U.S. long-haul trucks hit by diesel costs, recession

CHICAGO (Reuters) - This was supposed to be the year the North American big-rig truck market roared back to life after downshifting sharply in 2007, when tough new clean-air regulations took effect.

But after getting off to an encouraging start in January, orders for so-called Class 8 trucks -- the big, heavy-duty vehicles used to haul freight over long distances -- stalled in February and March.

That's thrown uncertainty over earnings for a host of U.S. companies scheduled to report in the next few weeks, including truckmaker Paccar Inc (PCAR.O), engine maker Caterpillar Inc (CAT.N), transmission maker Eaton Corp (ETN.N) and trailer maker Ingersoll-Rand Co (IR.N).

The big culprit behind the slump is soaring fuel prices, which have prompted sporadic protests by independent truckers but show no signs of easing. In the space of just six weeks, diesel prices at truck stops along U.S. highways have surged from $3.20 to nearly $4 a gallon -- up from about $2.40 this time last year.

Given the outsized role fuel plays in haulers' expenses, "trucker profits probably got creamed in the first quarter," said Kenny Vieth at A.C.T. Research Co, which tracks the commercial vehicle industry.

Adding pressure is the slowdown in the U.S. economy. A surge in truck purchases in 2006, as long-haulers rushed to buy ahead of the implementation of the clean-air rules, also means there are now too many trucks chasing too little freight.

So the rebound that truckmakers were counting on in 2008 isn't happening, and the mood at the industry's annual meeting last month in Louisville, Kentucky, was decidedly downbeat.

"Going into the show ... I expected that maybe we would feel a little bit of an inflection point for truck demand," Bear Stearns analyst Peter Nesvold said during a conference call he hosted this week on the sector's outlook.

"I think we are at an inflection point," he added. "But unfortunately I feel like it's in the wrong direction."

Not everyone agrees. Navistar International Corp NAVZ.PK, a leading truckmaker, and Cummins Inc (CMI.N), a top diesel engine supplier, both insist the market for Class 8 trucks -- which can cost as much as $130,000 apiece -- will rebound in the latter half of 2008.

"We haven't seen the pick-up yet," said Navistar spokesman Roy Wiley, "but we expect it to come in the second half."

One reason for the optimism? In 2010, even stricter clean-air rules come into effect -- rules that will require on-highway trucks to be equipped with newer, more expensive engines. Just as they did ahead of the 2007 rules, fleet owners and independent operators are expected to buy equipment in 2008 and 2009 before the rules take effect.

That so-called "pre-buy" in 2006 lifted industrywide sales and helped companies in the sector report record profits.

In all, the industry produced a record 378,000 Class 8 trucks that year, according to A.C.T. Research, double the 182,000 it produced in both 2002 and 2003.

But this time around, analysts say, it's different.

In 2006, the U.S. economy was humming and truckers were big beneficiaries of the good times. This year, the economy may already be in a recession, as the housing market slump and credit crunch prompt widespread belt-tightening -- and it's truckers who are taking it on the chin.

As a result, A.C.T. Research is predicting the industry will only see orders for 234,000 Class 8 trucks this year -- up just slightly from last year's trough of 212,000.

Nesvold at Bear Stearns, who tracks bankruptcies filed by freight carriers who borrow from the truckmakers' captive finance arms, says those filings by distressed haulers have spiked.

"We've seen a quadrupling of bankruptcy frequency over the last year or so," he said, "and especially here in the last few months, which is coincident with fuel prices going up."

Near-term, that suggests the bad times for truckmakers will continue as their customers continue to hurt. Longer term, the shakeout of some carriers will reduce capacity in the freight business and put those who survive in a much better position to pass along fuel surcharges, raise shipping rates and buy new trucks.

"When the freight cycle eventually does come back, I think you'll see freight rates tighten very quickly," Nesvold said. "Those guys who survive into the next freight upturn are going to be very well positioned. But there's still going to be a lot of pain between now and then."

(Editing by Peter Bohan and Gerald E. McCormick)