Impact of the Coronavirus: Trucking Bankruptcies Likely to Accelerate in 2020

Note: This article was originally written on 3/12 with stats updated on 3/24 for the ATA's NAFC Quarterly Newsletter "Driving the Numbers."

Many trucking companies entered 2020 hoping it would be better than 2019, which was a difficult year for many in the industry. Slowed economic growth, declining revenues and increasing costs caused irreparable harm to carriers both large and small. Last year, the number of trucking company bankruptcies in just the first three quarters was more than double what it was the previous year. Just three months into 2020, the spread of the coronavirus disease (COVID-19) has shocked the global economy and threatens the very livelihood of many trucking companies.

How did we get here?

In 2018, a variety of factors converged to create the best rate environment for truckers since deregulation forty years ago. Increased demand - due in part to the economic stimulus created by federal tax reform - combined with tightened capacity, meant that loads were more plentiful than were the drivers and trucks to haul them. Many carriers expanded their fleets and payrolls to take advantage of the profitable freight environment.

Fast forward to 2019, slowing economic conditions and increased insurance costs caused many carriers to face financial hardship. Running a trucking business in an increasingly litigious environment meant absorbing double-digit insurance premium increases. The growth in insurance costs is the cumulative effect of years of multi-million dollar nuclear jury verdicts and settlements, which pushed insurers out of the market.

Bottom lines in 2019 were squeezed not only by increasing insurance rates but by the expenses of increased driver pay that was needed to recruit and retain drivers amidst tightened capacity and the expense of additional trucks added to fleets. Additionally, the extra capacity brought into the market from the added drivers and trucks put downward pressure on rates.

Slowing economic growth presented another obstacle to profits, while trade wars caused anxiety and uncertainty in the economy. Lower growth in retail sales, a late pickup in housing starts and declining factory output equated to reduced load volumes. Many carriers expanded too quickly in 2018 when freight was plentiful. The increase in overhead is a major liability now that boom times are over.

Vulnerability in 2020

Many carriers entered 2020 in a vulnerable financial position. Even absent the virus’ escalation to a global pandemic, the coronavirus would have harmed carriers. As a major importer of Chinese goods, U.S. companies depend on regular shipments from Chinese factories to satisfy consumer demand. Companies depend on trucks to move freight from ports to warehouses across the country. Illness and mandatory quarantines halted production at Chinese factories in affected areas, stifling output of goods. Depending on the product, China’s production was delayed anywhere from 3 to 12 weeks. Chinese manufacturing is running at 50% to 90% depending on the industry. As a major trading partner to the U.S., reduced productivity in China has a sizeable negative impact on U.S. businesses.

Compounding the negative economic effect, the coronavirus is beginning to spread rapidly among the American populace, almost certainly ending the longest economic expansion in U.S. history. ATA Chief Economist Bob Costello remarked at NAFC’s Annual Conference last June, “Economic expansions do not die of old age,” Costello said. “They’re killed.” While Costello had no way of knowing exactly what was to come in 2020, his statements foreshadowed the coronavirus’ slaying of the current expansion.

The Coronavirus in the U.S.

The coronavirus has had a devastating human impact. As of March 24, the virus has killed over 18,000 people and infected more than 407,000 worldwide. The United States now has nearly 50,000 confirmed cases and over 600 deaths. The impact will be felt beyond those infected with the disease. In the past month, schools have closed their doors, professional sports teams have halted play and major events have been canceled and almost half of the U.S. population is under a stay-at-home order.

All of these necessary steps taken to prevent the spread of the disease will have a negative economic impact and a trickle-down effect on trucking. The Federal Reserve has deployed monetary policy to try to soften the economic impact. On March 3rd, the Fed took the dramatic step of making an emergency 0.5% cut to the target fed funds rate, a move not taken since responding to the Great Recession in 2008. Fed Chair Jerome Powell explained the decision, “We saw a risk to the outlook for the economy and chose to act.” The risk, as well as fear and uncertainty in the business community, is great. Since that bold first rate reduction, the Fed has decreased the target rate another 1% to a range of 0 to .25%. Additionally, the Fed is implementing quantitative easing policy not used since the last recession, saying it would purchase as many treasuries and mortgage-backed securities as necessary to stabilize the credit markets. "While great uncertainty remains, it has become clear that our economy will face severe disruptions," the Fed said in a statement. "Aggressive efforts must be taken across the public and private sectors to limit the losses to jobs and incomes and to promote a swift recovery once the disruptions abate." The Fed actions have not calmed financial markets, which have seen unprecedented volatility. All of the major stock indexes are also in bear market territory.

Politicians are tackling the crisis using fiscal policy as well. The Trump administration has worked with Congress to approve billions in coronavirus aid in the first two “phases” of legislative relief. Another $2 trillion “phase 3” bill likely to be signed into law by the end of March. ATA has summarized the legislative efforts on their new coronavirus hub, which can be found at trucking.org/COVID19. The site also includes other relevant government mandates and policy changes in response to the crisis.

The trucking industry generally follows macroeconomic trends. A downturn in the economy will undoubtedly affect the thousands of trucking companies that move goods across the country. In the weeks since the spread of the coronavirus to America, freight volumes of staples, like bottled water and non-perishable foods, have been surging. Americans are stockpiling goods in their homes in the event they have to be quarantined for an extended period. ATA Chief Economist Bob Costello expects this spike to be short-lived, with payback in softer volumes for these goods later.

The vast majority of economists are predicting that the coronavirus will tip the U.S. into a recession, which would undoubtedly cause many vulnerable trucking companies to go out of business. Profit margins for even the most successful trucking companies are thin relative to other industries, those who entered 2020 facing declining revenues and increasing costs will have a difficult time enduring a prolonged downturn. The magnitude of the effects will depend on how long the virus takes to peak and how long it will take consumers to recover, physically as well as emotionally. If consumer confidence remains low even after Americans have physically recovered from the crisis, the economy and trucking will suffer. For motor carriers who were enduring tighter profit margins even before the coronavirus disrupted markets, a short-lived crisis is essential to their very existence.