Mergers and acquisitions, bankruptcies, plummeting used truck prices, soaring fuel prices, higher operating costs …terms like these tend to pepper the stories being written today about the state of the truckload sector of transportation.

"Truckload carriers face a number of challenges," says Robert Costello, chief economist with the American Trucking Associations' Economics and Statistics Group. "Freight levels are down, and there are tremendous pressures put on carriers from the increased cost of fuel and insurance."

Costello cites a statistic reporting that 1,100 trucking companies recently filed for bankruptcy. "I thought the number would be higher," he says. "The reason it's not, I believe, is [that] finance companies are not repossessing trucks. If you're the finance company, why do it? The trucks are worth little right now."

The majority of these failures are among the smaller fleets, those with 100 or fewer trucks, which make up 90 percent of the TL market. The smaller carriers are at risk for a number of reasons. They purchase insurance and fuel in smaller amounts, so they do not receive the discounted pricing that helps offset increases for the larger carriers. They don't have the leverage to pass higher fuel costs—in the form of surcharges—on to their customers. "Fuel accounts for up to 20 percent of operating expenses for the small carriers," says Costello. "It's their second-highest expense after labor."

The spike in fuel prices in the middle of 2000 hit the industry hard, Costello continues. According to the Department of Energy's Energy Information Administration, diesel prices in certain regions (notably the Midwest and New England) averaged more than $2.00 per gallon during certain weeks last year. This crisis alone forced many truckers to exit the industry.

"We'll see a lot more of a shakeout before the slowdown is over," says Costello. "The smaller carriers will get hammered because they don't have the diversity in their customer base or the cash reserves to weather the downturn."

Analysts expect a shakeout among larger carriers as well, predicting that other truckers will follow the example of Swift Transportation Co. and M.S. Carriers, whose merger was pending at press time. "A lot of owners are getting older," says Ed Wolfe, a senior transport, logistics, and supply chain analyst at investment firm Bear Stearns. "They are looking for a strategy to exit the industry."

Not all sectors of the truckload industry are suffering, however. Flatbed carriers that haul construction materials are posting healthy numbers, thanks to strong housing and residential remodeling markets. "Interest rates are low and the stock market is floundering, so homeowners are looking to real estate as an investment alternative," says Costello.

Other economic indicators are not as promising. Credit-card debt is at record levels, averaging $8,000 per household, Costello says, and rising unemployment numbers may make consumers reluctant to part with their dollars at a time when inventory is backed up in the supply chain.

Under these trying economic conditions, it may do little good for carriers to look for relief from customers. A Morgan Stanley Dean Witter survey of more than 550 shippers reports that more than half the respondents expect TL rates to remain the same or even decline. Large carriers "will likely push through rate increases with their core customer base, but the freight hauled in the spot market is expected to be at less than desirable rates," said a recent report from the investment firm.

For carriers of all sizes, an oversupply of used trucks flooding the marketplace has pushed used truck values down anywhere from 30 to 50 percent. This affects the truckload carriers more than the less-than-truckload carriers because the TLs have no terminals. "All of the truckload carriers' assets are tied up in power units and trailers," says Costello.

Explains the Morgan Stanley Dean Witter report, "A carrier [that] purchased a 1998 truck for $70,000 and depreciated half the truck's value over three years (normal for the industry) has that piece of equipment on the books in 2001 at $35,000. Assuming this truck lost 30 percent of its recent value, it is only worth $24,500. For every 100 trucks in a carrier's fleet, that would equate to approximately a $1 million loss on the assets."

Over the past decade, TL carriers became accustomed to two- and three-year trade cycles for their new equipment because manufacturers provided attractive financing and generous trade-in terms, report industry observers. With trade-in values falling, many TLs have decided to extend their trade cycles out to four, five, or six years. Many, too, are choosing relatively new used equipment over vehicles just off the assembly line.

Covenant Transportation, for example, is shifting to a four-year trade cycle from a three-year one. David Parker, chairman, president, and chief executive officer of Covenant, told investors at a Bear Stearns conference that his company had "no problem looking at trucks that are a couple of years old."

Wolfe reports that TL carriers expect the weakness in the truck market to last for another two to three years. Carriers will purchase fewer new trucks from OEMs during this time. This slowdown comes after truck manufacturers enjoyed record-breaking sales of Class 8 vehicles in 1998 and 1999.

Analysts expect the move to used equipment and the lengthened trade cycles will help TL carriers cut expenses without adversely affecting operations. "Moving to a five-year trade-in cycle does little to maintenance costs," says Costello. "Yes, maintenance costs go up in the fourth and fifth years of ownership, but not dramatically. You'll also find more and more companies are outsourcing the maintenance of their vehicles, so it's not a big issue."

At least one problem that has dogged TL carriers over the past few years is easing somewhat, thanks to the downturn. With freight levels dropping, there are fewer trucks on the road; consequently, carriers do not need as many drivers. "The driver situation has improved dramatically," says Parker. "I don't see a huge problem ahead because there will be a tremendous [number] of trucking companies that won't exist anymore."

Other industry executives are reporting continued success in recruiting drivers, but not all industry observers are optimistic. "Carriers can find drivers today, but they still have trouble finding quality drivers," says Costello. "Has the driver shortage gone away? No. Has it lessened? Yes."

Costello reports that driver turnover in the second and third quarters of 2000 amounted to over 100 percent annually but had fallen to 94 or 95 percent in the first quarter of 2001. Yet the situation could change in the fall when Congress revisits a proposal to change hours of service (HOS) rules for drivers. Many carriers feared that if last year's proposed HOS rules had been imposed, TLs would have been forced to hire thousands of new drivers.

"We hope a new rule will be based on a much better cost/benefit analysis," says Costello. "It must address increases in safety and also recognize that trucks move the national economy. There must be a balance."

One development that has raised truckers' hopes for the future is the prospect of increased international business. Analysts forecast that the opening of the Mexican border in 2002 will provide opportunities for carriers that can form strategic alliances with Mexican companies. However, critics question the safety of trucks operated by Mexican carriers. "Many have a picture of substandard Mexican trucks flooding into the United States, causing safety problems," says Costello. "That's crazy. The poorly maintained trucks that receive press are drayage trucks, not longhaul trucks. If you look at the large trucking companies in Mexico, their fleets are very modern. A lot of manufacturers in this country have facilities in Mexico where they sell to these fleets."

Cross-border trade issues aside, executives agree that the fundamentals are in place for a strong resurgence in trucking when the economy turns upward. "We have been in a dark valley for 12 to 14 months," says Parker, "but things are going to start looking up."