Forward and reverse: The diverging fortunes of two LTL carriers

In late March, James L. Welch, CEO of YRC Worldwide Inc., met with Judy R. McReynolds, president and CEO of Arkansas Best Corp., parent of YRC's less-than-truckload (LTL) rival ABF Freight System, Inc., to discuss a YRC buyout of all or part of Arkansas Best.

McReynolds listened to Welch's proffer, met with her board, and within a day or two, told Welch that Arkansas Best wasn't interested. But the fact that Welch even made an offer spoke volumes. After a four-year slide that put it on death's door at the end of 2009, YRC was under new management, enjoying labor peace, and seemingly on its way to righting its money pit of a long-haul unit, YRC Freight, under the leadership of Jeffrey A. Rogers, who had turned YRC's Holland regional unit into a star performer.

ABF, meanwhile, was locked in a make-or-break battle with the Teamsters union over a new labor contract, was burdened with an uncompetitive cost-structure in a largely nonunion industry, and could only watch as its losses mounted and the value of its equity shriveled into the single digits.

That was then.

Today, it is YRC, not ABF, locked in a make-or-break contract battle with the Teamsters. It is YRC, not ABF, that is losing money and facing bill collectors demanding their pound of flesh in return for restructuring $1.4 billion in debt, with the first principal payment coming due in February. It is Arkansas Best, not YRC, that is watching its stock price climb. It is Arkansas Best that has suddenly become a competitive force in the less-than-truckload industry, bolstered by as much as $65 million in annual savings at ABF from a new five-year collective bargaining agreement with the Teamsters and the increasingly stellar performance of its expedited transportation unit, Panther Expedited Services. This is the kind of firepower that YRC, stripped of everything but LTL services, does not have.

Arkansas Best and YRC posted third-quarter results within a day of each other this week. The differences couldn't have been starker. Arkansas Best reported a solid, though not spectacular, quarter. Its net income more than doubled year-over-year. ABF's operating revenues rose $21 million from the 2012 quarter. Its four non-asset-based units, led by Panther, accounted for 26 percent of total revenue in the quarter, a percentage that has risen sequentially throughout 2013, the company said. Panther's operating income jumped four-fold year-over-year.

ABF's third-quarter operating ratio—the ratio of expenses to revenues and a key metric of a carrier's efficiency— was a decent 96 percent, meaning ABF took in $1 in revenue for every 96 cents it spent. The third-quarter results were tallied before the new collective-bargaining agreement took effect Nov. 3. If the cost-savings from the agreement were overlaid on third-quarter results, ABF's ratio would have dipped to 93 percent, according to estimates from Stifel, Nicolaus & Co., an investment firm.

Arkansas Best stock hit a 52-week high yesterday of $31.97 before closing at $31.70. That is a five-fold jump from its 52-week low.

DIFFERENT STORY AT YRC
At YRC, meanwhile, operating revenue rose 1.3 percent year-over-year but operating income dropped to $5.8 million, a $21.5 million decline from the 2012 quarter. The company reported earnings before interest, taxes, depreciation, and amortization (EBITDA) of $62.4 million, down $16.4 million from the year-earlier period.

The quarter was trucking's version of Murphy's Law, and it came from a familiar source: YRC Freight. A major network realignment that began in the spring was not well implemented, leading to service problems, a loss of high-yielding volumes, and escalating costs. It also resulted in Rogers' ouster in late September and in Welch taking control of the unit.

Welch said the problems continued into the third quarter, with service levels affected by driver shortages at certain terminals. Welch blamed the shortages on the timing of summer vacations and a reallocation of labor following the network realignment. The driver shortage had a cascading effect, resulting in higher-than-expected overtime pay, increased use of costly purchased transportation in certain lanes, and lower productivity, Welch said.

As if all of that wasn't enough, Welch said YRC recorded an additional $4.4 million in expenses over the 2012 quarter due to higher bodily injury and property damage claims.

Welch said the unit's service levels are "within a couple of percentage points" of where they were prior to the realignment. In addition, daily shipment counts in October were slightly higher than in the 2012 period, which reversed a negative trend, Welch said.

YRC's four regional units—Holland, Reddaway, New Penn, and Reamer in Canada—continue to do well, the company said. However, it is clear by the overall results that as long as YRC Freight, which still accounts for the majority of YRC's total business, performs poorly, the company as a whole is unlikely to gain traction.

The urgency of the situation was underscored late last month when management asked leaders of union locals to meet in Dallas Nov. 5 to discuss the need to extend their current labor agreement through 2019. The current pact expires in March 2015.

In an Oct. 30 letter to employees, Welch said that servicing YRC's $1.4 billion debt load leaves the company with no money to reinvest in the business once wages, benefits, and regular operating expenses are paid.

YRC is financing its debt at interest rates between 11 percent and 12 percent. That means it is paying $150 million in annual interest, more than all its publicly traded rivals combined. The interest burden is "strangling the company," YRC said in a handout at the meeting.

Time is of the essence, according to YRC. Because the refinancing process typically takes 90 days to complete, it must begin by Nov. 15 to meet the first principal payment of $69 million, which is due Feb. 15, the company said. YRC has a $326 million payment scheduled in September and another $678 million by March 2015. YRC's lenders have told the company they will not agree to refinance its debt without a new labor agreement in place.

There is no way of knowing if YRC's 25,000 unionized workers, which agreed to several rounds of concessions in 2009 and 2010 to allow the company to survive up to this point, will agree to any of this. YRC said Tuesday that local union leaders agreed to allow negotiators to start discussions with the company over its "financial future."

YRC stock fell more than 20 percent yesterday to close at $7.72. It hit a 52-week high of $36.99 in mid-July.