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August 11, 2008 2:00 AM, EDT

Trucking Bankruptcies Double; 1st-Half Capacity Loss Is 4.5%

By Jonathan S. Reiskin, Associate News Editor

This story appears in the Aug. 11 print edition of Transport Topics.

Trucking company bankruptcies more than doubled in the second quarter, soaring 118% from last year as high fuel prices pushed 970 U.S. carriers out of business, a leading industry analyst said.

The number of carrier failures in the second quarter was a slight gain from 935 in the first quarter, said Donald Broughton, a stock analyst with Avondale Partners. Broughton estimated that bankruptcies took about 88,000 trucks off the road in the first half of the year, roughly 4.5% of the nation’s 2 million heavy-duty tractors (4-21, p. 3).

While soaring fuel prices combined with a lax supply of freight to haul have created treacherous operating conditions, Broughton said signs are starting to appear that “the tide has turned.” With transportation providers and users in better balance, he predicted the trucking bankruptcy rate will probably decline in coming months and that inflation-adjusted freight rates will increase in 2009 and 2010.

“This is obviously not good for the carriers that fell out, but for the remaining players, they’re seeing things getting better,” Broughton said in an interview.

In looking at the sudden contraction in capacity, Broughton said the typical size of a firm that failed was 45 to 50 trucks. However, some were much larger.

Jevic Transportation, a heavyweight less-than-truckload carrier and a former member of the Transport Topics 100 largest for-hire U.S. and Canadian carriers, closed its doors in May (5-26, p. 1).

Alvan Motor Freight went under the following month (7-7, p. 8). Jim Palmer Trucking, a significant truckload carrier, also filed for Chapter 11 bankruptcy protection so it could reorganize (7-21, p. 6).

Trucking officials agreed that truckload capacity has tightened.

“There has been a continuing shakeout in the industry,” said Bob Costello, chief economist for American Trucking Associations. He added that the total of bankruptcies in the second quarter will probably prove to be “the high point during this cycle of failures. . . . Supply is tightening up,” he said.

C.H. Robinson Worldwide, America’s largest broker of truck freight, said in its second-quarter earnings report that the market has been tightening.

“Our truck gross profit growth . . . was driven by volume growth, offset by declines in our truckload gross profit margins. . . . Our truckload gross profit margins declined due to higher fuel prices and increased cost of capacity,” Robinson said July 22 in announcing an increase in net income, although not as much as stock analysts had predicted.

Stephen Russell, chairman and chief executive officer of truckload carrier Celadon Group, stressed in the company’s Aug. 4 earnings report that the market had changed, pointing to an increase in miles per tractor and a drop in deadheading.

“Average miles per week per tractor [during the quarter just ended] was the best since December 2006, and up about 2% from June 2007. Deadhead miles, at 9.7% of total miles, compared to 10.5% in the June 2007 quarter, and was the lowest since the September 2006 quarter.

“Although down by 2.1 cents from the comparable quarter last year, the average rate per loaded mile increased from the March 2007 quarter by close to 1 cent per mile. Revenue per tractor per week was the highest since the December 2006 quarter.

“We are clearly seeing the results of a meaningful reduction in capacity in the truckload industry. . . . Although overall freight demand is perhaps up slightly, the impact of the reduction in supply has led to a firming of rates and volumes per available truck,” Russell said.

Celadon endured a difficult fiscal year, shedding more than two-thirds of its net income for the 12 months ended June 30.

The last major spasm of failures was a five-quarter span in 2000-01, when an average of 1,100 carriers a quarter went out of business.

A difference between then and now, Broughton and Costello agreed, was that trucks then were merely parked on a lot until they were needed. In contrast, this time many late-model trucks have been sold abroad in Mexico, Russia and other nations.

“This is the destruction of capacity, not just the idling of it,” said Broughton, who has been following carrier failures data since the 1990s. He pointed to the remarks of Kevin Knight, chairman and CEO of Knight Transportation, who during a July 24 conference call with analysts predicted freight rates would rise.

“I would think that 2009 will probably look like, maybe, 2003, maybe even ’04; and the next year [2010] will look like ’04, maybe even ’05,” Knight said. After the 2001 recession, the period of 2003-06 was a span where real truckload rates rose with regularity.

“I’ve generally had this thesis on what would happen in the truckload sector since last fall, but I expected there would be a longer gestation period,” Broughton said. “I’m surprised on how fast it’s all come together.”