Trucking bankruptcies may be on the rise again after declining 49 percent in early 2009, as higher fuel costs and the recession grind down carrier profit margins.
Most at risk are cash-strapped smaller carriers vulnerable to sudden price swings, the loss of a major customer or unforeseen events such as a costly accident.
That prospect will please trucking companies with more liquidity, lower operating costs or more diverse and profitable freight, companies that believe they can outrun weaker competitors.
However, those motor carriers may not benefit as much as they expect from the demise of their competitors. That’s because the pool of available freight is shrinking as fast or faster than the number of trucks and trailers available to carry it.
Gross domestic product shrank 5.7 percent in the first quarter of 2009, and is expected to fall another 2 percent this quarter, according to the State of Logistics report released last month by the Council of Supply Chain Management Professionals.
GDP may rise in the last half of 2009, but no one expects an explosion of freight.
Shippers are cutting freight tons and miles as they tighten inventory, Stifel Nicolaus trucking analyst John G. Larkin said.
They’re also taking longer to pay carriers, said Lana Batts, a managing partner at trucking consultant Transport Capital Partners. “Those who remember what the industry was like prior to deregulation know you were required to pay your carrier within seven days,” Batts said in a June 26 conference call hosted by Stifel Nicolaus. “Now carriers are lucky to be paid in 70 days.”
The situation is even worse for trucking companies that lose customers to bankruptcy. “With so many shippers going bankrupt, are carriers going to get paid at all?” Batts asked.
The failure of two major customers is forcing one of Minnesota’s oldest trucking companies to close its doors. Monson Trucking closed three of its four facilities on July 1 and plans to cease operations Aug. 31 after 94 years as a family owned business.
Michael Monson, one of the owners of the company and great-grandson of founder Olaf Monson, said the bankruptcy of two Canadian paper mills cost the midsize truckload carrier $500,000 in revenue. It was the final blow for a carrier struggling to survive not just the recession but also the long-term decline of the industry it served.
“The whole pulp and paper industry has been just decimated over the past several years,” Monson said. “It doesn’t matter what grade of paper, they’re all down.”
The company plans to auction off more than 200 tractors and 500 dry van trailers in September. Those trucks and trailers will join thousands of vehicles liquidated by bankrupt carriers over the past few years.
“We have a tremendous amount of idle capacity from bankruptcies or trucks being parked,” said Batts, who noted 35 percent of the truckload carriers surveyed by her firm in the second quarter said they were parking trucks.
That capacity may be idle, but it’s ready to be put back in service when needed. “Very little of it will be scrapped or sold overseas,” she said.
That means truckload capacity isn’t shrinking as quickly as many observers think. Batts estimates truckload capacity has been cut 20 percent, but said that’s not enough to offset the drop in volume.
That will keep pressure on carriers to hold rates down, even as demand increases.
Fuel is the wild card. The price of diesel jumped 56 cents from March through mid-June, and higher fuel costs could push marginal carriers over the brink into bankruptcy.
But even at $2.594 on July 6, the national retail diesel price average was about $2 lower than it was a year ago.
“It’s really important to figure out what’s going on with fuel,” Batts said. “We know fuel suppliers will not carry the trucking industry. They get paid within 24 hours.”
Contact William B. Cassidy at email@example.com.