Mike Iannelli, a senior vice president of investment bank Lincoln International in Chicago, said the number of trucking companies that go out of business will depend on how long and how deep the freight downturn goes.

“There is a direct correlation between the length and depth of the downturn and how much capacity leaves the market,” he said.

Although Iannelli said he believes that the economy is “fundamentally sound,” changes in manufacturing and distribution will affect demand for freight hauling.

“As we move away from a manufacturing economy, we are not becoming any less of a consumption economy, for instance. Imports will continue to be important,” he said.