For YRC Worldwide, it’s onto Plan B in the wake of the stunning rejection of a five-year deal to continue 15 percent wage and benefit cuts by its 26,000 Teamsters workers.
So what is next? Whatever road YRC chooses, it’s clear that shippers hold the key to long-term survival of the venerable 90-year-old company whose roots date to the golden age of trucking.
YRC officials were studying their options in the hours after the labor pact was rejected by a 61-39 percent margin. That sharp reversal of support from the Teamsters rank and file followed three votes that approved previous wage cuts—by 77 percent in January 2009, 58 percent in August 2009 and 62 percent in October 2010.
Most executives at rival LTL carriers believe YRC must have some contingency plan in the wake of the contract rejection. “Otherwise they would not have pushed for this vote so early ahead of the old contract expiring,” one rival LTL executive said privately.
YRC CEO James L. Welch made the continuation of those wage cuts until 2019 the linchpin of his efforts to refinance as much as $1 billion in long-term debt. Most of that debt was incurred by a pair of billion-dollar purchases, Roadway Express (in 2003) and USF Corp. (in 2005), engineered by then-CEO William Zollars, who left the company in 2011.
Welch is insisting it’s “business as usual” for YRC’s regional and long-haul units, which collectively are the largest group of LTL carriers in the nation, with more than $5 billion in revenue and 15,000 power units of capacity.
Welch is blaming the timing of his pitch to Teamsters, who were being asked to extend a five-year wage cut just days before Christmas. Many Teamsters balked. Privately, some Teamsters chafed at what they viewed a take-it-or-leave-it approach to bargaining.
Welch cut his deal with the national Teamsters freight organizing committee. The committee recommended passage, but did not negotiate in the traditional sense, leading to the belief by many YRC employees they were not being fully consulted on the measure.
“Our members have sacrificed billions of dollars in wages and pension benefits over the past five years and yet the company has been unable to recover from the disastrous policies of the previous management,” Teamsters President James P. “Jim” Hoffa said in a statement.
Whatever the Teamsters’ feelings, the financial noose is tightening. YRC is facing about $953 million in debt coming due in the next 15 months. It has a $69.4 million bond issue that matures on Feb. 15. It has $325.5 million of loans due in September and $556.7 million of loans and bonds maturing in March 2015. All told, YRC is operating with more debt than all the other publicly held LTL carriers combined.
“While we are disappointed in the outcome of the vote, we believe that timing of events related to our refinancing did not work in our favor,” Welch said in a statement. “Many employees had already returned their ballots prior to December 23, the date the company announced it had a refinancing agreement in place. We believe that was information employees needed to make a fully informed decision.
“Despite the vote results, it is business as usual as we have approximately 15,000 trucks on the road today serving 250,000 customers,” Welch continued. “We will keep our customers, employees and stakeholders advised of our efforts.”
Satish Jindel, principal of SJ Consulting, Pittsburgh, which closely tracks the LTL sector, says YRC’s fate largely rests in the hands of shippers and employees.
“There are really four groups—employees, customers, banks and shareholders,” Jindel told LM. “The banks and shareholders will not save the company. Employees and shippers will.”
While Jindel says YRC faces an uphill fight, it is not impossible. He drew distinct differences between YRC’s plight and that of fellow unionized long-haul carrier Consolidated Freightways, which suddenly closed on Labor Day 2002 following years of losses. YRC has lost in excess of $3.1 billion since 2006.
“They have a rough road, and it has gotten more difficult for them,” Jindel said. “But they are not running out of money, like CF. Management is different. They will fight until the last person is left on the ship before they jump off.”
Jindel estimates YRC has approximately $250 million in cash and cash equivalents on hand. That’s enough to handle operational losses and debt payments for the next six to nine months. “But that will not save them going into 2015,” Jindel warned.
What is needed is a sound long-term refinancing of a lion’s share of that $1.3 billion in long-term debt, Jindel said.
Toward that end, Jindel is recommending YRC management focus its attention on shippers and employees first, then lenders and finally shareholders.
“Shareholders are absolutely not of any importance; they will not save the company,” Jindel said. “If management spends its attention on employees and shippers, they will have better ability make changes to win support of employees to reconsider what they are asking. If they spend time worrying about shareholders, like the previous management did, time will go by very fast.”
Jason Seidl, trucking analyst with Cowen & Co., said in a note to investors that rival LTL carriers could see a “sudden surge” of new freight as YRC’s liquidity problems intensify in the wake of the rank-and-file rejection of the wage cut.
This freight diversion could be a death spiral that leads to a possible Chapter 7 or Chapter 11 bankruptcy. In the history of trucking, there has not been a single large carrier that has filed for bankruptcy and survived as an ongoing concern. That’s because shippers quickly flee to rival carriers.
For his part, Jindel is not worried about that. “Not at this point,” he said. “A lot of things can be done in a year. From a shipper’s point of view, they shouldn’t worry about needing to convert (to another carrier). As long as they have good service at the right price, there is no need to change.”
Analyst Seidl differs on that and said in his note to investors, “Bankruptcy cannot be ruled out at this point, in our opinion. Investors will recall that this is the second major liquidity debacle the company has faced in the last five years. On the heels of the last recession, the various YRCW stakeholder groups agreed to take a good deal of pain to help the company stave off bankruptcy.
“This was ultimately accomplished through massive equity dilution, which only pushed the liquidity issues to the back burner while the company attempted to focus on an operational turnaround to regain profitability and cash generation. We would not be surprised if the re-emergence of major balance sheet problems leads many stakeholders to the conclusion that bankruptcy may now be needed to restructure the company’s finances.”
Then, ominously, Seidl concluded, “Restructuring, however, will not likely work in the LTL industry.”
Even if bankruptcy is avoided or delayed, the uncertainty surrounding YRCW’s financial position could be enough to make customers “concerned,” Seidl said.
“Many of them may already be exploring the option of redirecting at least some freight to other carriers,” Seidl said “The likely leakage would help reduce the LTL industry’s capacity, providing a welcomed boost for pricing on existing business for carriers” where rate increases have been around 3 percent most of the last few months.
Among the potential winners from a YRC bankruptcy would be fellow long-haul unionized company ABF Freight, which just won a 6.5 percent wage concession last year, and non-union rivals Old Dominion Freight Line, Con-way, and FedEx Freight.
Teamsters for a Democratic Union, which has been vocal in its opposition to the Hoffa administration, is advising the International Union to “finally step up to the plate” and bargain immediately with YRC. That would help assuage YRC’s lenders and save Teamster jobs “without completely gutting the contract,” TDU said on its website.
“Teamsters at YRCW may accept an extension. They may accept some changes that they don’t like. But they won’t accept a complete giveaway, with no bargaining by their own union,” the TDU statement concluded. “26,000 Teamsters jobs in the heart of Teamster power are on the line. It’s time to forget politics and get to work saving Teamster jobs.