This article is adapted, with the author’s permission, from an investment brief titled “Running on Fumes: Number of Trucking Failures Drops Dramatically.” The brief was published by Avondale Partners for information purposes on January 9, 2009.

Truck company failures removed 7% of the nation’s truckload capacity in 2008, but demand declined in the second half of the year and freight rates fell. Meanwhile, astronomical fuel prices wreaked havoc on carriers’ cash flow during the summer, but when fuel prices dropped precipitously, many carriers got a chance to recover.

“The steady drop in fuel prices provided a margin boost and a cash flow windfall to sustain truckers who would otherwise have exited the industry,” according to Donald Broughton, Managing Director and Senior Research Analyst at Avondale Partners, an equity research firm.

Carriers struggled to pay high fuel prices throughout the summer, but because of the delay in billing cycles, those same carriers were still collecting large fuel surcharges for hauls they had completed 30-45 days earlier. By that time, fuel prices had fallen, and the receivables created extra cash flow for carriers. That helped them to recover from the difficult summer and finish the year successfully.

The pattern of trucking company failures in 2008 supports this conclusion. While 3,065 trucking companies failed in 2008, with 785 of these shutting their doors in the third quarter alone, the fourth quarter saw “only” 375 company failures, or 12% of the year’s total. Those companies were also smaller, with an average of 28 trucks each, compared to 45 per company for the year overall.

Overall, 2008 was the worst single year for trucking company failures since 2000 or 2001, according to Broughton. Worse yet, 137,650 trucks, comprising 7% of the nation’s capacity, exited the market in 2008. That is substantially more than in the previous years, because the companies that failed in 2008 were larger.

Fuel price fluctuations were accompanied throughout 2008 by “the fastest swings between capacity and demand that we have ever witnessed,” Broughton continued. He observed that some shippers are now negotiating multi-year contracts, to lock in capacity and limit price increases in return for guaranteed volume. This unusual step should protect the forward-thinking shippers from price and capacity issues when the market recovers. The number and scope of such contracts have not had a measurable effect on price or capacity in the overall market, however, Broughton said.

 “Where is this load headed?” Broughton asked, rhetorically. As in the past, small carriers with longer lengths of haul are most vulnerable to failure. He predicts that truckload carriers will begin to consolidate, with a TL oligopoly emerging in the decades to come.