After acquiring the regional trucking operator USF for $1.37 billion in May 2005, YRC Worldwide Chairman, President and CEO William D. Zollars said he wanted his business to be “one of the four or five carriers left standing” after the next round of consolidation.
YRC certainly is still standing, but hardly in the way Zollars envisioned when he built the business into the largest industrial trucking operation in the United States, one commanding a huge share of less-than-truckload business, a share so big it had the opportunity to bring its own order to a highly fragmented market.
The company is standing largely because of support from the Teamsters union and YRC’s lenders after staggering losses that would have bankrupted almost any other trucker and made the carrier’s survival through a series of high-wire financial rescues perhaps the most important question mark hovering over the U.S. trucking industry.
That’s because even after reducing its scale by more than half through a series of operational and financial restructurings, and because of lost business, YRC’s various trucking units still hold 14 percent of LTL trucking market, according to SJ Consulting Group. The company also serves thousands of shipping customers, including many who say they can’t afford to lose the capacity and the equilibrium YRC brings to the market.
“Shippers ought to be desperately pulling for YRC to succeed,” said Mike Regan, president of TranzAct Technologies, which provides services to a broad range of U.S. shippers. “If YRC goes out of business, you will see a significant uptick in LTL rates.”
A YRC Worldwide bankruptcy “would be tragic,” said Doug Waggoner, president of Echo Global Logistics. “For one, competition is good. Second, if you think about long-haul LTL carriers, there aren’t many left.”
YRC Worldwide faces its most sweeping financial restructuring next month, a recapitalization that would put most of the company’s stock in the hands of its banking group, led by JPMorgan Chase, and its Teamsters employees.
If that restructuring is completed as planned on July 22, Zollars said last year he will step down as chairman, president and CEO of the company he has led since 1999, orchestrating both its rapid ascension and its struggle to avoid bankruptcy.
Zollars’ departure will signal a new era for a trucking giant that got its start in 1924 and has been reinvented several times over the decades — even surviving court-supervised bankruptcy reorganization in the 1950s. However, the trucking company, once the nation’s largest, needs to turn itself around before it runs out of road or its next era won’t be a long one.
Can a new chief executive and a new, largely bank-appointed board of directors save YRC Worldwide and offer the long-term stability the carrier needs to survive? Will YRC be able to rebuild? Or might it, as some analysts suggest, just run out of cash?
Despite strong headwinds from its diminished scale and its efforts to restructure operations while maintaining service, YRC Worldwide can survive, but the carrier won’t be the juggernaut Zollars tried to create for some time to come, if ever again. Financial restructuring alone won’t save YRC either, although it will buy the company time to rebuild.
“The market needs long-haul LTL carriers, but they probably need a different kind of long-haul carrier than YRC has been,” said one logistics executive who requested anonymity. “They’re trying to live another day so they can become that carrier.”
The company’s success will hinge on whether its new leadership can execute on the LTL carrier’s promises, regain the shippers it lost in the downsizing, maintain its existing customer base, and rediscover how to make a profit after losing more than $2.5 billion since 2006.
At worst, the company could burn through the cash from its restructuring at some point in 2012, and face another restructuring or threat of bankruptcy. YRC Worldwide is working under another plan, however, to keep building on the volume growth the carrier has seen this year until it can regain its balance and start making a profit.
At least YRC is no longer leaking shippers. It is adding freight now, as its first quarter results show, but has to translate that volume into profit and higher freight rates, perhaps its toughest challenge yet.
All that would be a tall order even without an economic recovery that slipped into neutral last month and the prospect of higher and more volatile operating costs. YRC Worldwide’s margin of safety may be slimmer than most LTL profit margins.
“We believe the company’s financial position remains tenuous,” equity research firm Wolfe Trahan said in a report released June 6. “We still believe YRC Worldwide could run out of cash sometime in 2012 unless recent operating trends improve.”
YRC Worldwide has resumed union pension contributions at a reduced level, and will have to resume some interest payments after the recapitalization, which may eat into its restructuring gains unless it builds up more cash, Wolfe Trahan said.
Sidebar: Rate of Recovery.
The company’s financial situation “remains dire,” and “almost nearly immediately unsustainable without a financial restructuring,” Stifel Nicolaus analyst David G. Ross, one of YRC’s harshest Wall Street critics, said in a May 9 note to investors.
But those warnings have come before, and the carrier has persisted. Other industry observers say the financial overhaul that has reduced crushing debt obligations clears the way for an operational recovery that remains challenging but would be built on clear trucking operating fundamentals.
“At this point, we believe it is likely that YRC Worldwide will survive in the medium term, and going forward, the company’s operational improvement is most important,” J.P. Morgan analyst Thomas R. Wadewitz said in a note to investors.
Regan said rebuilding the network to be profitable would be the best outcome for shippers. “The myth we’re operating under is that there is global overcapacity in the LTL market, so that YRC going out wouldn’t be a bad thing,” he said. “We know that’s not true. There are many major lanes where carriers are running at nearly full capacity.”
Although YRC Worldwide is a much smaller enterprise than it was five years ago — its annual revenue plunged from $9.9 billion in 2006 to $4.3 billion last year — its five LTL subsidiaries still account for a substantial amount of freight.
YRC Worldwide is the second-largest LTL operator in the country ranked by revenue, following FedEx Freight. YRC National is the third-largest LTL carrier, after FedEx Freight and Con-way Freight, according to SJ Consulting Group. YRC National and YRC Regional combined handled more than 3.4 million tons of freight in the first quarter of 2010, with YRC National handling approximately 1.7 million tons and YRC Regional 1.8 million tons.
The company says it has more than 350,000 shipper customers.
“If you look at the amount of tonnage they move, they’re a real factor in the marketplace,” said Chris Kane, chief customer officer at Kane Is Able, a Scranton, Pa.-based regional trucking operator and nationwide third-party logistics company.
Shippers expecting their LTL costs to rise on average 2.5 percent over the next 12 months — the figure cited by Wolfe Trahan in its second-quarter shipper survey — would get a sharp shock that might not be so short if some of that capacity vanished.
Other carriers would benefit, at least in the short-term, along with shareholders of publicly owned trucking companies who likely would see share prices jump.
But the impact of the loss of a carrier YRC’s size also would likely spread beyond the LTL marketplace and ripple across supply chains and other modes. Other LTL carriers would jump to fill service gaps, but it would be a messy process, and not a cheap one for shippers already concerned about rising operating costs in a sluggish economic recovery.
There would be little relief for shippers from other sectors of trucking or modes of transportation. Truckload capacity is already tight, and truckload rates have been rising. A shift from LTL to truckload through load consolidation would be difficult and costly.
“If we lose YRC, you tell me what your long-haul network will look like,” Regan said. There’s still demand for long-haul LTL service, he said, pointing out that carriers such as Old Dominion Freight Line are extending their length of haul.
YRC Worldwide’s struggles already have reshaped trucking competition and been felt at other carriers. Several LTL carriers, led by FedEx Freight and Con-way Freight, fought a bitter price war in 2009, discounting rates to the point of no return in an effort to secure freight, gain market share and, perhaps, finish off YRC Worldwide. They did increase market share — FedEx Freight passed YRC Worldwide to become the largest LTL trucking operator in 2010 — but at a high price in losses, which led to management changes at FedEx Freight and Con-way Freight last year.
When YRC survived a close brush with bankruptcy in 2009 by winning a $470 million debt-for-equity swap, it added miles to the road to recovery for the rest of the LTL industry and forced other carriers to focus on achieving and sustaining profitability rather than becoming the biggest LTL carrier on the planet.
If an emphasis on sustainable profitability reshapes trucking, it will be, in part, because of YRC’s survival.
Despite its $102 million first quarter loss, there are signs the odds for YRC’s survival are improving, said Satish Jindel, president of SJ Consulting Group.
For one, that first quarter loss was a $172 million improvement from the first quarter of 2010. At 107 percent, YRC National had one of the worst operating ratios in the industry, but it was almost 21 percentage points better than a year ago.
That’s the biggest OR improvement in the LTL industry, Jindel said.
YRC and YRC Reimer, the two carriers that make up YRC National, increased revenue 10.1 percent year-over-year, while the three carriers of YRC Regional — Holland, New Penn and Reddaway — raised revenue 18.4 percent. YRC National increased its tonnage per day 7.9 percent year-over-year and 1.4 percent from the fourth quarter, while tons per day at YRC Regional increased 16.2 percent from a year ago and 0.5 percent from the last quarter of 2010.
Shipments per day increased 6.3 percent year-over-year and 1.7 percent sequentially for the YRC’s nationwide carrier. At YRC Regional, shipments per day were up 9.8 percent from a year earlier, but were down 2.1 percent from the fourth quarter.
“From my perspective, they are doing all the right things,” Jindel said. “The question is, are they doing them fast enough, and that’s a valid question.”
YRC Worldwide’s board needs to quickly find and install a new CEO to replace Zollars and a new chief financial officer to take over from interim CFO William L. Trubeck,“and they need to start getting some price improvement,” Jindel said. “They are in a situation where they need profitable freight, not just freight.”
And there’s the rub. “In this industry, it’s easy to grow, but hard to grow profitably,” said an LTL executive who asked not to be identified.
Contact William B. Cassidy at firstname.lastname@example.org.