The U.S. Treasury Department’s July 1 decision to lend struggling less-than-truckload (LTL) carrier YRC Worldwide $700 million under the CARES (Coronavirus Aid, Relief, and Economic Security) Act took many by surprise. And with good reason.
For starters, the loan amount was about 10 times YRC’s market capitalization at the time. The deal requires YRC to issue new equity shares to the federal government, thus making it a near 30% owner in a company whose stock has been a less-than-stellar performer for the past dozen years. In fact, that shaky performance led the Congressional Oversight Commission to announce on July 20 that it was launching a bipartisan investigation into the loan, “in part, because the risk of loss of U.S. taxpayer money on this loan appears high.”
And it wasn’t just the loan’s size and risk that raised eyebrows; there were other factors as well. For one thing, contrary to the intent of the CARES Act, the loan did not rescue an otherwise-healthy company that happened to be sidelined by the pandemic. YRC was in trouble long before the novel coronavirus hit the U.S., chronically underperforming even during periods of strong demand and favorable LTL market conditions.
For another, the loan was framed as a critical national security issue because YRC carries nearly 70% of LTL shipments for the Department of Defense (DOD). Yet this is the same DOD that sued YRC in December 2018, alleging the carrier deliberately inflated shipment weights, applied improper rates to the consignments, and falsified statements to conceal its actions. These are serious charges, particularly when made against a long-time partner. YRC sought to dismiss the suit the following January, but nothing has come of it.
Finally, half of the loan will be used to effectively subsidize the modernization of YRC’s linehaul equipment, giving YRC what some might view as an unfair advantage over rivals that invest their own capital to upgrade their fleets.
If there is a saving grace, it’s that $350 million of the loan will be used to shore up YRC’s employee health and welfare plans, thus offering unionized workers some financial relief. YRC will immediately make $120 million in delayed payments to the Teamster pension and health-care plans. How the remaining funds will be used is unclear at this time. Another positive for labor is that YRC cannot cut more than 10% of employees on the payroll as of March 24.
YRC’s union workers have made extraordinary sacrifices to keep their company alive. A decade ago, YRC’s workforce voted to let the company suspend all pension contributions for 18 months and then reduce contributions by a whopping 75%. Those crippling levels remain in place. YRC’s current per-person contributions to the Central States Pension Fund stand at $106.55 a week, according to a well-placed union source. By contrast, unionized rival ABF Freight System contributes about $342 a week to its members’ pensions.
The loan’s size and terms scream presidential election-year politics. About 22,000 union jobs—and votes—were at issue, a factor the administration may have had front of mind as it considered the loan request. Yet the election will come and go, and YRC will be left trying to survive and profit in what will remain a competitive market.
How much runway will the CARES loan provide? History may provide a guide. In early 2014, workers ratified a five-year extension of their onerous contract under management threats that the company would likely go under if they didn’t. That agreement was expected to buy YRC significant time. Six years later, it is again looking for help. Only time will tell if the government’s largesse will be enough to keep the company out of another financial ditch.
