What Old-Timers Know About the Stressed Trucking Sector

In 1931, Clessie Cummins set a coast-to-coast truck endurance record, arriving in Los Angeles 97 running hours after departing New York City.

With that feat, Cummins established a reputation for performance and durability of his diesel engines. He shaved more than six hours off the previous record set by a GM truck with a gasoline engine.

Cummins, who is credited in Cummins Inc.’s origin story with building a steam engine when he was just 11, is known as the father of highway diesel. And the company he co-founded in 1919 recently celebrated its centenary. It also made headlines in November when it announced plans to lay off 2,000 workers in the first quarter of 2020. The diesel engine manufacturer cited falling demand for its engines in the North American trucking market as well as oil and gas sectors.

The tail end of 2019 was a dark period for trucking.

In December, Celadon Group,Opens a new window with a fleet of around 3,300 tractors, filed for Chapter 11 protection. The company’s failure was the largest-ever trucking company bankruptcy and made the front pages.

Celadon’s closure followed a long tail of business failures with close to 800 carriers shuttering in the first nine months of 2019, double the entire 2018 rate, according to the research firm Broughton Capital.

Bets that failed

A large part of the problem was that in 2018 demand was healthy, trucking rates were strong and bullish carriers bet on market conditions continuing and invested in trucks and trailers. They bet wrong and ongoing low spot rates complicated efforts for many of them to make company economics work.

While 2018 trucking failures were confined by and large to small operations, Broughton Capital noted that larger firms were also caught in the net in 2019.

The U.S.-China trade war and its tariffs slowed the economy and American manufacturing was troubled. Industrial output fell far steeper than anticipated at 0.8% in October, the worst monthly decline since May 2018, and was down 1.1% year-on-year.

While it’s unclear whether the slump will spread into the broader economy, the manufacturing sector’s travails weren’t news for the trucking industry.

For sure, the signs were there to be read. Navistar, the leading truck maker, announced that falling demand for heavy-duty trucks was forcing it to reduce its workforce by more than 10%. And while those cuts will be felt across all the company’s international operations, the bulk will come through North America production wind-downs.

At the macro level, the situation looked pretty grim. In November, North America orders for Class 8 trucks (heavy duty, including tractor-trailers) ran to 17,300 units, which was the lowest total for that month since 2015 and was 39% down in comparison to November 2018, according to industry data outfit FTR. That was a poor start for the fall, usually the busiest time for new-equipment orders.

FTR vice president Don Ake was widely reported as noting that there was real apprehension in the trucking sector. “The industry thrives on stability,” he said, “but we are now on a rocky road.”

Time for corrections?

It’s a new year, so we can maybe dispense with the gloom and doom, at least for a while. Earlier strong market conditions clearly created over-confidence and the current state of affairs could well be viewed as an overdue correction. There are certainly too many trucks chasing too little business, so trimming that over-capacity might be no bad thing. That way you survive, and maybe prosper, when the upturn comes.

What we need is someone with long experience of the trucking market’s ups and downs. One hundred years should suffice to provide us with dependable insight. Clessie Cummins is no longer with us but his company certainly is.

In a recent earnings callOpens a new window , Cummins’ chief operating officer, Tony Satterthwaite, was clear on the perceived opportunity. “We take the advantage of the downturn to fix things that are broken to make improvements, to upgrade equipment, to upgrade facilities,” he said.

“Because when things are going strong, we don’t have time to do those things.”