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Is the Teamsters Union to Blame for YRC's Troubles?

"Some companies in our position have simply declared bankruptcy. We have all worked too hard and sacrificed too much to go that route."
YRC Worldwide CEO James Welch

With a stock price that's dropped 75% since July, and a CEO preaching fire-and-brimstone warnings of impending bankruptcy, YRC Worldwide (NASDAQ: YRCW  ) is clearly a company in dire straits. But who's to blame for its troubles?

Round up the usual suspects
Some might blame prior management. In fact, YRC CEO James Welch recently came out and accused his predecessors of dooming the company by entering into a "spending free [that] saddled us with crushing debt of $1.4 billion -- nearly as much as all of our publicly traded competitors combined."

Bankers also caught flak in Welch's latest memo to employees, as the CEO noted that every year, interest payments on YRC's massive debt put "more than $150 million ... into the pockets of our lenders."

But whatever Welch might think of his bankers, the cold, hard fact is that they're the folks holding the IOUs. They're the people to whom YRC must go begging for new loan terms. Meanwhile, the bankers point fingers at YRC's own employees and demand the company secure a new five-year labor contract. If YRC wants its debt rolled over, the company must first persuade its employees to accept limits on pay and benefits increases, plus other labor concessions.

Driving off a cliff? Illustration source: Nov. 5, 2013 YRC Worldwide presentation (link opens a PDF) to Teamsters union.

A funny thing happened on the way to the bankruptcy
But if YRC needs a favor from its workers, it's got a funny way of asking for it. In a presentation to the Teamsters Union last week, outlining why it feels it needs a new contract, YRC gave itself a pat on the back for having "paid billions in Teamster employee wages" since 2009. At the same time, Welch made a point of noting that in YRC's less-than-truckload, or LTL, transportation industry, "non-union" labor is the norm.

Implying that its own unionized labor force is part of the problem, YRC observed: "YRC Worldwide's market share has dropped from 42% to 17%" over the past 18 years, while "the market share of non-union carriers has jumped 337%."

Precisely why YRC thinks that unionization of its workers translates into lost market share, it doesn't say. But YRC does seem to imply that there is a connection -- and that it has something to do with those "billions in Teamster employee wages" it's paid out over the past few years.

But are high wages really the problem at YRC? Are wages so high that they're preventing the company from competing effectively "in an industry that is now dominated by non-union LTL companies," as Welch puts it? Let's look at the facts.

Following is a chart showing YRC and four key competitors in the LTL transport space -- UPS (NYSE: UPS  ) and Arkansas Best Freight Lines (NASDAQ: ARCB  ) , where the workforces are majority unionized, and FedEx (NYSE: FDX  ) and Old Dominion Freight Line (NASDAQ: ODFL  ) , both of which are non-union shops. The chart shows how much each of these companies spends on wages, salaries, and benefits, as a percentage of the revenue it takes in in a year:

As you can see, YRC has a point -- to an extent. Its labor compensation costs are higher than what non-unionized rivals FedEx and Old Dominion have to pay to run their businesses. On the other hand, when compared with the other unionized shops, YRC already pays lower wages, salaries, and benefits, as a percentage of revenue, than do rivals UPS and Arkansas Best.

Yet UPS is solidly profitable, despite nearly five percentage points (of revenue) more on employee compensation than YRC -- and 23.5 percentage points more than archrival FedEx. Arkansas Best, if not generating actual "GAAP" profits, at least generates strong free cash flow from its business -- more than $70 million over the past 12 months. YRC Worldwide does not. It's not earning profits, and it's not generating positive free cash flow.

Foolish takeaway
Higher labor expense clearly plays a role in how profitable each of these companies is. It's a contributing factor in why FedEx is able to generate stronger operating profit margins than UPS. However, the real problem at YRC isn't wages but debt -- the $1.4 billion "crushing debt" to which Welch alludes.

If YRC were to cut that debt load in half, for example, by selling new shares to raise cash and pay down debt -- or through a recapitalization plan such as it executed two years ago -- that would bring the company within spitting distance of profitability, and financial viability.

Such a "rip the Band-Aid off solution" would, of course, be painful. It would spell disaster for current shareholders, who would find their stakes in the company diluted down to all but zero. The company's current plan, though -- demanding concessions from workers, and then rolling over the debt, promises to only draw out the process, and extend the suffering of everyone concerned.

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Read/Post Comments (5) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 12, 2013, at 1:12 AM, prginww wrote:

    YRC's profitability problems are really caused by the growth of regional and contract carriers around the country as well as Fedx and UPS's entry into the LTL market. UPS and Fedx have cornered the small package market with almost monopolistic pricing strategies (just watch for the January price increases from these two, they are almost always the same.) profits from that segment greatly overshadow the financial performance from their LTL divisions. The huge national network of YRC, made worse by the acquisition of Roadway, may well be obsolete and they may be destined to fail.

  • Report this Comment On November 12, 2013, at 10:06 AM, prginww wrote:

    YRC may have difficulty convincing their union members to accept further concessions, when it is evident from data in the proxy statement and recent sec filings that management is still enriching itself. Per a filing with the SEC noted on the YRCW website, just last week the CFO saw vesting of over $160,000 in restricted stock (which would have been worth over half a million dollars, if the stock price hadn't cratered recently.) I'm not debating the merits of their compensation, just noting that it may affect the voting of their teamsters.

  • Report this Comment On November 12, 2013, at 4:07 PM, prginww wrote:

    The graphic shown only represents part of the story. Operating costs not only include wages, but operational efficiencies that aren't seen here.

    UPS Freight posts profits in the hundreds of millions in most quarters yet they have thousands of fewer drivers. It's all about operating an efficient company that then has the ability to pay higher wages.

    The problems with YRC begins and ends with their debt load with a major contributing factor being the merger of Yellow and Roadway and their inability to making it efficient.

  • Report this Comment On November 12, 2013, at 9:15 PM, prginww wrote:

    This is really bull. Since YRC is now taking 15% of the union workers salary for them to work there, they are now making less money than the Non Union workers in the Lexington Kentucky area.

    Why don't the CEO and President start giving up some of his millions? Its a slap in the face to take money out of your workers pockets to put in a CEO's pocket when he only runs the company in the ground. Its poor management that is the problem with YRC not the workers or their benefits.

  • Report this Comment On December 16, 2013, at 10:36 PM, prginww wrote:

    YRC should have left the new concession deal open for negoiations in stead of cramming this crap down our throat with no time to rebutal. I think this would have more of a chance of passing if they would approach us with a no wage, no profit sharing and no signing bonus but got back into our pension(fully). They refuse to freeze Corporate Bully's wages and bonuses will not post them publicly for the duration of the contract. Our member's have given back enough money to pay down the debt consideralbly and YRC didnt due it. From the 15% reduction they were to pay down the debt and compete with "nonunion" carriers. My terminal has had NO growth since. In fact, I work less months(days) a year now than I did at full scale. So why would I vote for more time off? The bonuses they want to pay for the next two years for YRC and the regional carriers from my figures equal $50 million dollars for both years. With that and the millions of dollars in corporate bonuses and the millions upon millions of dollars of wage savings, that could wipe out the debt very rapid. All we ask is to get back in the pension. But all in all noone ask the rank and file members. Hey Welch I got a plan B also but Im not voting to give you no more of my money. Do your job! You said in your last company news letter management needs to listen better to the labor force and your first chance to you failed to do so. Merry Christmas to you to. Didnt you buy your kids some argile socks with your $250,000(or more) bonus. I bought my kids 15% less than I did last year.

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