DALLAS — Shippers spooked by the sudden collapse of New England Motor Freight (NEMF) in February and Falcon Transport in April should not to expect a spate of big trucking bankruptcies, speakers at the 2019 Transplace Shipper Symposium here said May 8. However, pressure on smaller trucking firms is rising as spot rates drop and costs rise.
“The risk is low because it’s very hard to kill a trucker,” J. Bruce Chan, vice president of investment research firm Stifel, said at the symposium. “A lot of the larger carriers have locked in rates for the year. On the small operator side, a lot of these guys had a good year last year, they’ve got a little bit of juice in the batteries, and they’ll run until the wheels fall off.”
If spot market rates continue their downward trajectory, however, smaller trucking companies will have a harder time making ends meet. “I do think that the smaller fleets, if their investment in capital last year was focused on spot market growth, they’re really in a pickle right now,” said Matt Harding, who joined Transplace last week as senior vice president of data sciences.
“Those companies are out there looking for relationships, and the large asset providers become the harbor in the storm,” Harding said. The fourth-quarter jump in the driver turnover rate at smaller fleets, as measured by the American Trucking Associations, may indicate some truck drivers at those companies are moving up to larger fleets as spot market rates drop.
According to data collected by the US Federal Motor Carrier Safety Administration (FMCSA) in a monthly survey that supports its Compliance, Safety, Accountability (CSA) program, the smallest trucking companies — those with only one to six vehicles — lost more than 5,000 drivers between Jan. 10 and Feb. 9, and lost another 187 drivers between Feb. 10 and March 9.
Trucking failures hit 20-year low
Trucking bankruptcies dropped to a 20-year low in 2018, transportation analyst Donald Broughton wrote in a DAT Solutions blog, with only 310 failed companies, representing a combined total of 2,805 trucks removed from service. Higher rates helped truckers large and small counter the rising cost of equipment and pay higher wages to truck drivers.
More motor carriers shut down in the first quarter of 2014 — 390 companies with 10,650 tractors — than went out of business in all of 2018, according to data released by Broughton when he was senior transportation analyst at Avondale Partners. In 2013, Avondale reported 970 carrier bankruptcies, far below the 3,065 trucking failures reported in the recession year 2008.
Bankruptcies did spike in 2016, when the trucking market last turned sharply south. The losses, however, involved small trucking operations with limited amounts of capacity. Because they involve small companies, most of these bankruptcies happen under the larger shippers’ radar and are only reported locally. And there are plenty of other carriers ready to back up to the dock.
NEMF’s shutdown was the biggest trucking bankruptcy in more than a decade. But the company’s failure appears to have been an anomaly in a healthy and growing less-than-truckload industry. The Elizabeth, New Jersey-based carrier, which had $343 million in revenue last year, lost key accounts in late 2018 and could not renew credit agreements.
“After much discussion as well as consultation with outside financial advisors, it was concluded that it does not make sense to continue operations to support a business in which our margins continue to shrink, thereby resulting in significant financial losses,” Thomas W. Connery, former NEMF president and chief operating officer, said in a Feb. 11 letter to employees.
But the “downward trend” NEMF cited in its bankruptcy filing isn’t an industry-wide trend. “For the first time since the 2008-2009 recession, the majority of LTL carriers have a lower operating ratio than they did pre-recession,” indicating higher profitability before taxes and other charges, said Ben Cubitt, senior vice president of procurement and engineering at Transplace.
“Old Dominion Freight Line kind of set the stage, taught the industry how to price [and] how to look at freight,” Cubitt said. “The rest of the industry has followed, and it really is an industry that has gotten good at pricing. They’re maintaining their pricing discipline. They offer a 4.5 percent [general rate] increase and you either take it or they move the freight out of their network.”
That’s a far cry from the days when those general rate increases would be whittled down to nothing or next to it once shippers and LTL carriers began to negotiate contracts. He also noted that NEMF’s freight was quickly absorbed by other carriers in its Northeastern region, without an extended period of disruption, and that NEMF drivers were snapped up by competitors.
Customer loss, hacking hurt Falcon
The story behind the April 27 shutdown of Falcon Transport has similarities and differences. Like NEMF, the Youngstown, Ohio-based truckload carrier blamed its demise partly on the loss of a large customer. But the company also blamed hacking and a ransomware attack. According to FMCSA data, Falcon had 585 drivers and 723 trucks.
Like NEMF, Falcon lost its lenders, who “suddenly” decided “not to advance funds and to demand payment,” the company said in a notice sent to Ohio’s Department of Job and Family Services. The shutdown was reminiscent of the closure of Arrow Trucking of Tulsa, Oklahoma, which stranded 1,400 drivers when it closed its doors just before Christmas 2009.
Also like NEMF, Falcon folded after more than a century of freight hauling. The company was founded by the Constantini family with a horse and wagon in 1903 and acquired by CounterPoint Capital Partners of Los Angeles in 2017. Customers included automakers. The loss of a General Motors plant in Lordstown, Ohio, may have contributed to the shutdown.
Although the bankruptcy of a midsized company such as Falcon doesn’t move the capacity meter, it does send a message to shippers. Truckers may be “hard to kill,” but sudden shifts in the market and pricing, and the loss of major customers (or too much reliance on them) can loosen the wheels on businesses that are undercapitalized as operating costs rise.