April 14, 2014 6:00 AM, EDT

Trucking Bankruptcies Rise

Report Blames Rising Costs, More Regulations
By Rip Watson, Senior Reporter

This story appears in the April 14 print edition of Transport Topics.

Trucking fleet failures more than doubled in the first quarter from a year earlier as rising costs, regulatory burdens and inclement weather sank marginal fleets, a new report found.

A total of 390 companies with 10,650 trucks were pushed off the road between January and March, compared with 195 carriers and 4,330 trucks in the first quarter of 2013, Avondale Partners analyst Donald Broughton told Transport Topics.

Sequentially, failures rose 40% from 7,735 trucks in the fourth quarter, said Broughton, who has tracked fleet failures for two decades.

“Cost pressures have intensified, and there haven’t been corresponding rate increases,” he said, adding that higher maintenance expenses also played a role in the rising failures.

Shutdowns now have increased for seven consecutive quarters on a year-over-year basis and remain at a three-year high. The first quarter also continued the pattern that began in the fourth quarter, when failures climbed even as truck shipments increased.

The fourth quarter of 2013 was a turning point for truck shipments, even though truck tonnage climbed throughout the year because of sharply higher heavyweight loads.

Rising expenses and the prohibitive costs of adding new drivers reduced truckload capacity 2.5% over the past four quarters as fleets were reluctant to expand, the report said.

Broughton also gave an example of a negative spiral triggered by regulatory burdens, specifically for fleets that voluntarily adopted electronic logging devices in advance of a Federal Motor Carrier Safety Administration mandate.

He described it this way: “In 60 to 90 days [after adoption], a fleet generates 6%, 8% or 10% fewer miles, and drivers start to quit because they aren’t getting miles. Next thing [executives] know, 10% of the fleet is idle because there are unseated trucks. So they raise driver pay, which pushes up costs per mile, and the driver still is getting fewer miles. Then they are illiquid and prone to failure.”

Broughton also told TT that weather-related difficulties were a second factor in the accelerated failure pace.

A report last week from Stifel, Nicolaus & Co. analyst John Larkin underscored the role of weather.

“Weather artificially tightens supply and demand,” he wrote. “Weather adversely impacts transportation network efficiency. Supply chains are out of kilter due to intermittent plant and warehouse closures.”

One example is Swift Transportation Co., which announced April 7 that it expects first-quarter earnings to be within the range of 11 cents to 13 cents a share. That compares with 17 cents in the year-ago first quarter.

It said weather damaged freight volumes, raised fuel and maintenance costs and boosted insurance and claims expenses.

“While we are disappointed by the impact of the extraordinary challenges we experienced with the weather this quarter, we are optimistic about the underlying fundamentals we are seeing in the market,” said Richard Stocking, Swift’s president.

The reduced capacity was visible in the sharp rise in first-quarter spot market loads and rates reported on load boards, Broughton said. For example, load board operator DAT reported record activity in the quarter, including a 50% year-over-year increase in loads as requests for trucks far outpaced availability.

Broughton said weather exerted less pressure on load boards’ activity than some may believe. He believes that weather-related equipment supply reductions were counterbalanced by lower business activity that reduced demand for trucks.

Broughton issued his report as the trucking industry heads toward a stronger market, based on recent economic reports. Gross domestic product is forecast to rise 2.7%, based on a Bloomberg News survey of economists, well above a 1.9% pace last year.

Also last week, Cass Information Systems said in a monthly report, which measures trucking and other freight activity, that shipments rose 6.6% in March over February, “ending the first quarter on a high note.”

Still another positive point was a Bloomberg-Internet Truckstop survey of carriers and brokers released April 8, which gauged a 10% year-over-year rise in freight levels last month.

Because capacity continues to dwindle, Broughton said, he expects that the pace of failures will keep rising unless two things happen: “The [failure] trend will change only if pricing rises faster or shippers and carriers successfully re-engineer the system to recover the lost miles.”

Broughton said he believes simultaneous capacity reductions and higher business levels will push contract rate increases 4% to 6% higher later this year, assuming that spot market rates remain strong.

Other analysts such as Thom Albrecht of BB&T Capital Market and Larkin envision rate increases at a slower pace of about 4%.