As YRC's Welch calls it a day, the company's future becomes someone else's problem
Welch brought a sick patient back to life. His successor, YRC Freight's Hawkins, will have his hands full navigating a potential reckoning that lies ahead.
The term "hot mess," frequently used by millennials to describe "something in a state of extreme disorder or disarray," according to Merriam-Webster, has never been associated with transportation companies. But that's essentially what James L. Welch inherited when he became CEO of YRC Worldwide Inc. in July 2011.
The Overland Park, Kan.-based less than truckload (LTL) carrier was rescued from the boneyard at the end of 2009 and early 2010 by the enormous financial sacrifices of its unionized workforce and the almost-surreal forbearance of its lenders. When Welch took over 18 months later, however, YRC was still on life support. It was deeply in debt, weighed down by underperforming businesses, and trying to survive in an environment of weak LTL demand, with rivals deliberately underpricing their freight to drive the company out of business. Welch was also burdened with decisions made by prior CEO William D. Zollars to acquire rivals Roadway Express in 2003 and US Freightways in 2005, moves that led to dramatic declines in service and would come to virtually drown YRC in an ocean of red ink during a period in the wake of the Great Recession when the company's tonnage collapsed.
Nearly six and a half years later, YRC still stands, albeit not without trials and errors; more pain inflicted on its unionized workers, represented by the Teamsters union; and questions about its future—especially what happens over the next five years. But Welch won't be around to steer it. The company announced late yesterday that Welch, 62, will retire July 31. Darren D. Hawkins, currently president of YRC Freight, YRC's long-haul unit, will become the parent's president and COO, a newly created and transitional post, on Jan. 1. T.J. O'Connor, president of YRC's Reddaway western regional LTL division, will become president of YRC Freight when the year starts. Bob Stone, Reddaway's vice president of operations, will take O'Connor's current job on that date. YRC's board plans to name Hawkins its CEO at its July meeting.
Hawkins, 47, is well regarded and seen as the best choice to fill what is viewed by many as the most challenging position in LTL. He will need all his acumen and interpersonal skills to manage what lies ahead. YRC today faces blowback from two big companies, long-time customers who have complained that they are being asked to accept 5- to 6-percent annualized contract rate increases even though they stood by YRC during the lean times with steady tonnage streams at rate escalations about half of that, according to an industry source.
At the same time, the company is coming off a sloppy third quarter, which warranted a mid-October negative pre-announcement blaming the results on the combined impacts of hurricanes Harvey and Irma on its network operations, even though other LTL carriers didn't seem too affected by the storms. (The narrative prompted David G. Ross, who covers YRC for investment firm Stifel, to coin, in a research note, the phrase, "Here comes the story of the hurricane, the storm YRC came to blame.") The quarter also brought surprising news of poor performance from YRC's New Penn Motor Express regional unit, for decades considered the gold standard of LTL efficiency and profitability. The weakness, which a source said was attributed to IT issues, led to the resignation of its president.
Storms and a couple of angry customers aside, YRC, like other LTL carriers, is riding the tailwinds of an improving economy; solid industrial and construction demand, which has dimmed bad memories of the 2014-16 industrial recession; and better overall pricing trends. All of those favorable trends could last through 2018. For Hawkins and the company that will soon be his to run, the challenges—barring another recession by decade's end—will arise sometime in 2018 or early 2019. That's when YRC will begin contract talks with the Teamsters union—which today represents about 26,000 YRC employees—to replace the current compact, which expires in March 2019.
There is much baggage here. To save the company from potential ruin in 2009, the union's rank and file agreed to a debt-for-equity swap that diluted their collective equity holdings to near zero. The workers also agreed at the time to a massive chop in pension benefits. Then, in 2014, needing to restructure $1.4 billion in debt and not able to get any more latitude from the banks without additional labor concessions, Welch and management went back to the union seeking a five-year contract extension that included further givebacks.
A dangerous game of chicken ensued, with the union rejecting YRC's initial contract proposal, prompting Welch and underlings to warn there was no path forward for the company other than bankruptcy if the rank and file didn't come to terms. The members subsequently voted to ratify the extension, but the episode left a trail of bitterness that exists to this day, according to a union source. The Teamsters, which declined comment on Welch's departure, are unlikely to be called on for even more concessions during the next round of talks, but it's doubtful the union will be content with a continuation of the status quo, according to an industry source.
YRC caught a break when its lenders agreed to extend the maturity date for a $641.7 million term loan to July 26, 2022, from 2019, a move that Ross of Stifel said gives the company more breathing room and better negotiating leverage with the Teamsters. Lurking in the background are about $2 billion in unfunded pension liabilities, which, as with most such obligations, is classified as an off-balance-sheet expense. At this time, YRC's third-quarter balance-sheet debt stands at $941.7 million, the lowest it's been since before the Great Recession. The coverage ratio of debt to earnings before interest, taxes, depreciation, and amortization over the past four quarters sits at 3.52 to 1, and terms of YRC's loan agreement require the company to significantly narrow the ratio over the next five years.
Meeting those requirements while satisfying liquidity needs would require profitability improvements. YRC, in its quarterly government filing last month, said it could achieve those improvements by streamlining its support structure; continuing to make strides in pricing, productivity, and efficiency; and increasing its volumes. At the same time, it noted that some of the items on that list were outside its control.
From July on, all of these issues will be on Hawkins' plate, not Welch's. No one expected Welch to stay forever. He was brought in to sustain the 93-year-old concern, and if appearances tell the tale, he has succeeded. "Welch did a great job with what he had to work with," said Charles W. Clowdis Jr., a long-time industry executive and consultant. "He kept the company afloat, and for that he should be rewarded."
About the Author
Executive Editor - News
Mark Solomon joined DC VELOCITY as senior editor in August 2008, and was promoted to his current position on January 1, 2015. He has spent more than 30 years in the transportation, logistics and supply chain management fields as a journalist and public relations professional. From 1989 to 1994, he worked in Washington as a reporter for the Journal of Commerce, covering the aviation and trucking industries, the Department of Transportation, Congress and the U.S. Supreme Court. Prior to that, he worked for Traffic World for seven years in a similar role. From 1994 to 2008, Mr. Solomon ran Media-Based Solutions, a public relations firm based in Atlanta. He graduated in 1978 with a B.A. in journalism from The American University in Washington, D.C.
More articles by Mark B. Solomon
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