News / Casualties mount in a 'perfect storm' hitting US drayage market

Eduard Goricev

Smothered by soaring costs and debt in a tepid market, the ranks of US drayage firms are thinning, and more casualties are expected when Washington’s drive to push out non-domiciled drivers sets its sights on the sector.

In California, National Road Logistics filed for chapter 11 protection this month. The firm, which runs 27 trucks and employs 35 drivers, buckled under liabilities of $43m against assets valued at $1.6m.

It follows other casualties in the sector this year, such as TGS Transportation, a 40-year-old operator that filed for chapter 11 and announced that it would liquidate its assets.

To Paul Brashier, VP global supply chain at ITS Logistics, news of drayage firms dropping out of the market is no surprise.

“A lot of dray operators were running below operating costs,” he said. For the past 18-24 months, operating costs per mile have exceeded the rate per mile carriers were paid, he added.

With margins razor-thin, if not worse, carriers have had little room to absorb rising costs, a situation where the stratospheric rise in the price of fuel has been catastrophic, especially for small and mid-sized operators. Fuel surcharges supposedly insulate carriers on this front, but the fact that they are based on weekly price averages and applied subsequently has meant that carriers had to absorb some of the higher fuel cost.

And this situation is not unique to drayage firms. Across the US truckload sector the wave of bankruptcies has risen in recent weeks. For more and more firms, particularly SMEs and owner-operators, the sharp rise in fuel costs is the straw that breaks the camel’s back.

“It’s a perfect storm of high costs, low rates, lower volumes and capacity exiting the market,” Mr Brashier said. “It’s getting to the point where you may have to make a tough decision. It’s a question how many can hold on until the market recovers.”

Projections point to lower container import volumes in the coming months that will extend the pain for drayage providers. On top of this, operators in California face cost pressures from higher regulatory strictures, Mr Brashier noted.

Many operators carry the additional burden of loans, which are taking a worsening toll on their ranks. BMO, a key lender to the sector, reported last week that gross impaired loans in the transport sector rose to a record $310.6m in the first quarter.

Financial pressures aside, Mr Brashier warned that the decline in capacity could accelerate in the drayage sector as Washington’s campaign to purge the trucking industry of non-domiciled truckers and drivers with inadequate English language skills continues. So far this has concentrated primarily on the longhaul trucking sector. There has not been much enforcement around ports and ramps, he noted.

“We’re starting to see states come through and purge capacity off the books,” he added. In California an administrative grace period extended to 20,000 non-domiciled holders of commercial driver’s licences expired in March, and state officials indicated that about 13,000 licences would be cancelled to comply with federal regulations.

“Companies that built their business around that driver capacity are at risk even though rates are going up,” Mr Brashier said.

The exodus of carriers and drivers has shrunk trucking capacity faster than the decrease in demand, ending nearly three years of downward pressure on rates. Pricing has trended up in recent months, but not at a rate that would have pulled struggling players back from the brink of financial collapse.

Mr Brashier predicts that rates will move north for a year.

This suggests that shippers that signed new contracts in recent months have the fortune of locking-in pricing before a lengthy upward stretch, but it remains to be seen how far they will be able to hold onto those lower rates.

“If you went into RFP in January, February you got low rates, but freight is not going to move at those rates,” Mr Brashier said.

He advises shippers to make sure that their carriers are in a good position from a rate standpoint.

And he stressed the importance of vetting their truckers’ financial health.

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