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No shelter from the storm

ST. LOUIS, Mo. - The failure rate of U.S. trucking firms with more than five trucks hit an all-time high in the third quarter of 2000, according to data compiled by the St. Louis, Mo.-based consulting...

ST. LOUIS, Mo. – The failure rate of U.S. trucking firms with more than five trucks hit an all-time high in the third quarter of 2000, according to data compiled by the St. Louis, Mo.-based consulting firm A.G. Edwards and Sons.

The approximately 1,300 trucking company failures during the third quarter of last year almost doubled the number of failures in the previous quarter, A.G. Edwards reports, making earlier gloomy predictions of a record number of failures in 2000 inevitable.

According to Donald Broughton, a transportation industry analyst with A.G. Edwards, the huge jump in trucking company failures during the third quarter last year “far surpasses” anything he has seen in previous industry slow-downs.

He blames the failures on a convergence of three negative events in the industry and in the broader economy that simply overwhelmed many smaller fleets.

“It was a perfect storm, if you will,” Broughton explains. “Obviously, the price of fuel has risen pretty dramatically – remember, crude has gone from US$10 a barrel to US$35 in less than two years.”

The second problem encountered by many struggling fleets last year was often of their own making, Broughton says. Faced with an ever tightening labor market for drivers, he says, fleets have been pushing up wages – their number one expense – for the last several years in an effort to keep their equipment moving.

“But a few years ago, it wasn’t necessary for fleets to raise their (freight) rates to pay for higher wages because fuel was one-third the cost it is today,” Broughton explains. “Once the fuel went up, many fleets were faced with paying for three or four years of wage increases at once … and the cash flow just couldn’t handle it.”

Finally, the last shock wave came for many fleets with the recent downturn in the North American economy. Manufacturers in many sectors have been announcing lay-offs since the summer, and retailers were very disappointed with the results of the Christmas shopping season.

The result has been a decline in the level of freight. Evidence of this can be seen in the year-over-year truck tonnage index, which Broughton says will be down about six per cent in 2000 compared with 1999. He adds that he expects to see “equally catastrophic” numbers of failures when the fourth quarter numbers are in.

As for owner/operators, Broughton says they have likely been doing even worse than the fleets, although A.G. Edwards does not keep statistics on that segment of the industry. “For a lot of reasons, this is a business where it pays to be big,” he says.

As for Canadian fleets, there is no evidence to suggest a similarly massive jump in failures during the third quarter of last year, although statistics do indicate that the industry could be in for more than its share of insolvent operators in 2000, as well.

According to bankruptcy numbers compiled by Industry Canada, there were 712 company failures recorded in the transportation and storage industries (the two are lumped together in the data) across the country by the end of October last year. That is just three shy of the 715 recorded for the whole year in 1999. At an average rate of about 67 bankruptcies per month, this sector was on pace to record about 846 company failures for 2000, an increase of 15.5 per cent.

Once again, fuel was a problem. According to Statistics Canada’s quarterly survey of the top 82 for-hire carriers across the country, fleets paid an average of 40 per cent more for fuel during the second quarter of 2000 (the most recent data available) than during the same quarter in 1999. And the second quarter of 2000 marked the third consecutive quarter in which fuel expenses rose by double digits over the previous year. n

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