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 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 and Arkansas Best Freight Lines , where the workforces are majority unionized, and FedEx and Old Dominion Freight Line , 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.

Lost money on YRC? Here's a chance to make it all back
Have you lost money in the the 75% slide of YRC Worldwide stock these past few months? Make it all back by saving thousands of dollars on your next car! Our top auto experts just released "The Car Buying Secrets You Must Know" in a brand-new free report, and the advice inside could save you thousands in cold, hard cash. This report is yours to keep today, so click here now for instant access.

The article Is the Teamsters Union to Blame for YRC's Troubles? originally appeared on Fool.com.

Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends FedEx and UPS. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.


Increase your money and finance knowledge from home

Income Investing

Grow your nest-egg.

View Course »

Basics Of The Stock Market

Stock Market 101 - everything you need to know but were afraid to ask!

View Course »

Add a Comment

*0 / 3000 Character Maximum

3 Comments

Filter by:
twomillionmiler

cutting on the wrong end!!!!! more and more corpate greed eating away at america

March 25 2014 at 2:13 PM Report abuse rate up rate down Reply
larry

Have never liked the idea of Drivers having to load there own freight. Damaged freight injuries to unexperienced,Driver/ loaders safety. As Dave quoted "working like the place is on fire" And driving to destination the same way. A combination for disaster. That happens too offen on the highway. Like to see claims ratios and accident frequences per million miles before investing. And for putting 18 hours of work in an 14 hour day worth it to the family that just got ran over by tired driver.of freight thrown all over the highway from uneven / miss loaded freight . just my 2 cents.

November 29 2013 at 2:16 AM Report abuse rate up rate down Reply
Dave

Go to any loading dock at almost any company and watch the UPS driver loading or unloading his own truck, working like the place is on fire and getting in and out and not BSing with the help. The pay is part of the deal, but how much a person produces for the amount paid makes a huge differance.

November 12 2013 at 12:53 PM Report abuse rate up rate down Reply