"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.
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.
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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