Truckers cut back capacity after 3Q demand dive
Shippers, freight buyers could see a very tight trucking market if trucking demand ticks up next year.
By Dave Hannon -- Purchasing, 10/17/2008 12:01:00 PM
Slumping demand for trucking and extremely tight credit markets are combining to drive trucking capacity out of the U.S. market at alarming rates.
This week, Grand Rapids, Mich.-based trucking firm Gainey Corp. became the latest victim when it filed for Chapter 11 federal bankruptcy protection. Wachovia Corp. filed a lawsuit against Gainey last month claiming the trucker failed to repay more than $238 million of a $260 million loan taken out in 2006. In a statement on its web site, Gainey said: “Our sound business fundamentals—which include positive cash flow and operating income—will continue to ensure our uninterrupted operations, including paying all suppliers, delivering all freight and meeting our payroll.”
But even those trucking companies that are still financially sound are removing capacity as demand trends look bleak heading into 2009. In its third-quarter earnings statement, USA Truck of Van Buren, Ark. said its “long-term strategic plan calls for a halt to fleet growth until we consistently earn at least a 10% return on capital.” According to Clifton Beckham, president and CEO of USA Truck, the number of bankruptcies was not as high as it could have been last quarter as lower diesel fuel prices “prevented some weak carriers from failing or encouraged them to bring on capacity that had been idled, both of which contributed to more competition for less freight.”
But in the long-term, USA Truck believes “freight demand is likely to deteriorate further over the next few quarters, and that less freight, inflated equipment prices and tightening credit will further shrink industry capacity,” the company said.
Truckload carrier Werner Enterprises said capacity in the third quarter was more in balance than the previous quarter due to carrier failures, but more recent trends show a steeper than expected drop in truckload demand. In its third-quarter earnings statement, Werner said that “as a result of a significant number of carrier failures that occurred during the first half of 2008, industry capacity remained more in balance with freight demand in third quarter 2008 compared to the excess of capacity at the beginning of 2008.”
Werner reports that freight demand during the latter part of third quarter 2008 and the first two weeks of October “has been disappointing but not unexpected, considering the turbulence and uncertainty in the financial markets...Unless freight and financial market conditions improve quickly, Werner believes there is a higher probability of increased carrier failures.”
Landstar President and CEO Henry Gerkens said in his company’s earnings statement “the company experienced reduced freight demand during the latter part of the 2008 third quarter. This trend has continued into early October and based upon the current uncertain economic outlook, I don't foresee that trend reversing in the 2008 fourth quarter.”
JB Hunt said in the third quarter it continued to right-size its tractor fleet, which resulted in a reduction of 1,419 tractors compared to the tractor count at the end of the third quarter 2007. “Our fleet ended the quarter at 3,309 tractors, which is adequate to service our customers’ current demand,” the company said in its third-quarter report.
Stifel Nicolaus analyst John G. Larkin feels that truckers have not scaled back capacity fast enough to account for slumping demand. “Rising demand layered on top of declining industry capacity...should create a veritable bonanza for freight transportation companies that are able to provide capacity into the marketplace," Larkin said in a recent note.
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