Lenders to the U.S. trucking sector are hesitating to pull the plug on struggling freight carriers, a trend that may exacerbate the industry's steep downturn.

The volume of freight hauled by truckers has fallen precipitously amid the broad economic slump. But trucking business failures - a relatively quick mechanism to help bring excess trucking capacity in line with sharply reduced demand - are running about half the rate of last year, according to some estimates.

"I'm shocked that we're not seeing a higher number of failures," said Bob Costello, chief economist for the American Trucking Association, the industry's main trade group. "There are some creditors out there giving these guys some rope" in hopes for a swift rebound.

He and other trucking sector observers say debt-holders appear loath to take control of non-performing assets at a time when markets for used trucks and real estate are in the dumps.

But the result of such lender "forbearance" could end up merely extending the period in which relatively healthy carriers must fight for fewer customers amid cut-rate pricing.

Costello declined to comment on any specific trucking firms.

But struggling YRC Worldwide Inc. (YRCW), one of the largest U.S. carriers, is perhaps the poster child for the industry's dilemma. YRC holds at least 20% of the market for less-than-truckload shipping, in which loads from multiple sources are combined on single trucks and where industry overcapacity is considered the most problematic.

The Overland Park, Kan., company has twice sought and received leeway from its lenders regarding its large debt load, and it recently announced that it plans to seek federal bailout funds to help it with pension obligations.

YRC Chief Executive Bill Zollars declined a request for an interview through a spokeswoman, who noted that the company has yet to formally request any bailout money. In recent months, YRC has repeatedly praised the support of its lenders, with Zollars saying during a conference last week that debt-holders "see the path to success very clearly."

Investors aren't as optimistic. YRC shares, trading recently around $2.50, have fallen more than 88% since last summer amid the company's financial woes and the overall recession.

Room On The Truck

Donald Broughton, an industry analyst with investment-banking firm Avondale Partners, is among those who contend a big bankruptcy would be a good thing for a sector wrestling with upwards of 20% too much capacity, although he declined to comment specifically on YRC.

Broughton said about 480 predominantly small trucking companies ceased operations during the first quarter, compared to 935 during the same period last year.

Volumes have fallen dramatically since late last year for virtually every industry linked to freight, from trucking to railroads to ports. The American Trucking Association's tonnage index slumped 13.2% in April, compared to the year-ago period, the biggest decline in 13 years.

Trucking companies have parked vehicles and laid off workers. Emmployment in the for-hire trucking industry through the first four months of 2009 is down by about 100,000 jobs, or 7%, compared to last year.

But Broughton said the moves haven't been sufficient to heal the sector overall. "It's unreasonable to expect that the (trucking) industry economics will get any better soon" absent a substantial reduction in capacity or a sudden snap-back in volume, he said, adding that prospects for the latter are dim.

Keybanc Capital Markets analyst Todd Fowler said a large company failure wouldn't cause much economic disruption for shippers because healthier carriers would quickly move in. He said Con-way Inc. (CNW) and Arkansas Best Corp. (ABFS) would be among the likely beneficiaries if YRC eventually files bankruptcy.

"In this environment, there is a lot of capacity that is available in other networks," Fowler said.

Con-way Chief Executive Douglas W. Stotlar concurred, saying he's prepared to respond immediately if a large amount of capacity exits the market, although he declined to comment specifically on YRC.

Stotlar said Con-way currently has about 900 trackers, or about 9% of its less-than-truckload fleet, sitting idle.

If a competitor were to cease operations, "that tonnage would be diverted tomorrow and (customers') freight would get covered," he said. "We could move a lot more tonnage through our network today, and I know we're not alone in that."

-By Bob Sechler; Dow Jones Newswires; 512-394-0285; bob.sechler@dowjones.com