Biggest U.S. trucker battling economy's headwinds

HOLLAND, Michigan (Reuters) - Keith Graham says times are not good, but they have been worse.

"I was down to two deliveries a week at (auto supplier) Pullman Industries in South Haven," said the truck driver at USF Holland, a unit of America's largest trucking company YRC Worldwide Inc (YRCW.O). "Recently, they went back up to four deliveries a week, which is good news."

"When it comes to the auto industry, Michigan could do with a whole lot more good news like that, " Graham, 47, said.

Those extra deliveries were related to new product lines for General Motors Corp GM.N, officials said.

But if good news like new product lines at a U.S. automaker is rare these days -- the industry has been decimated by shrinking market share for Detroit-based automakers GM, Ford Motor Co (F.N) and Chrysler LLC -- the same can be said for YRC and USF, which YRC bought in 2005.

Like other U.S. trucking companies, YRC has seen weak demand since the third quarter of 2006, driven by weak auto sales, the housing sector slowdown and lackluster retail sales.

But company officials say business in USF's four core states -- Ohio, Indiana, Illinois and Michigan -- has been hit harder than elsewhere due to struggling automakers.

"We serve many second- or third-tier suppliers and they are all feeling the effects as are other companies" of slower auto sales at Detroit's Big Three, USF Holland President John O'Sullivan said. "In this region, we are all in this together."

But analysts like Morningstar's Keith Schoonmaker say YRC's problems go deeper and its business model needs an overhaul.

"The slowdown in the sector is bad timing for the company," Schoonmaker said. "But YRC is the worst performer in the market for how much profit they generate from $1 of revenue."

The company's difficulties have recently dragged its stock down to the lowest level since spring 2003.

FIERCE COMPETITION

YRC is a less-than-truckload (LTL) operator, a consolidator of small loads into a single truck. The company has national routes as well its regional USF brand. But analysts said the regional operations are where the problems lie.

With the slowing Midwest economy and auto-related business, O'Sullivan said USF Holland is targeting new customers.

YRC CEO Bill Zollars also told Reuters that pricing at the regional operations has caused some "self-inflicted wounds." So he said YRC is rectifying this by "firing some customers."

Analysts say the problems are bigger and point to YRC's union work force and high fixed costs.

"YRC has a number of structural issues," said Dan Skubiz, an equity research analyst at St Louis-based Missouri Valley Partners, which manages assets of close to $2 billion. "Those high costs pull their margins down when business is slow."

His firm sold its last YRC shares in June and Skubiz said it could be "several quarters" before he looks at it again.

Skubiz also cited increased competition for YRC from LTL operator Old Dominion Freight Line Inc (ODFL.O) and package delivery companies FedEx Corp (FDX.N) and United Parcel Service Inc (UPS.N), which have both invested in the LTL market.

"FedEx and UPS don't just try a new market on for size, they get into it to win," Skubiz said.

John Labrie, president of Con-way Freight, the LTL unit of truck and logistics company Con-Way Inc (CNW.N), said FedEx and UPS "have raised the bar in the LTL market."

Old Dominion, FedEx and Con-way are nonunion, and UPS's LTL unit UPS Freight is mostly nonunion for now.

YRC has said it will cut redundant infrastructure and focus on improving operations to save $100 million over the next six months. But Morningstar's Schoonmaker said with 1,000 facilities, YRC has excess capacity. Trimming that network and cutting a deal with its unions -- negotiations on a new contract are under way now -- on more flexible work rules could be just what the company needs to be more competitive.

"We'll have to see what they do in the next quarter, but what we're looking for is a meaningful reduction in infrastructure," Schoonmaker said. "That would be good news."