Yellow’s days are numbered.
As the largest less-than-truckload (LTL) unionized carrier and the second-largest trucking company affiliated with the International Brotherhood of Teamsters (UPS is the largest), Yellow has suffered from financial mediocrity that has led to the inevitable outcome.
The Teamsters leadership is largely responsible for its own demise, forcing an operational structure that has made it impossible for Yellow to compete against higher-quality operators delivering more consistent and reliable service offerings. A lack of flexibility in staffing levels and operations that would allow unionized carriers to respond to freight market volatility means these carriers are always at a disadvantage to their non-unionized competitors.
While Yellow’s current executive management is highly competent, the task of turning the largest unionized LTL carrier from the die that was cast decades ago has been a nearly impossible task. Yellow has faced bankruptcy several times over the past two decades because it was saddled with too much debt and operational complexities after an acquisition binge that was instigated in the early 2000s.
Bill Zollars, the CEO of Yellow from 1999 to 2011, dreamed of creating a unionized LTL super-carrier when he consolidated Yellow with Roadway and USF. These carriers were among the few trucking companies left from the pre-deregulation era, when the Teamsters were the most powerful force in the industry. During the period when trucking was regulated by the federal Interstate Commerce Commission, or ICC, unions prospered along with the trucking companies, in large part because pricing and competition were limited by the ICC.
Trucking unions and deregulation are not compatible
Transportation and logistics have been instrumental to the economic prosperity of the United States since 1980.
From 1935 until 1980, all interstate transportation service lanes — and the prices trucking companies could charge on those lanes — were regulated by the ICC. If a carrier wanted to change a rate or add a new service lane, it had to seek ICC approval first. This was a slow and cumbersome process that severely impacted economic growth. Prior to deregulation, trucking companies held the economy back with lousy service, lack of flexibility, and high rates.
Owning a motor carrier under the ICC regime meant high profits and protection from competition. In that era, unions made sense because profit margins for owners were fat, and due to the fixed nature of rates and service, operational flexibility wasn’t required.
During the Carter administration, the airline, railroad and trucking industries were all deregulated, removing governmental control over the number of carriers, their routes, pricing and other services.
Over the last 43 years, the trucking industry has transitioned from an antiquated system to a landscape in which any carrier can service any lane or region it wishes to. Rates are no longer under bureaucratic control; instead, market participants — namely shippers, carriers and brokers — call the shots.
Customers largely benefited with far lower transportation costs and an infinite number of service options. The just-in-time transportation networks that drive much of our modern economy wouldn’t have been possible without transportation deregulation.
Thousands of new companies entered the trucking industry in the deregulated market, and most of the new trucking companies did not (and do not) have the burden of a union workforce. Non-union trucking companies thrived in the deregulated market, introducing higher quality service offerings, flexibility, and far lower pricing for shippers.
By contrast, many of the unionized carriers were saddled with a lack of flexibility, high labor costs and abysmal service offerings. This put them at a significant competitive disadvantage. Most failed.
Yellow becomes a unionized conglomerate through consolidation
In 2002, unionized carrier Consolidated Freightways (CF) filed for bankruptcy and shut down. It was the largest trucking bankruptcy in history, costing 15,500 employees their jobs and shuttering a $2 billion LTL operator.
After taking the helm as CEO of Yellow, Zollars believed that the best way for the unionized carriers to compete against their non-union competitors was through economies of scale. Riding the momentum of volume gains from freight that was previously handled by CF, Yellow acquired Roadway in 2003 and USF in 2005. Yellow was renamed “Yellow Roadway Consolidated Worldwide (YRC).”
Under Zollars, Yellow borrowed heavily to acquire Roadway and USF, saddling the carrier with massive amounts of debt. He believed that he could gain greater leverage over labor negotiations with the Teamsters because of the number of unionized employees at the new company. He also believed the Teamsters would support the carrier conglomerate’s goal of achieving operational efficiencies between its various subsidiaries.
Unfortunately, Zollars’ big bet didn’t work out
In 2006, a year after the USF acquisition, the freight market went into a recession.
As the freight market sputtered along, one of the biggest economic downturns in American history occurred: the Great Recession of 2008-09. The economic crisis severely impacted the LTL industry, prompting carriers to engage in pricing wars. LTL carriers saw a significant and simultaneous deterioration in volumes and rates.
In 2006, YRC’s revenues were $9.9 billion. By 2009, revenues were down a staggering 40% to $5.3 billion.
Unfortunately, YRC couldn’t react to the market dynamics as quickly as its non-unionized competitors and faced imminent bankruptcy. Drivers for the company made far more than their counterparts at non-union companies and also had a lucrative pension and other benefits — uncommon in the deregulated trucking industry.
Led by Jimmy Hoffa Jr., the Teamsters understood the incredibly challenging conditions that YRC was in. Hoffa also understood that alternative employment opportunities for Teamsters were few and far between in this midst of the financial crisis.
Over a period of years, Hoffa and the Teamsters agreed to a number of major concessions that saved YRC.
For example, in 2009, the Teamsters agreed to wage reductions of 15% and a sharp reduction in the company’s contribution to the pension plan. The Teamsters also agreed to allow Yellow to consolidate operations with Roadway, creating a far more efficient business, with fewer duplicative terminals and equipment. These cost reductions and efficiencies helped the company survive its short-term cash crisis, but it was far from out of the woods.
The company had to restructure its massive debt, implementing 21 credit amendments between 2009 and 2011.
In mid-2009, Yellow exchanged pension payments for real estate, avoiding a default. In late 2009, Yellow exchanged $470 million in debt for 94% of the shares in the company.
Unfortunately, this didn’t work out for the new shareholders, because those shares were diluted once again in 2011. That financial restructuring wiped out nearly all of their equity in the company, leaving them with just a 2.5% stake.
This massive dilution helped the company avoid bankruptcy once again, but it wasn’t the end of YRC’s woes.
In 2014, the company faced bankruptcy once again when it attempted to renegotiate $1.4 billion in debt that had matured. YRC was able to secure $300 million, but only on the condition that the Teamsters would accept 15% in wage cuts and other concessions. The union initially rejected the refinancing, but finally accepted it after the company reduced the cuts to union benefits and compensation.
In 2019, YRC’s new contract with the Teamsters forced the company to increase wages by 18% over five years. YRC lost $104 million that year.
COVID nearly killed Yellow, but the US Treasury stepped in
Unfortunately, YRC’s prospects didn’t improve in 2020 when COVID hit, forcing the company to contend with 20%+ volume declines.
As a unionized carrier, it once again did not enjoy the flexibility that its non-union competitors had in addressing costs.
On May 11, 2020, YRC stated that there was “substantial doubt” about its ability “to continue as a going concern,” in its first-quarter filing with the U.S. Securities and Exchange Commission.
This was quickly dealt with, however, in a controversial bailout by the U.S. Treasury Department. The carrier gave 30% ownership of the company to the federal government in return for a $700 million loan. The loans are priced at LIBOR plus 3.5% and mature in September 2024 — now just 15 months away.
The justification for the loans was that Yellow was a major carrier for the U.S Department of Defense and if the carrier shuttered, it would disrupt transportation services for the military. It was later determined that this was nonsense, as other carriers in the LTL market could easily handle Yellow’s freight volume should it shut down.
In May 2022, YRC changed its corporate name to Yellow and implemented a strategy known as “One Yellow,” with the goal of consolidating its various subsidiaries into super-regional carriers under the Yellow banner. The goal was to eliminate duplicate linehaul networks and to drive efficiencies through the consolidation of facilities, staff, and equipment under the One Yellow banner.
The Teamsters initially supported the changes, allowing Yellow to pursue consolidation in its operations in the western U.S. Unfortunately, the cooperation was short-lived. By June 2023, as Yellow pursued more changes, including the shuttering of some terminals, redefining its employee work rules, and expansion of its use of purchased transportation (outside carriers), the union started to aggressively push back.
According to Yellow management, all of these changes were necessary for company viability.
Earlier this month, Yellow management notified the Teamsters that the company will be out of money by August. To date, it has only paid $230 million of the $700 million loan.
“Yellow has been unable to effectively manage itself for a long time,” said Sean O’Brien, Teamsters general president, in a video to members. “Now, the company says it’ll be out of money by August. Do not forget: Teamsters have already given back everything they possibly could to keep Yellow afloat.”
Yellow management insists that structural changes to its labor relations and network are necessary for the company to stay afloat, stating that the changes are necessary to avoid “Yellow’s economic ruin.” It is currently suing the Teamsters for $137 million in damages it claims are owed due to the union’s opposition to its attempt to overhaul company operations.
Yellow management cites a 33% drop in tonnage volume over the past two years as a primary justification for the proposed changes.
In the lawsuit, Yellow disclosed that it has $168 million in liquidity, having burned through more than $109 million over the past year. The company stated it would run out of cash by mid-August and would be forced into liquidation.
While a restructuring is always possible, the chances of that are quite small
Yellow has been a “zombie company” for the past two decades, barely surviving. Its frequent flirtations with bankruptcy — as well as its relationship with the Teamsters — makes it undesirable for investors (even those with appetites for aggressive risk).
Yellow is largely regarded as a low-priced carrier with inferior service, much of this due to the limitations imposed on the company by its unionized labor. A unionized LTL carrier is a legacy of a bygone era when the government restricted competition, thus protecting labor from the volatility of the freight market and the tight margins in trucking.
If Yellow does shut down this year, it will become the largest bankruptcy in trucking history, representing 10% of the LTL market at $5.1 billion in revenues. More than 30,000 employees will be out of work, over twice as many as when Consolidated Freightways shut down.
Such an outcome would also be a significant blow to the Teamsters, which hold a great deal of power over whether Yellow survives or dies. If the Teamsters decide to hold their ground on potential concessions, they will only have themselves to blame when they wipe out 22,000 union jobs.
Those jobs are likely to never return, as unions are not compatible with modern trucking.