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BANGALORE (Reuters) - Bankruptcies in the U.S. trucking industry are expected to escalate this year as higher fuel prices and excess capacity squeeze margins further and lenders start to tighten their noose on the sector.
The highly fragmented freight market in the United States has been in recession for about three years now. Excess capacity has put pressure on pricing and dented margins at truckers as well as freight brokers.
But the sector has not seen as many insolvencies as expected in the last two years, as lenders wait for the market to improve for the used trucks they hold as collateral.
Last year, lenders helped YRC Worldwide (YRCW.O), the No.1 U.S. trucker, narrowly avoid bankruptcy.
Industry analysts say a spike in bankruptcies might not be a bad thing after all for the sector -- it will take away hundreds of underperforming companies, suck out the excess capacity and finally narrow the gap between supply and demand.
Some of the bigger players in the market, such as J.B. Hunt Transport Services (JBHT.O), Werner Enterprises (WERN.O) and Knight Transportation (KNX.N), are expected to benefit as the insolvency of smaller firms create some breathing space in the sector.
Andy Ahern of consultancy firm Ahern & Associates said he would be surprised if he doesn't see at least 2,500 to 3,000 trucking companies go bankrupt in 2010.
According to Ahern, about 2,220 truckers went bankrupt in 2009, compared to 5,500 in 2008. The figures do not include companies that just shut down operations without filing for bankruptcy protection.
Even then, this represents a 60 percent decline in bankruptcies in a year when 70 percent of the trucking companies in the market made losses.
"We are going to see the collapse of two or three major carriers and that is going to be the beginning of the process of changing supply and demand, and when that happens trucking is going to start to rebound," Ahern said.
Lender leniency has so far stemmed bankruptcies in the trucking industry. Banks have not forced truckers into bankruptcy so far as the current value of used trucks held as collateral is so low that they are worth less than the debt.
"Because there is excess capacity, owning a bunch of trucks may not be a great asset at the moment for a bank as collateral," said Drew White of financial information company Sageworks Inc.
YRC, which narrowly avoided bankruptcy in December 2009, went through an elaborate debt exchange offer and received concessions from banks and labor union, avoiding a failure that would have changed the supply-demand dynamics in the trucking market.
But analysts don't believe YRC is out of the woods yet.
BMO Capital Markets' Jason Granger said YRC could at some point be forced into a position where it needs to significantly downsize its operations and resurface as a smaller organization.
Used trucks do not have a strong market as truckers are not adding to their fleet -- they already have a lot of trucks that are not in use due to low freight volumes.
"Banks traditionally have become more lenient toward forcing troubled carriers into bankruptcy in early stages of the down cycle," said BMO's Granger.
"As asset value that the banks hold as collateral improves, banks start to become more aggressive in forcing carriers into bankruptcy."
He expects the acceleration in bankruptcies to become more pronounced in late 2010 and 2011.
Rising fuel prices are another key factor in quickening the pace of bankruptcies. When the benchmark U.S. crude oil prices shot up 47 percent in the first half of 2008, U.S. trucking bankruptcies rose 130 percent, according to analyst Granger.
In the last two quarters of 2009, oil prices rose 13 percent. Oil averaged $76 a barrel in the fourth quarter, significantly higher than the $32.40 per barrel touched earlier that year.
Trucking failures are not the only way for excess capacity to leave the market. Some analysts believe mergers and acquisitions could start to see an upside as distressed deals happen and the larger players prepare for a recovery in 2011.
Tom Connolly, managing director at Eve Partners, an investment bank focusing on transportation and logistics, said some distressed deals and opportunistic acquisitions could happen, but he doesn't see a dramatic rise in M&As.
"I don't think bankruptcy is the only way (for excess capacity to leave the market) but it is the most logical way out," said Connolly.
Reporting by A.Ananthalakshmi; Editing by Saumyadeb Chakrabarty and Gopakumar Warrier