Falling shipment orders and rising trucking bankruptcies could spell volatile capacity swings for shippers, followed by surging rates when the economy turns around and demand bounces back.
Despite a glut of equipment available this fall to many shippers still pushing goods through a troubled American economic landscape, a new report suggests larger trucking trends are running off the road as cash reserves at some carriers dwindle and trucking bankruptcies mount.
The latest bankruptcy update by investment bank Avondale Partners issued late last month reports 785 trucking company failures in the third quarter, bringing the total so far in 2008 to 2,690.
The rate of failure is almost 50 percent higher than last year's third quarter. The number of individual trucks exiting the market due to bankruptcies this year now tops 127,000, or 6.5 percent of the nation's capacity.
"If the fourth quarter continues to develop at current pace, 2008 will become the worst year to be a marginal trucker and could be the best year to have survived," Avondale Partners managing director Donald Broughton said.
"If these trends continue, when demand returns it will have an even more powerful impact than it did last cycle and capacity will get very tight, very quick."
Broughton said the abrupt decline in fuel prices during the third quarter helped save companies on the brink of bankruptcy, as fuel surcharge revenue was collected at a higher rate than fuel bills were piling up.
"This suggests to us that the drop-off in the third quarter will prove to be only a lull in the storm and is not a sign that the worst is over," he said.
Carriers measure the intensity of the storm in falling demand. Tonnage as measured by the American Trucking Associations - which includes the nation's largest truck fleets - decreased 0.9 percent in September, the third consecutive month-to-month drop.
"I anticipate truck freight volumes to continue to fall before they improve," said ATA Chief Economist Bob Costello.
"It is a tough freight market, and there is nothing on the horizon that says this will change anytime soon," Costello said. He said a recession could last through the first quarter of 2009.
Most alarming about the rapid fall-off in demand is that it's occurring at a time when the peak shipping season is normally in high gear. Analysts say that's due in large part to the suddenly much tighter credit markets - and thus a sudden tightening of capacity.
"As a result, we've seen a surge in incremental supply as carriers are struggling to fill trucks," said William J. Greene in an Oct. 31 research note. He noted consumer spending in the third quarter was the weakest since the early 1980s.
"With such poor demand, fourth quarter 2008 should be a struggle for all carriers, but the real test is first quarter 2009," typically the slowest season, he said. "The lone bright spot may come from a second stimulus package, which along with lower gas prices could provide some relief."
Wild swings in the balance between capacity and demand over the last year "have made an otherwise tumultuous time even more chaotic," Broughton said.
"Many of what we consider to be the more astute shippers are sensing the change in tide and have begun negotiating multi-year deals which offer guarantees of volume (today) in exchange for guarantees of capacity and a limit on the rate of increase in base pricing in coming years."
The volatile capacity environment has one shipper considering a "rolling" contract, Broughton said, where for every quarter the trucker benefits the shipper receives an extended quarter of guaranteed capacity and pricing caps.
Ty Hanline, director of logistics for gift basket retailer Hickory Farms, said such changes to traditional shipper-carrier contracts could become catalysts to longer-term relationships.
"We always try to lock in (rates) through all our big lanes with our core carriers," Hanline said.
"We bid at the beginning of the year, because that's usually the best time and capacity will hold throughout the rest of the year," said Hanline. But capacity swings this year have "required that we go pretty far down into our routing guides" to look for incremental space, he said.
As for customer demand, "we're already making adjustments to our forecast for the rest of year," Hanline said.
"We're not planning on producing as much. We don't want to end up with unsold product."
Carriers should be preparing as much as shippers, Broughton said, as many truckers successful in surviving the storm so far have fortified their financial balance sheet by retiring debt.
"Though less understood or appreciated, improving the quality of the operating balance sheet can be even more valuable to a trucker when demand does start to grow again."
Broughton stressed keeping average fleet ages relatively new, improving driver recruiting and training, increasing hiring standards, and investing in technology that gets more use out of existing equipment and allows them to be dispatched using fewer man hours.