YRC Seeks 'Holy Grail'
9/15/2008
John Gallagher
Associate Editor
A stalled economy is propelling the nation's largest trucking company to combine the operations of its two long-haul LTL operations, extending the restructuring of a trucking industry that has been redrawn by consolidation, changing shipper demands and a growing field of nimble regional competitors.
Yellow Transportation and Roadway, run as separate brands by parent YRC Worldwide, will be combined into one company called Yellow Roadway. Local sales teams will join forces immediately to sell the services of the combined operation.
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The plan, unveiled at a Wachovia Securities transportation conference in New York Sept. 8, marks the most dramatic step in the ongoing unification within YRC since Yellow Transportation bought Roadway Express in 2003. That acquisition was a landmark in the upheaval in trucking since deregulation nearly 30 years ago and YRC Chairman, President and CEO William D. Zollars says combining the networks shifts the changes into another gear.
"This is a watershed day for us in terms of the acceleration of our integration strategy," said Zollars. "We've had ongoing integration, but this is really the Holy Grail. It will give us the most comprehensive network in this part of the industry. It will allow us to do a much better job of delivering a world class service at a much lower cost."
Cutting operating costs has been a major focus at YRC and other trucking companies over the past year as shipping demand has waned, and in its restructuring announcement YRC joined other major operators in saying that volume is declining in late summer after what looked to be a cautious recovery. Zollars said demand in the third quarter "has progressively weakened," pushing down pricing, and competitor ABF Freight System said the week before its tonnage was down 4 percent so far in the quarter (see related story, page 22).
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The key benefit to YRC of the combined operating network is improved lane density. By merging operations, redundant terminals will be stripped from the system, and distribution points can be bypassed. Pickup-and-delivery as well as line-haul moves will be realigned and condensed to where they can build loads faster and dispatched on a more frequent schedule.
"At the end of the day, we'll have the largest comprehensive transportation network in the country," said Michael J. Smid, president and CEO of YRC National Transportation.
By the time the dust settles at the end of next year, some 200 of the 650 terminals in the Yellow and Roadway networks will be shut down and sold, a 30 percent reduction in operating facilities. The number of jobs eventually cut from the combined companies' 45,000 mostly union work force will "largely depend on the economy and how effective we are in making this transition," said Smid.
Starting in 2010, YRC expects to see an annual operating profit boost of $200 million as a result of lower fixed costs associated with the plan.
"The impact will be even bigger than that," said Satish Jindel, president of SJ Consulting Group. "They should have been planning for this soon after acquiring Roadway and got the back-office functions straightened out."
Jindel said shippers, who have seen consolidation ripple through the LTL industry for several years, likely will roll with changes whether they come under the Roadway, Yellow or combined Yellow Roadway brand names. "I think they'll find customers don't care, as long as they have drivers they can trust," he said.
The trucking industry has been anticipating greater blending of operations from the time the original $1.1 billion Yellow-Roadway merger realigned the LTL grid five years ago.
The newly formed company immediately grabbed 60 percent of the long-haul market, but at around the same time parcel carriers FedEx and UPS dove into the heavy-haul ground freight arena with acquisitions of their own.
The networks at FedEx Freight, UPS Freight and Con-way have grown, and the carriers have expanded into areas such as truckload, while industry observers say YRC has been occupied pulling together a sprawling LTL empire that includes its two national carriers and its more recent addition of USF, now an anchor of the YRC regional service.
YRC has suffered financially as well, particularly as the freight economy began its free-fall in mid-2006. The company has undertaken several changes in management and in operations. Two quarterly losses within the last year compelled the carrier to reduce its work force. Approximately 1,100 cuts were made from its hourly driver and dockworker ranks in its regional USF operations in the first quarter, and 400 employees were severed from its nonunion ranks over the last several weeks.
Zollars points to YRC's most recent operations overhaul, its new Velocity Network that sped delivery in 30,000 Yellow, Roadway and USF Holland lanes, as a huge success with customers and a major reason for speeding up the Yellow-Roadway combination. "We've gotten very good feedback and have grown the business in an environment where the rest of the business is not growing," he said. "It's been a great benchmark in making sure we're on the right track."
Some industry observers, the changes at YRC - including the most recent Yellow-Roadway integration - are questioning whether the changes haven't come fast or deep enough.
"Unfortunately, we surmise these 'cost saving' initiatives are beginning to ring hollow," said William H. Fisher, an analyst with Raymond James, "given that company has mentioned similar large cost savings (and) other targets a number of times in the past few years, only to see operating profits fall $320 million or 56 percent from 2006 to 2007 and on to the current operating loss trends."
"When you get into a situation now like YRC is in, it's almost impossible to keep the cost base ahead of the tonnage decline," said a trucking official who declined to be identified. "You just can't cut expenses fast enough. And every time you cut, you're changing what's left of your assets and how your network operates, and how the remaining tonnage is handled and routed. Those changes take time to work in and often need some runway to smooth out. In the meantime, your network is suffering service failures, which causes more customers to leave."
Others say service doesn't have to suffer in the transition.
"They'll probably lose some business, but it doesn't have to be a lot if they do this right," said Lee Clair, a partner with Norbridge, a management consulting firm. "Customers are averse to change. … But it's a risk they have to take. The biggest potential problem could be employee morale."
The Teamsters union, which claims to have been burned by such large-scale internal restructuring at other companies in the past, isn't counting on an easy transition.
"There is a process outlined in the National Master Freight Agreement that the union will utilize to ensure that our members are treated fairly throughout what will inevitably be a very difficult process," said Tyson Johnson, international vice president and national freight director.
"While we recognize that the Bush administration's economic policies have had a dramatic negative effect on freight and the entire transportation sector with high fuel prices and reduced economic activity, the Teamsters union will fight to preserve our members' jobs and benefits in this restructuring through vigorous enforcement of the freight contract negotiated earlier this year."
Smid said YRC management met with senior Teamster leadership to discuss the changes the day before the announcement. "While any change requires a lot of communication, there are provisions in the contract that allow us to move this way. We're discussing this within the prescribed labor framework," he said.
Avoiding a major fall-off in service and keeping freight from hemorrhaging to the competition will be YRC's biggest challenge. And although some pain will be unavoidable, the end result should be positive, Jindel says.
"It would have been better if this had been done earlier, but better late than never. If they didn't do this now they would have lost business even faster," he said.
"They represent 28 to 30 percent of the total LTL market, with hundreds of thousands of customer across the country. They have a very stable workforce - that's one thing you get with unions. But they need to catch up on the time they lost and they need to move fast."
