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April 16, 2007 8:00 AM, EDT

Bankruptcies Increase as Freight Declines

By Frederick Kiel, Staff Reporter

This story appears in the April 16 print edition of Transport Topics. Click here to subscribe today.
Trucking company failures jumped in the first quarter of 2007, transportation analysts said last week, and industry observers warned of tougher times ahead because of an uncertain economy, weak freight loads and rising fuel costs.
Donald Broughton, transportation analyst at A.G. Edwards & Sons Inc., said that fleet failures were 24% higher in the first quarter, compared with the first three months of 2006. However, Peter Nesvold of Bear Stearns estimated that growth in failures rose by 11%.
“Some 385 companies with a minimum of five trucks went out of business during the first three months of 2007,” Broughton told Transport Topics. “That is 26% more bankruptcies than the final quarter of 2006 and 24% more than the first quarter of ’06.”
“The number of seasonally adjusted bankruptcy filings edged 11% higher, year over year” in the first quarter of 2007, Nesvold said April 9 in his “OEM Insider” newsletter. He and Broughton use different systems for calculating bankruptcy totals, but Broughton said their results were consistent with each other.
Both analysts agreed that bankruptcies during 2007 won’t come close to totals reached earlier in the decade or in the third quarter of 2005, just before a tougher bankruptcy law went into effect.
Eric Starks, president of the trucking analysis firm FTR Associates of Nashville, Ind., told TT that “the freight environment is definitely in a recession. Because of that, we’ll see problems with companies trying to survive.”
“By and large, the smaller guys are at risk of bankruptcy in these times,” Starks said. “They have a harder time hedging against fuel prices, and with weak freight, it is traditionally the smaller and medium guy that gets hit. I think, if you look at historical numbers, bankruptcies would jump 50% to 100% from the level where they are now.”
Satish Jindel, president of SJ Consulting Group, said he also sees bankruptcies rising.
But he said the “volume of truck freight is starting to get better, with a slight shift in pricing power from the shipper back to the carrier.
“That should start to bring improvements in the industry, but those trucking firms already in trouble will send the bankruptcy rate up even higher . . . for several more months,” Jindel said.
Broughton was similarly bearish.
“My view of the national labor market is far weaker than current unemployment suggests,” Broughton said.
“I speak to many truck driving schools, and they’re telling me that they have the largest classes they’ve had in the past five or six years, and they have more students backed up on waiting lists than ever,” Broughton said. “There are fewer jobs available out there.”
Nesvold also said that he noticed “a more pronounced correlation” between year-to-year declines in American Trucking Associations’ truck tonnage index and increased fleet bankruptcies since the October 2005 bankruptcy law changes.
Freight tonnage in 2006 was consistently below 2005, a trend that has continued in 2007.
ATA reported its tonnage index fell 3.6% from December and 5% from January 2006 (3-5, p. 1). Diesel fuel, which sold for $1.70 a gallon in August 2004, averaged $2.84 a gallon on April 9.
Todd Spencer, executive vice president of the 150,000-member Owner-Operator Independent Drivers Association, was pessimistic.
“The concern is that we don’t see fuel prices moderating much,” Spencer told TT. “What we’re seeing is a game of catch up . . . and sluggish demand for trucking services that will take a toll on the industry.”
Broughton said that despite increasing, the first-quarter failure rate was far lower than in 2000-2001, “when 900 firms were failing a quarter, with sometimes a 300% increase over failures of the same quarter of the previous year.”
Nesvold said the increase must be seen against “the record low” bankruptcies of 2006.
A total of 1,630 trucking firms with at least five trucks closed their doors in 2006, compared with 2,250 in 2005. The largest quarterly amount for both years was posted in the third quarter of 2005, just before the new bankruptcy law took effect, when 685 companies filed for bankruptcy.
Bankruptcy “filings were still less than half of those during the comparable period in 2000,” Nesvold said.
Despite the increase in bankruptcies, Bob Costello, ATA’s chief economist, said he thought an improving economy would help the trucking industry later this year.
“We thought the first half [of 2007] would be pretty tough, followed by an improvement in the second half,” Costello told TT, saying he thought the national economy would improve and that shippers’ extra inventories would thin out.
David Owen, president of the National Association of Small Trucking Companies, was optimistic.
“Our membership is at its highest level ever, and we’re adding 35 to 50 new members a month,” Owen said. “I’m not saying the analysts’ figures are wrong, but when you remember that our failure rate was 300% a quarter three years ago, we’re doing fine now.”