This article was originally published on ETFTrends.com.
By Frank Holmes, CEO and Chief Investments Officer for U.S. Global Investors
It was the best of times, it was the worst of times—for American trucking companies.
This year alone, nearly 800 U.S.-based trucking companies have gone bankrupt. That’s almost three times the rate as in 2018, when things were looking remarkably positive.
Only 310 carriers failed that year, resulting in about 2,800 trucks being taken out of service, a 20-year low. Demand was strong. Ground freight rates were rising. The group ended 2018 with $796.7 billion in revenues, up nearly 14 percent from the previous year, according to the American Trucking Associations (ATA).
Flush with cash, managements did what some other industries have been guilty of doing in boom years—they began to expand aggressively. Capacity growth exploded, and spending on drivers’ pay surged.
Among the things they didn’t anticipate in 2019 were escalating insurance costs and oversupply, which drove shipping rates down at the fastest pace since 2016. The U.S. trade war with China didn’t help either.
When the dust finally settles, as many as 24,000 trucks will have been removed from U.S. roads this year alone. Most carriers are small businesses—about 91 percent of fleets in the U.S. operate six or fewer trucks, and 97 percent operate 20 or fewer, according to ATA data.
In years past, drivers have been able to find work relatively quickly at larger carriers when companies have failed. The difference this year is that we’ve seen a number of big bankruptcies, including LME (424 truck drivers), Stevens Tanker Division (576), Falcon Transport (585) and New England Motor Freight (1,472).
The biggest ever trucking industry bankruptcy occurred earlier this month. The publicly-traded Celadon Group filed for Chapter 11 bankruptcy protection on December 8 after two former executives were charged with accounting fraud, costing shareholders some $60 million. This left close to 4,000 Celadon employees jobless, including 2,500 drivers.
Lessons From the Tarmac
More than a decade ago, it was another industrials sector that was undergoing a raft of bankruptcies. Between 2005 and 2008, about 70 percent of the U.S. airline industry was operating under Chapter 11, including leaders Delta Air Lines, American Airlines and United Continental.
But a wave of consolidation followed, and the airline industry is now in a much more rational business environment than it was before. Fundamental changes took place, and executives brought new discipline to capacity growth. New sources of revenue were introduced, additional seats were included and aircraft became far more fuel efficient. Next year, in fact, fuel as a percent of airlines’ operating costs is expected to fall to just 22.1 percent, according to the International Air Transport Association (IATA). That’s down significantly from 30.6 percent in 2014.