Fleet Failures Accelerate in 4Q

This story appears in the Feb. 1 print edition of Transport Topics.

Trucking company failures accelerated in the fourth quarter of 2009 and will continue to rise this year as fleets in the worst financial shape run out of cash and creditors run out of patience with them, a new Avondale Partners report said.

The total number of fleet failures climbed to 445 in the fourth quarter, compared with 375 in the year-earlier period and 405 in the third quarter of 2009, Avondale analyst Donald Broughton said in his report.

Measured in trucks taken off the road, the increase was even more pronounced. A total of 21,010 trucks were removed from service as the average number of trucks in failing fleets climbed to 47.

The latest total was nearly double the 10,625 trucks removed in the 2008 quarter, when the average was 28.

On a sequential basis, the total capacity exiting the fleet was almost 50% higher than 2009’s third quarter. That total was 14,135 and the average failed fleet had 35 vehicles.

“The momentum has shifted back toward an increase in the number of truckers shutting down,” Broughton told Transport Topics on Jan. 22.

“For several reasons, we expect the failure rate to jump up in the first quarter, which will further improve industry fundamentals for the surviving carriers,” he said.

“Lenders have to take down some of the worst of the portfolio to prove they are taking care of the rest of it,” he said.

Speaking on a conference call, Stephen Russell, CEO of Celadon Group Inc., agreed with Broughton.

“It’s likely there will be an increase in fleet failures in the first quarter,” Russell said. “Banks aren’t lending to weak fleets.”

“A lot of lenders were reluctant to put [struggling fleets] out of business,” Bob Costello, American Trucking Associations’ chief economist, said on Jan. 26. “Eventually, the lender is going to say, ‘It’s time to pay up.’ ”

“Marginal fleets have spent the last three quarters exhausting potential sources of cash, such as deferring maintenance,” Broughton said, noting that early last year, fuel prices were nearly 30% lower than current levels. “Now there are no places left to go.”

Despite the fourth-quarter increase, the total number of failed fleets for all of 2009 was 1,734 — far below the record of 3,065 set in 2008.

A key factor in the rise of failures is the way year-ending audits are done.

“In the first three quarters, the audit is more of a review than an audit,” Broughton explained. “The fourth quarter year-end audit is an entirely different matter, especially in the post-Enron/Sarbanes-Oxley world. Major lenders have confessed to targeting the worst sliver of their loan portfolios for foreclosure in an effort to demonstrate some semblance of action.”

“Eliminating these carriers not only reduces the amount of capacity chasing fewer loads, but it eliminates the most irrationally priced participants,” the report said.

That will help the survivors, along with some modest signs of an improving market, Broughton said.

ATA’s truck tonnage index for December topped November by 6.6%, the first time that has happened in 15 months (click here for related story).

Spot market pricing trends also are improving.

After a low point when rates posted on load boards were as much as 35% below rates negotiated in contracts, the gap was as little as 10% in the fourth quarter, Broughton said. The gap hovered between 15% and 20% in the third quarter.

Broughton believes the survivors’ pricing will improve starting in the second quarter and continue into next year as additional failures further reduce capacity.

Rates for truckload carriers such as Heartland Express, Werner Enterprises and Knight Transportation fell sequentially in the first three quarters of 2009, countering the typical pattern of seasonality that shows improvement in each successive quarter. That decline hasn’t happened at those carriers since they began disclosing financial details when their stock was publicly traded, Broughton said.

While the future may be brighter for survivors, he doesn’t envision more consolidation as stronger fleets gobble up rivals felled by low rates and weak demand.

Broughton cited the example of an interested buyer who had 100 presentations from potential sellers, but all were unattractive because the market value of the equipment was far below its value on the seller’s books.

The average gap between a truck’s market value and the amount owed exceeds $25,000 now, Broughton said, far above the $15,000 peak during the 2001 recession.