Darkest before the dawn

In the first three months of this year, 935 trucking companies failed. That’s nearly 50 percent more than in the fourth quarter of 2007 and the highest level since the third quarter of 2001, according to Donald Broughton, transportation analyst for institutional investment firm Avondale Partners. And the 935 carriers weren’t all tiny operations, either; only carriers with at least five power units are counted, and Broughton found that the average fleet size was 45 trucks.

Compared to the trucking recession in 2000 through 2002, the latest rise in bankruptcies was slow in coming. Trucking companies generally ended the 1990s with poor equipment utilization, low margins and ugly balance sheets. The industry was poised for a hard fall, which came within a few months as freight volumes collapsed, insurance premiums soared and diesel prices spiked – at least by the standards of the day. Due to overcapacity and an extended period of moderate fuel prices, many carriers lacked effective fuel surcharges. The bloodletting was swift and severe; about 10,000 trucking companies failed during those three years.

By contrast, many carriers were enjoying the best times in their history by early 2006. Freight volume was solid, and pricing was strong. And while diesel prices basically had doubled since 2000, fuel surcharges now were very much the norm. So when the downturn arrived, the pain generally was gradual and less severe than the last time around. Carriers that depended directly or indirectly on residential construction bore the brunt, while other carriers faced a slow deterioration in their finances.

Two principal factors undoubtedly combined to force hundreds of trucking companies out of business in the first quarter. License and insurance premium renewals surely imposed large cash flow stresses on many carriers at the same time credit has been very tight. And fuel prices rose sharply in February and March; during the 10 weeks ended April 21, the national average diesel price soared more than 86 cents.

Even with surcharges in place, surging diesel prices create cash flow and profitability challenges. Due to the lag between load delivery and payment, carriers often use past surcharge dollars to pay today’s fuel bills. Moreover, since most formulas rely on the Energy Information Administration’s weekly reports, this week’s surcharge is based on last week’s prices. Of course, a carrier benefits from these same dynamics when fuel prices fall, but that’s of little comfort to a cash-strapped trucking company when prices rise.

The big unknown, of course, is whether the first quarter represents the peak of a mild pruning of capacity or just the beginning of a major purge of weak carriers. Either way, survivors can expect better times in months to come. The trick is to be around to enjoy them. If your cash reserves are healthy and your finances are sound, congratulations. If not, you have one simple and overriding goal: Survive.

Survival means focusing not just on fuel economy – such as slowing your trucks over the road or ensuring proper tire inflation – but also on fuel efficiency: Reducing empty and out-of-route miles, ending idling and maximizing payload, for example. Your drivers and those who manage them day to day hold the key. Forward-thinking managers know that driver quality matters in areas like loss prevention, maintenance and customer service. Fuel economy is part of that mix, too, but $4 diesel injects a particular urgency into driver management. A poorly trained or managed driver costs you serious money each and every mile – not just when he makes big mistakes.

Trucking failures are sad and unpleasant, but they are necessary to reduce capacity and restore healthy margins. A prolonged downturn without a rise in business failures simply weakens everyone. A jump in bankruptcies, however, means that prosperity is just around the corner – eventually.