By Steven Hausman, President and CEO, Advanced Business Capital

Most old trucking dogs look at economic downturns similar to bodily scars.  Each one has their own story.  Over time, the similarities seem to outweigh the differences but some, of course, hurt more than others.  Now, as far as trucking is concerned, this current downturn looks like it could be a doozy: already longer than 2001, deeper than 1995-1996.  In fact, this one’s starting to look much like what we encountered in the early 1980s.

First of all, freight has been falling, generally, since late 2006.  The American Trucking Associations Truck Tonnage index perked up in early 2008, but fourth quarter declines dropped it back below 2006 levels.  Profitability of for-hire carriers has been taking a beating throughout this period because those interim increases in freight demand were fully consumed by record high fuel prices. 

This, again, is eerily descriptive of the downturn in the early 1980s – two years of declining freight tonnage, a brief respite and then another 18 months of turmoil.  This particular time of the cycle reminds me of a WWE tag team wrestling match where the referee is curiously distracted and both of some hapless guy’s adversaries start beating on him until one of the bad dudes is finally sent back to their corner.

So assuming that for-hire carriers are in for a real smack down, what can small-to-midsized carriers and freight brokers anticipate in 2009?  The following is based on a collection of some facts, other people’s conjecture and, of course, various old scars.

Large Bankruptcies – Mid-2009
In each of the past five trucking downturns, the large concentration of bankruptcies, as well as the most significant ones, all occurred toward the end of the trough.  This also compares well to boxing, where reportedly 100% of all knockouts occurred toward the end of the fight, so I suppose there’s no big revelation here.  Now, we’ve already seen several big ones this cycle – Jevic, Great Wide, Gainey, Jim Palmer, etc.  However, the LTL (Less-than-Truckload) segment has been particularly hard hit, due to their much higher fixed cost structure, and we’ve yet to see many significant bankruptcies in that sector or the full impact of the credit crunch on larger asset-based truckload carriers.  On the other hand, we have seen otherwise solvent companies file for protection in order to preemptively retain their credit facilities.  So while it may happen sooner rather than later, I believe we could see more bankruptcy filings in 2009 than in the prior two years combined.

Now, as far as smaller carriers and freight brokers are concerned, the fallout of large transportation company bankruptcies can affect us all in several ways.  The good news is that these larger vacancies swiftly reduce carrier capacity.  The industry estimates that there are about 2 million heavy trucks in service in the United States, of which just over 5% were removed through carrier exits in 2008.  A doubling of that reduction in 2009 would create a reasonable opportunity, both in terms of freight and pricing, for those smaller carriers who survive, or just re-surface.  The bad news is that more and more of these larger transportation companies have also entered the intermediary market – and many of us know these companies best as sources of loads.

The Transportation Intermediary Market
Smaller carriers tend to be much more dependent on freight brokers/forwarders and 3rd Party Logistics companies as a source of freight.  During normal times, our main concern is fraud – such as identifying those intermediaries who keep our money despite receiving their payment from the shippers.  For no particular reason, I think we’ve already seen the worst of broker fraud in this cycle.  Now, it’s the shippers we’re worried about.  Out of the 22,000 active (FMCSA authority) transportation intermediaries in this country, there cannot possibly be more than a few thousand with the financial capacity to honor carrier payments if/when the shipper defaults – dishonorable acts aside.  So what should we do with an invoice from a 3-year old freight broker when the consignee is Circuit City or Mervyns?  It’s gotten much tougher.

Diversify – now more than ever
So now that we’re all paying more attention to the shipper as well as the intermediary, where do we go from here?  Most of the 2009 forecasts we’ve seen call for a 2% or so drop in GDP (Gross Domestic Production) and we probably could live with that.  Unfortunately for trucking, the economic sectors that produce shippable goods are looking at contractions several times greater than the overall domestic decline.  The new administration’s stimulus program will hopefully target some of these areas.  However, I think the only thing we, as an industry, can do is to avoid putting too many eggs in one basket.  In these times, some can be good and more is not better.

The Credit Crunch, continued
Since few of our factoring clients are “bankable”, by any standards, the crisis on Wall Street wouldn’t seem to impact, directly, their livelihood on Interstate 95. Going back to the Motor Carrier Act of 1980 (“Deregulation”), I remember an old customer of mine explain that we would most certainly continue to have regulation in trucking – just that the regulators would shift from the Interstate Commerce Commission to equipment lenders and insurance companies.  That still seems to be the case. 

The used truck market has been thrashed, as credit availability for these “sub-prime” loans is virtually non-existent.  Trailer sales are worse.  Remember that truck production and sales recently peaked in 2006, as the industry “pre-bought” equipment prior to the 2007 Federal emission standards, and has been correcting itself ever since.  Inventory levels are not the issue, as they very much were in the previous downturn.  It’s purely the absence of credit.

Not only are there fewer sources of financing, but even the OEM captive finance companies appear to be more capital constrained this particular cycle as well.  Now, more than ever, you need to partner with funding sources who have been through this before and are 100% committed to the trucking industry.

ABOUT THE AUTHOR:  Steven Hausman is President and CEO of Advance Business Capital LLC, one of the leading factors dedicated solely to the for-hire transportation market and a TransCore Channel Partner.  Steve is a fourth-generation trucker, has an MBA from the University of Michigan, and 30 years' experience in corporate finance, leasing, commercial lending and factoring with companies that include CitiCapital, The Associates and Volvo.  Steve can be reached at 214-513-9600 or shausman@abcllc.com. For information on factoring, see www.loadfunding.com or call 866-638-8700.