Celadon shutdown was a product of two freight recessions

Chart of the Week: 3-Year-Old Used Truck Prices – USA, Cass Freight Shipments Index – USA SONAR: UT3.USA, CFIS.USA

At this point the news and story of Celadon, the largest trucking
failure in history
has been covered extensively in the media. The 3,000+
trucking company was by far the largest to shut down in what has been a
troubling year to say the least for many asset-based transportation providers. One
of the largest debates surrounding the shutdown is what was the main cause of
the company’s failure; accounting fraud or a poor operating environment. Looking
at the Cass Freight Shipments Index—measures total freight volumes in
the U.S— and 3-year-old used truck prices—an item that played a major
role in the accounting fraud—we can clearly see 2015-16 and 2018-19 were
contractionary periods for trucking. These two years were the most pivotal for the
top 20 carrier.

In an earlier chart of the week, we covered how 2019 was the worst year for trucking in recent history, citing increasing costs, over-expansion, and lower demand as some of the biggest reasons. 2016 was not much different from 2019, aside from the fact the 2015 freight market was not quite as robust as the conditions in 2018.

Industrial production annual growth was negative in 2015-16 and has been declining throughout 2019. Chart: SONAR – Industrial Production Growth, IPROG.USA

Both years were industrial recession years, but not general
economic recessions. The U.S. economy is not as tied to the manufacturing and
production cycles as it once was with 70% of the GDP being represented by
services. Transportation is a service itself, but it is very closely tied to
production. Many of the goods transported originate from outside of the U.S.
Celadon was the one of the nation’s largest international carriers, operating
nearly 800 trucks in Mexico and Canada, which were largely used to service the
automotive industry.

The Cass Freight Shipments Index includes both rail and
truckload volumes and is created from invoice data by the nations largest
freight invoicing company. Volumes in 2019 were higher than 2017, as volumes
averaged over 5% higher from January through October this year. The absolute
volumes are not what is important in measuring the true health of the freight
market, the volatility is.

Truck operations are driven by consistency and well-balanced networks. Consistent volumes are extremely important in keeping the network balanced. For instance, if a carrier knows they will have five loads coming out of Laredo each day, they can find a shipper that will help them position five trucks in the area each day. If either customer stops needing those five trucks the carrier network will have a gap, requiring them to spend more money moving the trucks into position, also known as deadheading or empty miles. If the carrier is not able to price the cost of moving empty into the rate, they lose money on every mile driven.

Note that the volumes declined significantly in 2016 and 2019 from the previous year, but the drop was more severe from 2018 to 2019. The sharper the drop the harder it becomes to balance the network. Combine that with increasing costs, such as insurance and driver wages due to the rapid expansion in 2018 and the fall has been much more damaging.

The declining market in 2016 was worse than 2019 in a very significant way—used truck prices fell much later in the downturn cycle in 2019 than they did in 2016. Some of this has to do with the models involved in the 2015-16 prices, specifically the Internationals with the infamous 2012 Max Force engine, which was riddled with problems. Celadon executives potentially did not realize how widely known the issues with these trucks were, maybe they did. Either way, they made a decision to over-value them based on a the results of a poor operating environment.

Special Note: SONAR subscribers can get a detailed look at the Celadon shut-down and many other freight market reports inside the platform by clicking on the research center icon at the top of the page.

About the Chart of the Week

The FreightWaves Chart of the Week is a chart selection from SONAR that provides an interesting data point to describe the state of the freight markets. A chart is chosen from thousands of potential charts on SONAR to help participants visualize the freight market in real-time. Each week a Market Expert will post a chart, along with commentary live on the front-page. After that, the Chart of the Week will be archived on FreightWaves.com for future reference.

SONAR aggregates data from hundreds of sources, presenting the data in charts and maps and providing commentary on what freight market experts want to know about the industry in real time.

The FreightWaves data science and product teams are releasing new data sets each week and enhancing the client experience.

To request a SONAR demo click here.