One Company, Yes, But Will It Be Profitable?

Analysis by: John Schulz
Analysis of: Yellow and Roadway Now One Company
Published at: www.joc.com

Implications

YRC Worldwide says it has fully integrated the operations of long-haul national units Roadway Express and Yellow Transportation. The move comes five years after YRC bought Roadway for $1.1 billion. It also comes after YRC has lost a reported $1.612 billion in the last two years as the nation's largest trucking company by volume struggles with sales, operations and efficiency in the economic downturn.

Analysis

Well, better late than never.

Five years after then Yellow Transportation bought out rival Roadway Express for a whopping $1.1 billion, the two unionized long-haul carriers have finally merged.

In a press release, YRC Worldwide Chairman Bill Zollars trumpets the move as a "game-changing event for our company."

Maybe, maybe not.

As one who called the Roadway Express purchase a mistake from the get-go, I do applaud Zollars and his team for getting this done in the face of the most wicked industrial and economic downturn in perhaps 75 years.

Transportation mergers are never easy. This one never was. Despite how attractive it looked on paper, merging some 600-plus terminals and 45,000 Teamsters into one functional company is no mean trick. YRC deserves kudos for doing it.

Now, will it work?

It almost has to. If it doesn't, YRC probably won't be around to pick up the pieces.

YRC is dancing a slow dance with its lenders, buying time at each quarter with terminal sales and lease-backs, wage concessions from its Teamsters, and discounting levels that are hitting a reported 80 percent off listed tariff rates, according to shipper sources.

But there is a payday in all this. For one thing, YRC is down to about 450 terminals. This source story says that is about "100 more than either Roadway or Yellow did individually," although that is not really the way to look at it.

The way to properly frame this exercise is it closed or otherwise disposed of nearly 150 duplicative terminals in the carriers' combined networks. That is real money savings. YRC can now sell the terminals for hard cash (it outright owns most of them, and the real estate underneath them), provided some company has the credit line to buy them.

Already, non-union Estes Express has purchased one for millions of dollars. That is going directly to YRC's bottom line, to keep its bankers happy by staying within the parameters of its loan covenants.

Shippers really hold the key to all this. If the combined Yellow-Roadway network suffers any noticeable service glitches, shippers are going to vote with their feet, no matter what level of discounts they are getting.

I've long felt this operation could cover the contiguous 48-state network with fewer terminals and real estate. ABF Freight System does the same thing with about 250 or so terminals. Although YRC's national network is perhaps two or three times larger than ABF's, I think with freight levels so depressed right now, 450 is about the right number for YRC.

If YRC has to shrink to survive, so be it. If it earns more money as a $6 billion company than it did as a $9.6 billion company, shrink it and be happy. After $1.613 billion in losses in two years, YRC would probably be happy with any level of profitability right now.