The Final Chapter

Last week's news moved Yellow closer and closer to CF status

“Save your strength for things that you can change
Forgive the ones you can't
You gotta let it go” - Zac Brown Band

***

Based on significant recent events, this is an update to my April post re: Yellow/UPS union negotiations. Things are playing out relatively as expected, with the union focusing more on UPS (and other opportunities) than on Yellow, as that is where the money and upside is and that is where its membership can grow. UPS added 80K Teamster jobs over the past decade. Yellow - none. The biggest change in the last few months has been the acceleration of Yellow’s troubles, leaving the company (again) on the verge of collapse. This piece will focus on the recent developments in the Yellow saga and why I believe the end is becoming clearer.

I do not expect Yellow to be in business next month.

The best summary of Yellow’s fight over the last 15 years is The Black Knight from Monty Python. Yellow is The Black Knight. But there is no fight anymore.

This will also be my last piece re: Yellow. My energy is better directed elsewhere. Think the Teamsters believe their energy is better directed elsewhere now, too.

I’ve followed Yellow my entire 23-year career. Sometimes with a front row seat and sometimes with a backstage pass. A couple times, I even got banned from the arena. But I was always watching.

When I took my first job out of college as an investment banking analyst at Deutsche Banc Alex. Brown, Yellow was our client. Coldplay also released its song “Yellow” that year. And “it was all Yellow” for us. Then-CEO Bill Zollars was at the beginning of his empire-builder phase and wanted to acquire another union carrier. He asked us, if he should buy Arkansas Best (ABF), Consolidated Freightways (CF), or Roadway. Well, ABF had 3x the margins of Yellow - they were too good to buy. Yellow and Roadway hated each other and had almost perfect network overlap, so it made no strategic sense. CF was the most complementary from a network and culture perspective, but in 2000-2001, they were already spinning down the vicious cycle, and we felt it was too far gone to be a good merger candidate. Nothing to do.

(But there was - just not on the M&A side. Yellow had to get rid of their non-union regional LTL operations ahead of the 2002 union contract negotiations so as not to be “double-breasting.” This was done in late 2001, spinning out an earlier version of what is now Saia, leaving Yellow as just a long-haul unionized LTL carrier.)

After moving to the research side at Legg Mason, I was shocked to see the headline come across in July 2003 - “Yellow Buys Roadway,” although maybe I shouldn’t have been. After seeing CF go belly-up in September 2002, Bill Zollars was trying to create his own “too big to fail” company before “too big to fail” was all the rage.

In 2005, the company (Yellow Roadway Corp.) acquired USF Corp. for a rich price. Limited strategic rationale. Just bigger. Zollars loved the top line brag and appearing on CNBC. Riding the housing bubble and general economic boom, the company’s revenue and earnings peaked in 2006. As volumes stalled and then fell, reality began to set in. Having a few separate union LTL carriers and holding a lot of debt all of a sudden didn’t look too sweet. Losses followed quickly.

Yellow’s problems seriously began in 3Q08, and they almost went under in 2009. In fact, the company had a shutdown plan ready to execute on multiple occasions. 

Key highlights -

• In January 2009, union workers at YRC Worldwide agreed to a 10% wage cut to “save the company” - with no snap-back provision and an elimination of COLA for the life of the contract. This broke the NMFA - all union carriers were not treated the same after this, with Yellow getting special favors and ABF having to pay full price.

• Further labor concessions (pay cuts) were taken in Aug 2009 to “save the company”

• The company almost closed in December 2009 (debt/equity swap) – bondholders “forced” to convert debt to equity to “save the company”

• YRC entered into sale-leaseback transactions for a good number of its service centers (and corporate office) to raise cash from 2008-2010 - some of these sale-leasebacks were to LTL competitors at double-digit lease rates.

• Another debt/equity swap was necessary in early 2011 to “save the company” - of course, this wiped out the previous debtholders who had converted to equity in 2009.

• January 2014 the company almost went under as well, if yet another restructuring was not agreed upon by lenders and workers. After three rounds of concessions prior, the Teamsters voted “no” on round 4, causing a panic. A revised proposal, though, was pushed through at the last minute. If not for James Welch coming back to the company to lead them through this, YRC would’ve been out of business 9-10 years ago, in my view.

• Tonnage has been falling and the network consolidating for 15 years

• Repeating message to union, labor, pension funds, and banks – “we need you to take less, or we fail” – this same song has been playing on repeat for 15 years. No amount of cost reduction or additional capital, though, has led to anywhere close to a sustainable business model.

I’m skipping over a lot of the details and history here. Throughout the above timeline, I was in regular contact with Teamster leaders, rank and file workers, and investors, getting a fuller picture of events, and providing them a perspective that was outside the management narrative.

At the end of 2008, the company had 711 service centers in N. America and $8.9bn in revenue. At the end of 2022, Yellow had 308 service centers and $5.2bn in revenue. In its most recent financial update (6/9/23), tonnage per day QTD y/y was DOWN 16.3% and revenue per ton was DOWN 2.7%, implying revenue DOWN ~19% y/y. The company is on pace to end 2023 closer to $4bn in revenue.

It is not “too big to fail”. Not even close. SJ Consulting Group estimated the LTL market size at $58.7bn for 2022, making Yellow just 8.9% of the market last year. Assuming a flat market y/y (pricing gains offset volume declines) in 2023, Yellow is on pace to be <7% of the LTL market by year-end. For comparison sake, CF was also just under 10% of the LTL market when it closed its doors Labor Day weekend of 2002. Yellow is no bigger than CF was when it went out.

And in today’s market, every LTL carrier has 10%-20% excess capacity in their network. If Yellow shut down tomorrow, the industry would absorb the freight fairly quickly - of course, there’d be some near-term indigestion, but that will get resolved by year-end. July-August is a seasonally soft period, so sooner would be better than later for carriers and shippers. And given the excess capacity in the system today, it should only modestly change the rate picture for shippers. There will be an uplift but not a spike in LTL prices post-Yellow. The floor will firm.

Last week, the following happened to bring this thing closer to the end, in my view.

• COC (6/27) – Congressional Oversight Commission report, citing lack of oversight with CARES Act lending related to Yellow – a struggling, unprofitable company who never should’ve received taxpayer funds.

• NYT 6/27) – here - more of a political bent re: COC report

• WSJ (6/27) – here - focused mainly on change of ops suit

• FreightWaves – (6/27, 6/28, 6/29, 6/30) – multiple stories on the situation from historical and competitive perspective, plus updates on news flow

• Other outlets covering – this story made it outside the transportation industry press, which has caused more alarm among shippers

• Yellow writes letter to White House (6/29) – this was a Hail Mary, but one has to expect Yellow fighting until the end and trying everything (“I’ll bite your legs off!”)  This is one of those attempts. However, the administration has already positioned itself to let this thing go, as reported above.    

Takeaways

The news of Yellow’s serious trouble has accelerated, become political (Biden administration and others have distanced themselves from the company and seem to be using Yellow as an example of careless relief aid given with taxpayer dollars to failing company under CARES Act and Trump administration), and moved beyond the transportation pages into the mainstream press.  This has alarmed more customers. Freight and employees are now leaving the company. The vicious cycle has begun, which should lead to Yellow disappearing from the LTL market for good, as early as this week – but almost certainly by the end of August.    

What is the vicious cycle?

In the LTL industry, and other businesses with relatively high fixed costs and significant operating leverage, things can compound up (virtuous cycle) or down (vicious cycle) with volume. Every day, Yellow needs to turn the lights on, pay its overhead, send PUD drivers out on local runs, have dockworkers show up to move the freight, and run trucks in linehaul ops between terminals. If freight is declining (remember: tonnage down 16% y/y in Apr-May and likely more in June), revenue is falling faster than costs, as trucks and drivers are still running, just with more empty space in the trailers. This forces costs to be cut, which translates into worse service, which leads to more tonnage declines, which leads to more cuts, which leads to worse service, more tonnage declines, and on and on until bankruptcy.

Yellow is not a healthy company. It’s in a vicious cycle. Employees are leaving. Teamsters won’t (and maybe can’t) give anymore. The government appears to no longer want to play this charity game, as it would just be throwing more money away. There is nothing worth supporting. We don’t see them recovering this time.

It’s amazing they made it this far. 99 years old this year. Almost made it to 100.

So, why would Yellow NOT go under? 

Most common arguments in italics.

“Because they haven’t before when in dire straits.”  That’s like saying the tree didn’t fall the last time an axe hit it.  Or the last 50 times. Well, the strikes keep coming, making the next axe hit more likely to fall the tree.  Not less likely, because the other attempts didn’t do the job.

“Because the Democrats/Biden administration won’t let a union company fail.”  Why not? This is not the same thing as the party/administration supporting unions.  They do support the unions. Especially the Teamsters. If the Teamsters (who have 1.2mm members) don’t support keeping 20K underpaid union workers around at a failing company, why would the administration care?  The administration is most likely aligned with the union (and all of their members), not the individual company. Teamsters President O’Brien doesn’t want to operate from a position of weakness and is finding strength in other negotiations.  He and the IBT support letting Yellow die to grow elsewhere, like Amazon.  There’s no growth at Yellow and no hope for a better financial future.  Plus, it’s a slap in the face to the other union LTL carriers (ABF and TForce) who are paying their workers higher wages than Yellow but competing for the same customers. This will eliminate a competitor operating with below-market union costs, increasing fairness on the playing field. 

“Shippers don’t want it, because they fear higher prices.”  Shippers have been leaving Yellow for 15 years, as the company’s volume keeps shrinking, down double-digits y/y right now.  If they really wanted to keep Yellow afloat, they would’ve paid them more money and rewarded them with more freight in recent years.  They haven’t done this, because Yellow does not provide a quality product. Service is below-average.  These (unfounded, in my view) fears have prevented a more rapid shift away from Yellow, but there is no support there long-term for the business. 

Those are the only arguments I’ve heard in recent weeks when discussing the situation with others.  Old arguments, like “they’re too big to fail,” are gone, as Yellow is now the same size as CF when CF went out of business in 2002, and there is plenty of excess capacity among competitors to absorb the freight with little disruption or market impact.  As for the lenders, their best hope of recovery is now, not later. The real estate still holds significant value, so no reason to fund future losses.

15-year-old saga almost over

I now believe there is an 80% chance Yellow shuts its doors for good between now and Labor Day.  In LTL, shippers should expect more of a firm pricing floor than a big pricing jump.  In the four quarters following the Consolidated Freightways (CF) bankruptcy in 2002, LTL yields among public carriers rose 7.4%, on average.  And that was following two years of negative y/y yields.  If LTL contract rate increases are 4%-5% now, maybe they go to 5%-7% for a short period.  3PL rates will tighten quickest, as they have been softest year-to-date. Shippers will digest this more easily than they think.  Carriers just need to make sure they have a plan in place to sort through what freight they accept and how to limit shipments in their network to avoid taking too much. This will be an opportunity for all remaining players to improve volumes and density, but they need to be smart about it.

The Teamsters are moving on, and UPS will get most of the attention in the coming weeks. This time next year, Yellow will pretty much be forgotten, and things should be functioning normally in the freight world. CEO Darren Hawkins has fought the good fight, but he’s basically been playing with a 2/7 off-suit for years. He will continue to do whatever he can until the end, but we think the end is here.

***

Past Posts

• Beyond Logistics post #1 re: Trucking 101 —> here

• Beyond Logistics post #2 re: Life —> here

• Beyond Logistics post #3 re: Pricing —> here

• Beyond Logistics post #4 re: Communication —> here

• Beyond Logistics post #5 re: Technology —> here

• Beyond Logistics post #6 re: 3PL trends —> here

• Beyond Logistics post #7 re: Lessons from Comics —> here

• Beyond Logistics post #8 re: Cleaning Up Inside —> here

• Beyond Logistics post #9 re: All Bad Things Must End —> here

• Beyond Logistics post #10 re: Better Questions —> here

• Beyond Logistics post #11 re: 2023 outlook —> here

• Beyond Logistics post #12 re: Anti-Fragile —> here

• Beyond Logistics post #13 re: Union Negotiations - UPS/Yellow —> here

***

About the author: Dave Ross currently serves as Chief Strategy Officer at Ascent and EVP at Roadrunner. Prior to his current roles, he was Managing Director and Group Head of Stifel’s Transportation & Logistics Equity Research practice, where he was a top-ranked Wall St. analyst and spent >20 years researching and writing on the freight transportation & logistics industry. Based in Miami, FL, he’s a connector, advisor, artist, investor, dog dad, and serves on a few select non-profit boards (CTAOP, Humane Society, and Fountainhead).

** All opinions in this piece are solely those of the author and not intended to represent those of Ascent Global Logistics or Roadrunner or other affiliated entities.

Thanks for reading Beyond Logistics! Subscribe for free to receive new posts and support my work.