Fleet Bankruptcy Pace Slows

This story appears in the April 27 print edition of Transport Topics.

Lower fuel prices, along with the assistance of some forgiving financiers, limited the number of first-quarter trucking bankruptcies to 480, slightly more than in the last three months of 2008, but far below the 935 firms that failed in the corresponding period a year ago.

According to a report by Avondale Partners, the first quarter’s fleet failures took 15,370 trucks off the road, said analyst Donald Broughton, who authored the quarterly survey.

In last year’s first quarter, capacity was reduced by more than 41,000 trucks, kicking off a record year in which 137,650 trucks — about 7% of industry capacity — exited the market because of fleet failures.

“A big part of the story is fuel,” Broughton told Transport Topics.

“That’s one reason for the dramatic decline compared with last year’s first quarter. We had the largest sequential drop in the price of fuel in 25 years in the fourth quarter. The largest year-over-year percentage drop was the first quarter,” he said.

Diesel averaged $2.18 a gallon in 2009’s first quarter, compared with $3.52 in 2008. That drop followed a decline of $1.60 a gallon in the fourth quarter of 2008, and that dramatic price slide threw a lifeline to cash-starved fleets reeling from last summer’s record high prices.

Fleet bankruptcies in the fourth quarter totaled 375.

So far this year, “the other major factor is the creditors, as if we needed something else to blame on the financial institutions,” Broughton said. “Creditors are granting 90 days of forbearance, or more, to carriers that are behind on their tractor and trailer payments. Lenders, in essence, are saying, ‘We don’t want the equipment back.’ ’’

The reason, Broughton said, is a drop in used truck prices that some analysts have estimated at 30% or more.

During 2008, the total number of bankruptcies was 3,065, peaking at 970 companies in the second quarter. Five carriers on the Transport Topics 100 list of the largest for-hire carriers in the United States and Canada filed for bankruptcy last year; three of those five are still operating.

In the first quarter of 2009, several midsized fleets failed, including Mid-States Express Inc., Gulf Coast Transport Inc. and Summitt Logistics & Brokerage, but none was large enough to crack the TT 100.

First-quarter licensing fees, a cost that some believed would contribute to a bulge in bankruptcies, was not a factor, Broughton said, because the cash-flow improvement from lower fuel prices was much greater than those fees.

Though fleets pay an average of $1,800 to license a tractor/trailer combination, lower diesel prices reduced a typical carrier’s costs by $6,650 in the first quarter, compared with last year, based on 5,000 gallons used during each period for each truck.

“That windfall is more than enough to relicense your truck, make a payment or two and survive to fight another day,” Broughton said.

Others have noticed a change in approach by lenders.

“After the 2000 recession, when there were hundreds of thousands of trucks on the ground that were sitting in big encampments, the financial institutions have made a conscious decision to work out terms,” said David Freeman, director of Capital Resources Partners, Knoxville, Tenn.

“We are trying as a finance company to help our truckers as much as possible, so they can stay on the road, making a living,” said Scott Cohen, principal of Cobalt Financial, a national company that finances used Class 8 trucks.

Cohen said that “there is definitely some truth” in the statement that lenders are increasing loan forbearance.

“It depends on the parameters of every lender,” Cohen said. “Some are able to do that, and some do not have that flexibility.”

“As a captive finance company, we are in the trucking industry for the long haul,” said Daimler Financial spokesman Jack Ferry.

“We look at credit worthiness, the ability to pay and cash flow,” Ferry continued. “We support our customers and work with them through difficult times. We work with customers on an individual basis and our decision to help them is based on sound business principles of their business and a solid business plan that will give them the ability to ultimately meet their loan obligations.”

Another factor in the bankruptcy picture in trucking, Broughton said, was a revenue shortfall that is being driven by the weakest spot market truck rates since the 1980s. Some estimates are that spot freight rates have fallen 35%, or more, Broughton said.

There is a link to bankruptcies, he said, because “the carriers that fail are the ones that are most irrational in pricing their services. Eliminating them not only helps capacity; it allows the remaining competitors the ability to better hold the line on price.”