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Trucking company failures declined to 370 during the second quarter, plunging 61.9% from the 970 recorded a year earlier, despite the economic turmoil that has sent fleet profits reeling. But the stock analyst who prepared the data warned that the bankruptcy improvement wasn’t a sign of better times.

Donald Broughton of Avondale Partners said there weren’t more bankruptcies, largely because banks were reluctant to foreclose on delinquent loans when used equipment prices are so low. He said more failures by weaker carriers are needed to keep the overall industry healthy, and that lenders who have granted repeated forbearances on nonperforming equipment loans while waiting for a strong economic recovery have “simply purchased a longer fuse in exchange for a bigger bomb.”

“We seem to have an increasing number of companies who are practicing what one of our favorite trucking CEOs calls ‘sport trucking’ because they certainly aren’t doing if for a profit,” Broughton said in his Aug. 17 report to clients. “In the end, it is difficult for the legitimate and financially viable firms to compete against someone who doesn’t have to make a truck payment, or at least hasn’t had to make one for nine months.”

However, Kevin Burch, chairman of the Truckload Carriers Association, questioned the wisdom of calling for an increase in carrier failures to clear out capacity.

“It’s a free market, and you have to be careful in asking for what you want in talking about people going out of business,” said Burch, who is also president of Jet Express in Dayton, Ohio.

“Some truckload carriers have started to see more orders for business related to General Motors’ reorganization,” Burch said, adding that cutting too much capacity now could wreak shipping havoc when the economy does improve.

Burch also said that the stories he hears most frequently about lenders is that they are tightening letters of credit for working capital, which makes it more difficult for carriers to do business.

“We have TCA members seeing their letters of credit lowered or tightened or not renewed,” said Burch. “These are more important than ever for operation. In some cases, people are treated like banks don’t know them, even though they’ve had long-time relationships. It’s a serious issue.”

The pattern of bankruptcies has tended to follow fuel prices up and down. During the first half of 2007, carriers closed at a rate of fewer than 500 a quarter. In the second half of that year, the rate accelerated to more than 500 a quarter.

Then in the first half of last year, the bankruptcy rate exploded to 935 in the first quarter and 970 in the second quarter.

Broughton said soaring diesel prices in the first half of 2008 were the crucial event that led to the failures (click here for previous story).

When fuel prices deflated, so did the failure rate. Only 375 fleets closed during the fourth quarter last year, and 480 shut their doors during first three months of this year (click here for previous story).

Broughton said in an interview that he sympathized with fleet executives struggling to keep their businesses afloat during an un-commonly bad economy. As an investment analyst, however, he said it’s impossible to escape the view that “there’s still too much capacity in the trucking industry now. If fewer closings were taking place in the face of stronger demand, we could all celebrate. But demand for trucking is still weak, and if more weak companies left, the remaining players would do better.”

Some industry executives agreed. Stephen Russell, Celadon Group’s chairman and CEO, assessed the industry while discussing Celadon’s second-quarter results on Aug. 12.

“June represented the ninth consecutive month of year-to-year [tonnage] decline. Volumes in the industry are weak. Further, rates have dropped significantly, compared to prior years, as some fleets are willing to bid at clearly noncompensatory levels to keep their trucks running, although spot rates in certain pockets of the market have shown some strength in the last two months,” Russell said, according to a transcript provided by Bloomberg News.

“Bid process by many shippers has resulted in very aggressive low pricing. Coupled with this supply-demand situation, used truck and used trailer prices have dropped over the past nine months dramatically, in many cases, well below what trucking companies owe to their banks. As a result, in today’s environments, banks are unwilling to call their loans and shut down fleets while concurrently, and in most cases, unwilling to provide working capital loans to weak fleets,” Russell said.

“As a consequence of this situation, it has resulted in some fleets having closed or filed bankruptcy, but far less than we would have expected, because banks don’t want to pull the plug,” he said.