By John D. Schulz · July 22, 2020
Trucking’s competitive dynamics changed mightily on July 1 with the U.S. government’s infusion of $700 million in a badly needed financial lifeline for ailing trucking giant YRC Worldwide. YRC companies control about 10% of the $46 billion less-than-truckload (LTL) market.
Rival LTL carrier executives and YRC customers were stunned by what is the largest freight financial transportation assistance from the American government for a non-airline company.
YRC, which collectively owns YRC Freight (the fourth-largest LTL carrier) and three regional subsidiaries, will do in excess of $4.4 billion in revenue this year. It has lost in excess of $2 billion since its questionable purchase of long-haul rival Roadway Express for $1.1 billion in 2003.
Rival carriers that compete both in the long-haul sector against YRC Freight and in the burgeoning regional LTL markets with New Penn, Holland and Reddaway had been privately hoping for YRC’s demise for more than a decade.
Quietly, some rival carriers had even begun gaming what the LTL landscape would look like without YRC. It’s the same tactical planning carriers did preceding the “what-if?” scenarios before the bankruptcy of $3 billion LTL giant Consolidated Freightways on Labor Day 2002. Although unseemly, competitors seemed ready to pounce on YRC’s carcass.
That’s because parent YRC Worldwide has flirted with Chapter 11 bankruptcy for most of this century. It has tiptoed to the edge of its financial covenants while repeatedly restructuring as much as $1 billion in long-term loans.
For the short term, those worries are over. The federal government’s infusion of $700 million in loans (due in 2024) gives YRC financial wiggle room that it has long needed. One analyst even joked that perhaps YRC should change its moniker to RW&B – for “Red, White and Blue,” considering the government now has taken a 29.4% equity stake in the company.
Joking aside, what does this really mean for the LTL market specifically, and the overall $700 billion trucking market in general?
“We believe the other LTL stocks reflect at least some potential for YRCW to go out of business,” Scott Group of Wolfe Research said in a note to investors entitled “The Cat With 20 Lives – Lifeline from the Government.”]
The report added, “So with YRCW now seemingly assured to survive this recession, we view (this) news as a near-term negative for the other LTL stocks. Longer term, we still believe the non-union carriers should gain share from YRCW over time.”
But the report said the first portion of the loan — $350 million for capital expenditures – “could help it (YRC) narrow its service gap relative to peers,” the Wolfe report said. “So perhaps the pace of long-term share gains for the other LTLs could moderate some.”
According to analysts and rival carrier executives, in the short term it assures YRC as a valuable player in the LTL market place. The principal reason YRC was able to obtain the $700 million loan – YRC officials bristle at the term “bailout” and say they fully intend to make good on the loan – is YRC’s strategic national defense asset for the government.
According to officials from both the company and government, YRC is a “leading provider of critical military transportation” and other hauling services for the U.S. government. Treasury said YRC provides 68% of LTL services to the Department of Defense.
YRC was able to obtain the $700 million in loans because it qualified under Division A, Title IV, Subtitle A of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The government said that Treasury’s determination was based on a certification by Defense Secretary Mike Esper that YRC is “critical to maintaining national security.”
Whether YRC is that critical in a surface transportation market that totals $700 billion is open to question. But rival carriers are crediting YRC officials with excellent government lobbying skills in being able to obtain the funding at favorably low interest rates.
Still, the issue for shippers is what does this mean for LTL capacity? Privately, some shippers say they always appreciated YRC’s value in the market not only for its ability to maintain services during its financial woes but its competitive pricing when compared to other, more financially stable rivals.
In short, YRC provided some bargain rates as it attempted to fill its trucks during some of its darkest financial periods. Whether YRC will still provide those rates going forward now that it has at least four years of some financial stability is an open question.
But whatever capacity YRC is providing shippers in the short term could be offset by a recent prediction of more carrier bankruptcies in the trucking market, according to recent predictions in the 31st annual State of Logistics report written by Kearney and sponsored by Penske Logistics in coordination with the Council of Supply Chain Management Professionals.
The report cited disruptions to supply chains as a result of the COVID-19 pandemic as one factor in what it’s predicting will be a capacity crunch in trucking next year and in 2022.
“Small to medium-sized carriers with a tight list of customers in highly affected industries will be hit the hardest,” the SoL report predicted. “Considering that more than 90% of carriers own fewer than six trucks, most carriers will need to think strategically to survive the industry turmoil.”
The SoL report was issued two weeks before the government’s announcement of aid to YRC. But almost prescient in its prediction of government assistance to YRC, the report indicated that even that might not be enough to save other carriers. “Although recent government loans have provided a short-term safety net to aid smaller carriers, certainly a longer-term solution is needed.”
The SoL report found that carrier profitability had already started falling in the first half of last year when 640 carriers went out of business, according to figures compiled by Donald Broughton of Broughton Capital. That was more than double the number of trucking failures all of 2018, Broughton noted.
Reasons cited for these bankruptcies and closings (typified by the sudden cessation of New England Motor Freight, once the 18th-largest LTL company in March 2019) were falling rates and demand, increased tariffs and trade tensions, higher insurance and increased costs of labor due to the driver shortage.
Those issues are all still with us today – layered by uncertainty due to the COVID-19 pandemic.
“The deeper a COVID-19-induced recession, the likelier this trend is to accelerate,” the SoL report predicted. “Thus as a carrier, you’re justified in putting all your chips on short-term survival.”
The report added in a stark warning to carriers: “If you can make it through the next six to 18 months, other carriers will drop out, capacity will tighten, rates will rise and your longer-term outlook will be more stable.”
July 20, 2020
About the Author John D. Schulz
John D. Schulz has been a transportation journalist for more than 20 years, specializing in the trucking industry. John is on a first-name basis with scores of top-level trucking executives who are able to give shippers their latest insights on the industry on a regular basis.