2Q Fleet Failures Nearly Double on Cost Pressures, Report Says

This story appears in the July 21 print edition of Transport Topics.

Trucking failures virtually doubled in the second quarter, compared with the same period last year, as continued driver and regulatory cost pressures pushed more marginal fleets off the road, a new report found.

Capacity was trimmed by 9,435 trucks, reflecting 375 companies with an average of 25 trucks in the second quarter, according to the report from Avondale Partners analyst Donald Broughton that was provided to Transport Topics on July 17. By comparison, capacity was reduced by 4,745 trucks from 205 fleets in last year’s second quarter.

Failures declined from 10,650 trucks in the first quarter, when winter punished much of the United States. The sequential decline also was because demand and freight rates improved in the second quarter, the analyst said.

“There absolutely is a bifurcation between the haves and have-nots in trucking right now,” Broughton told TT. “Not only are some fleets having trouble implementing [electronic logging devices], but it is all the other factors that are pinching utilization, like hours-of-service rule changes and older trucks that are in the shop more often instead of on the road.

“That all adds up to utilization that is 10% or 15% less efficient than well-capitalized fleets that successfully manage technology,” he said. “You can’t be 10% or 15% less effective than a competitor and survive.” Broughton said that tepid freight demand and weak pricing prior to the recent strength in general freight markets also “left many marginal carriers on the edge of exiting the industry.”

An improving market was re-flected by multiple sources last week. The Federal Reserve said in its Beige Book report there was moderate economic growth nationwide. In addition, load board operators DAT and Internet Truck Stop also showed continued strong year-over-year improvement.

Recent improvement in freight shipments has been detailed by American Trucking Associations, in anecdotal comments from some fleets and in analysts’ reports.

Broughton believes the rising failure rate, which has reduced overall capacity by 3% over the past year, is being driven primarily by the cost of adding new drivers. He termed those expenses “prohibitive.”

“Driver-related costs are rising for carriers because of everything: pay rates, recruiting and retention costs,” he said. “Drivers also are not getting the miles they used to, so I as a fleet operator am going to have to pay them more to compensate for that.”

ATA Chief Economist Bob Costello has gauged that mileage reduction at about 10%.

Until mid-2013, Broughton said, the reduction in capacity was about 1% because fleets that could afford it bought new equipment.

Capacity also is being steadily reduced by factors other than failures, Broughton noted, citing ongoing effects such as undercapitalized fleets that trade in more trucks than they buy.

“With failures rising to more meaningful levels and demand strengthening at the same time, we believe that large truckload carriers in particular should see improved pricing power in 2014,” the Avondale report said.

Broughton said it was possible that rates overall could rise by more than the 4-6% pace during 2014 that he first predicted earlier this year.

The St. Louis-based analyst also cited multiple failure-related effects from regulatory changes, particularly the federal requirement to add electronic-logging devices.

Failures occur when fleets can’t figure out how to run with ELDs and drivers flee for jobs that offer more miles and pay, depressing revenue levels.

In addition, he said fleets that accumulate too many violations are being ordered by the Federal Motor Carrier Safety Administration to install the devices, which reduce productivity.

Broughton’s report also identified a link between moderating turnover rates at large truckload fleets, those with $30 million or more in revenue, and future driver pay increases.

ATA earlier this month said turnover at those fleets was 92% in the first quarter, compared with 97% for all of 2013.

“We see the recent stabilization in driver turnover as a sign that across-the-board pay increases are not necessary in the immediate future,” Broughton said. “We expect pay increases in 2014 to be more geared towards ‘gain sharing,’ i.e., bonus pay related to fuel economy, utilization, safety and service.”

In addition to affecting turnover, the slowdown in broad-based pay increases should provide additional momentum to increase fleets’ profit margins, he added.

He also cited recent driver pay increases as a growing deterrent for drivers to switch to higher-paying construction or manufacturing jobs.

“Significant fleetwide pay increases since the second half of 2013 have brought wages back to more competitive levels, relative to other industries,” he said.

The decline in capacity is being felt more strongly in spot markets, Broughton said.

That’s because shippers that can’t find a truck because a fleet failed will turn first to the load boards in an effort to move their freight.