If YRC fails, what happens to U.S. truck sector?

By Nick Carey - Analysis

CHICAGO (Reuters) - The fortunes of a particular corner of the U.S. trucking industry in the next year are as tied to whether one company, YRC Worldwide Inc (YRCW.O), survives as they are to a recovery in the recession-bound U.S. economy.

If YRC fails it could provide competitors with just the reduction in industry capacity they need to jack up pricing for the first time since late 2006.

While that would be good news for the less-than-truckload (LTL) market -- which refers to truckers who consolidate smaller loads into a single truck -- it will hurt customers already facing the pinch in a down economy.

YRC, based in Overland Park, Kansas, nearly quadrupled its revenue from $2.6 billion in 2002 to a peak of $9.9 billion in 2006 thanks largely to two major acquisitions, and is important because it controls some 20 percent of the LTL market.

"One of two things has to happen: either we have to lose capacity or demand has to come back," said Morgan Keegan analyst Art Hatfield. "The rate at which YRC's business is deteriorating makes it more likely that it will be them to go out of business rather than someone else."

He said a YRC failure "would have a positive effect on the market, as it would help restore the balance between supply and demand. It would also help stop the bleeding on pricing."

LTL shippers account for around 13.6 percent of America's trucking sector, with the rest dominated by the highly fragmented truckload -- or long-haul -- market.

Analysts say all is not yet lost for YRC as it is managing to cut costs and getting concessions from unions and lenders -- but this is a race against time.

"The big unknown is the economy," said Longbow Research analyst Lee Klaskow. "If we see an uptick in freight volumes then there is a very good chance that YRC will survive."

"But if demand remains weak well into 2010 then YRC is not going to make it."

WARNING: ROAD OUT AHEAD

During the recent economic boom, YRC was profitable and seemingly riding high after it acquired rival Roadway Corp in 2003 for $966 million followed by USF Corp in 2005 for $1.47 billion, making it the undisputed No. 1 in the U.S. LTL market. But those acquisitions have come back to haunt YRC.

As the U.S. economy began to sour, YRC did not do enough to integrate its national network, leaving it with too many facilities, a high debt load, too many workers and high fixed costs, analysts said.

When the recession hit, YRC took heed and started cutting facilities and workers. But since the market crisis that followed the collapse of Lehman Brothers (LEHMQ.PK) last September, the company has lurched from crisis to crisis.

"YRC is doing what it should have when times were good," said Morningstar analyst Keith Schoonmaker. "But it's only in the crucible of truly trying times that YRC can effect real change."