Summary
In the referenced article, Avondale Partners Senior Research Analyst Donald Broughton was noted seeing a dramatic reduction in trucking business failures in the 2nd quarter ’09 as compared to previous and year-over-year quarters. Also noted was the principal reason carriers are remaining in business - creditors are allowing otherwise insolvent companies to stay in business so that they don't have to take back used equipment. We agree that problems have slowed, but differ on some other points.
Analysis
There is no question that 2008 went down as a record year of trucking business bankruptcies, failures and closures. Our firm set records as noted previously for business help to financiers, truckers and shippers. Our weekly rate of “problem” requests is running at one-quarter of that last year. That is good news.
It was quoted that the average size of failed companies was 18 trucks for the quarter, as compared to those almost double that size last year and closures are now at their lowest level since the first quarter of 2007. We see the same, but our fleet data show it’s been more a function of lower fuel costs than anything else. Poorer utilization still is the second issue. We’ll comment on financing in a bit.
We all know well that trucking business failures have historically lagged fuel price spikes - when truckers’ cash reserves / credit lines are finally chewed up. This time is not much different except that fuel surcharge is sticking better now - since the mid-2004 steady climb in fuel prices. The 2000-2001 smaller business failures we were involved in were pretty exclusively a result of NO surcharge (zapping $0.06 / mile - i.e. all profit plus) and due to the smaller average fleet sizes (and first to fail).
The big issue last year of course was the acceleration of failures when the price of fuel surpassed $3.20 per gallon (our tip-over reference point).There were issues of operationally countering the surcharge deficits, plus there were the issues of just cash flowing added fuel costs. The use of receivable financing helped, but the cost of doing that was ultimately problematic due to factoring rates. Fuel prices are up off the 2nd quarter ’09 lows, but still lower than the average price since 2005 (about $2.50 per gallon).
Our core business is working with financiers and truckers on problems. We agree that lenders are being more lenient, but not to the point where otherwise insolvent trucking companies are largely allowed to say in business. We are using our thumbs-up / thumbs-down profitability program to assist financiers in quickly assessing whether a business is viable. Most are OK once they adjust fleet size and get revolving credit payments addressed. Our assessments lead lenient financiers to helping to the tune of just a few cents per mile anyway (redoing financing). The small number of trucking companies that deserve to be out of business are working their way through the “repo” process.
Freight pricing and utilization are the bigger problems today. We all see it as softened base freight rates from the majors to the tune of about a nickel a mile. Exasperating it for smaller carriers is larger companies cutting rates to get what traditionally has been handled by smaller companies. It is similar to what we have seen over the last 20-years where major freight companies wholesale or strategically try to grow by picking up customer traffic lanes they have not been or are no longer competitive in - by cutting rates.
We are seeing some of same on the Less-Than-Truckload (LTL) side which is negatively affecting YRC Worldwide, but with Truckload (TL). TL is more traffic-lane focused and we think capacity balance is about as good as it will get.
While we see major fleets cutting their own capacity, some are trying to grow their “brokerage” divisions. In a flat volume freight marketplace like today, we see this in the real world as trying to keep numbers up by bidding “down” freight that was previously handled directly by smaller companies. Within the broker segment, this happens more readily - and adds to the negative reputation of some brokers.
It was quoted that the average size of failed companies was 18 trucks for the quarter, as compared to those almost double that size last year and closures are now at their lowest level since the first quarter of 2007. We see the same, but our fleet data show it’s been more a function of lower fuel costs than anything else. Poorer utilization still is the second issue. We’ll comment on financing in a bit.
We all know well that trucking business failures have historically lagged fuel price spikes - when truckers’ cash reserves / credit lines are finally chewed up. This time is not much different except that fuel surcharge is sticking better now - since the mid-2004 steady climb in fuel prices. The 2000-2001 smaller business failures we were involved in were pretty exclusively a result of NO surcharge (zapping $0.06 / mile - i.e. all profit plus) and due to the smaller average fleet sizes (and first to fail).
The big issue last year of course was the acceleration of failures when the price of fuel surpassed $3.20 per gallon (our tip-over reference point).There were issues of operationally countering the surcharge deficits, plus there were the issues of just cash flowing added fuel costs. The use of receivable financing helped, but the cost of doing that was ultimately problematic due to factoring rates. Fuel prices are up off the 2nd quarter ’09 lows, but still lower than the average price since 2005 (about $2.50 per gallon).
Our core business is working with financiers and truckers on problems. We agree that lenders are being more lenient, but not to the point where otherwise insolvent trucking companies are largely allowed to say in business. We are using our thumbs-up / thumbs-down profitability program to assist financiers in quickly assessing whether a business is viable. Most are OK once they adjust fleet size and get revolving credit payments addressed. Our assessments lead lenient financiers to helping to the tune of just a few cents per mile anyway (redoing financing). The small number of trucking companies that deserve to be out of business are working their way through the “repo” process.
Freight pricing and utilization are the bigger problems today. We all see it as softened base freight rates from the majors to the tune of about a nickel a mile. Exasperating it for smaller carriers is larger companies cutting rates to get what traditionally has been handled by smaller companies. It is similar to what we have seen over the last 20-years where major freight companies wholesale or strategically try to grow by picking up customer traffic lanes they have not been or are no longer competitive in - by cutting rates.
We are seeing some of same on the Less-Than-Truckload (LTL) side which is negatively affecting YRC Worldwide, but with Truckload (TL). TL is more traffic-lane focused and we think capacity balance is about as good as it will get.
While we see major fleets cutting their own capacity, some are trying to grow their “brokerage” divisions. In a flat volume freight marketplace like today, we see this in the real world as trying to keep numbers up by bidding “down” freight that was previously handled directly by smaller companies. Within the broker segment, this happens more readily - and adds to the negative reputation of some brokers.
One can see some of the issues in fleet releases today. For example, Werner Enterprises recently adjusted expectations from their fleet and brokerage unit. A client’s 250+ truck fleet was lowball bid by them only to be recently asked to pick up all of their past traffic lanes after a month of problems. This fleet is very financially sound and has been in business for several decades. We can see the issue clearly within numbers and statements from Landstar System, where they know the tradeoff of lower rates versus getting a trucker (their own contractors or broker carriers) to take the load.
There are some very good asset-related brokers like Schneider Logistics, Transplace, GreatWide Cargo-Master division, Werner Enterprises, Ruan, Knight Transportation, Landstar System and others - with good reputations. Smaller trucking companies look very favorably on “partnering’ with them on backhauls - and have long-term relationships. Full disclosure, I owned companies that brokered produce and was an agent for a large carrier. We tried to be fair!
The other group affecting rates comes from traditional broker / agent systems. These include asset-less providers such as TransCore DAT, CH Robinson, other 3PL’s, smaller companies, and then the numerous Internet-based ones. In a flat tonnage marketplace, growth comes from offering value-added services, going International or taking it from others. The tough issue is when a larger entity takes freight from a smaller carrier at a discount, takes their “minimum 15%” broker profit margin and then puts the freight back out to carriers. If a broker gets a trucker to take it, the broker wins - but the industry loses.
Another example is a long-time family friend with a 30-truck fleet - where they just lost a long-time primary haul to CH Robinson. They have been in business for 30+ years and have no debt. The shipper stated that “corporate” said they must use them. CH Robinson’s “new” shipping location is calling for help, but my friend says the rates are way too low. Nobody is happy! It is just a matter of time until that freight goes back old carriers. In the mean time, my friend’s freight planning has been changed dramatically and their profitability is hurt - and now they have to take freight outside their normal traffic lanes.
These examples are not “one offs,” we have more but this offers a snapshot of reality. Brokers make up a large and important part of the industry - and reputations with shippers and truckers are key for overall success. In these and other cases where rates are squeezed by our own, it’s very upsetting to the smaller carrier segment and often goes unnoted in the broader industry. The major carriers know this well, but we must go through part of the cycle again, too. You wonder why the word “broker” is such a cuss-word.
Squeezed rates are just another part of the problem, but having low fuel prices is key to freight and profits! Financing is key, but not a showstopper.
Jay Thompson consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
