Death of the weak only hope for truck companies?

A tractor trailer hauls a cargo container at the Port of Long Beach, California June 19, 2008.

CHICAGO (Reuters) - For life to improve for America's battered truck sector, one of two things must happen: Either the U.S. economy needs to rebound or more companies need to fail for truck supply to shrink to meet demand.

But as the U.S. continues to languish in recession, few analysts see any relief for truckers before 2010.

"It's fair to say the trucking sector has excess capacity," said Art Hatfield, an analyst at Morgan Keegan. "Either the economy has to improve or more capacity will go away."

"The latter scenario looks more likely," he added.

Truck companies run low-margin operations on the front line of the world's largest economy.

The entire sector has suffered from weak freight volumes since the third quarter of 2006, hit by sagging retail and auto sales, the U.S. housing sector meltdown and the U.S. recession. Truckers have cut prices as too many firms have chased too little business.

Rather than getting better in late 2008 -- as many in the truck industry had hoped -- the downturn has only worsened.

U.S. truck tonnage in December fell 11 percent from November, the biggest monthly drop since April 1994, according to the American Trucking Associations (ATA).

"We are now over 27 months into a freight recession that is the worst I have seen during my 37 years in this industry," Arkansas Best Corp (ABFS.O) Chief Executive Robert Davidson said after the less-than-truckload (LTL) company posted a loss this week.

The company also said it had cut 1,100 jobs in the quarter. LTL operators consolidate small loads into a single truck. Another LTL carrier, Con-way Inc (CNW.N), said this week it was delaying buying new trucks to conserve cash.

The one thing that has kept many truck companies -- small, medium and large -- from going under has been the recent drop in diesel prices from record highs last summer.

"Many truck companies that were on the brink of business held on thanks to the drop in diesel prices," said Tavio Hedley, staff economist at the ATA. "That reprieve is over."

Analysts say that while the private companies are at the highest risk, all eyes are on the country's struggling No. 1 trucker, LTL carrier YRC Worldwide Inc (YRCW.O).

"STAY OF EXECUTION"

Oil was the truck killer in the first half of 2008. As prices rose to the July highs over $148 per barrel, the number of truckers filing for bankruptcy jumped.

According to data from investment banking firm Avondale Partners, 1,905 U.S. truck firms went under in the first half of 2008, not far short of the 1,985 recorded for all of 2007.

Like other U.S. transport firms, truck companies levy fuel surcharges when diesel prices rise. But there is a lag of a week or two before the surcharge changes, so as prices go up, truckers feel the pain more until they recover that cost.

Conversely, they get a small lift as fuel prices fall as that delay works in their favor.

In the second half of last year, the whole trucking sector benefited from a drop of more than $100 per barrel in the price of oil as the worsening world economy lowered demand for fuel.

The number of second-half bankruptcies reached 1,160, bringing the total for 2008 to 3,065. High, but short of the record 3,990 in 2001 during the last U.S. recession.

"Without the decline in diesel prices, more companies would have gone under," ATA's Hedley said.

But the price of oil has now stabilized somewhat, which analysts say spells trouble for truckers.

"The drop in the price of oil for many truckers was like an inmate on death row getting a temporary stay of execution from the governor," said Jason Seidl, an analyst at Dahlman Rose. "With no more lag effect (from falling oil prices), they still face a bad economy and weak volumes."

"This could be the straw that breaks the proverbial camel's back," he added.

COLD SPRING COMING

Seidl and others predict a wave of bankruptcies starting in the spring, and the best hope for the rest is to wait it out.

Most publicly traded companies -- especially long-haul operators Knight Transportation Inc (KNX.N), Heartland Express Inc (HTLD.O) and Werner Enterprises Inc (WERN.O) - are expected to weather the storm as they have little debt.

But YRC, which reported a quarterly loss of $244.4 million or $4.14 a share on Thursday, is seen as the one to watch.

YRC has received a temporary waiver on its debt covenants and its unionized workers recently approved a 10 percent wage cut in return for a 15 percent stake in the company to save up to $250 million a year. YRC has also cut jobs and shut down facilities to take excess capacity out of its network.

Analysts like Lee Klaskow of Longbow Research say YRC has a fair chance of survival.

"It's not in the interests of YRC's creditors to let it go under, as they would be stuck owning thousands of trucks," he said. "So YRC should be given some time to turn things around.

But in a January 23 blog, Wolfe Research wrote "we believe the restrictive conditions in these (debt covenant) waivers likely shows how little hand YRCW has left ... and we continue to believe a high risk of some form of bankruptcy remains."

(Editing by Patrick Fitzgibbons and Phil Berlowitz)