If YRC fails, what happens to U.S. truck sector?
CHICAGO (Reuters) - The fortunes of a particular corner of the U.S. trucking industry in the next year are as tied to whether one company, YRC Worldwide Inc (YRCW.O), survives as they are to a recovery in the recession-bound U.S. economy.
If YRC fails it could provide competitors with just the reduction in industry capacity they need to jack up pricing for the first time since late 2006.
While that would be good news for the less-than-truckload (LTL) market -- which refers to truckers who consolidate smaller loads into a single truck -- it will hurt customers already facing the pinch in a down economy.
YRC, based in Overland Park, Kansas, nearly quadrupled its revenue from $2.6 billion in 2002 to a peak of $9.9 billion in 2006 thanks largely to two major acquisitions, and is important because it controls some 20 percent of the LTL market.
"One of two things has to happen: either we have to lose capacity or demand has to come back," said Morgan Keegan analyst Art Hatfield. "The rate at which YRC's business is deteriorating makes it more likely that it will be them to go out of business rather than someone else."
He said a YRC failure "would have a positive effect on the market, as it would help restore the balance between supply and demand. It would also help stop the bleeding on pricing."
LTL shippers account for around 13.6 percent of America's trucking sector, with the rest dominated by the highly fragmented truckload -- or long-haul -- market.
Analysts say all is not yet lost for YRC as it is managing to cut costs and getting concessions from unions and lenders -- but this is a race against time.
"The big unknown is the economy," said Longbow Research analyst Lee Klaskow. "If we see an uptick in freight volumes then there is a very good chance that YRC will survive."
"But if demand remains weak well into 2010 then YRC is not going to make it."
WARNING: ROAD OUT AHEAD
During the recent economic boom, YRC was profitable and seemingly riding high after it acquired rival Roadway Corp in 2003 for $966 million followed by USF Corp in 2005 for $1.47 billion, making it the undisputed No. 1 in the U.S. LTL market. But those acquisitions have come back to haunt YRC.
As the U.S. economy began to sour, YRC did not do enough to integrate its national network, leaving it with too many facilities, a high debt load, too many workers and high fixed costs, analysts said.
When the recession hit, YRC took heed and started cutting facilities and workers. But since the market crisis that followed the collapse of Lehman Brothers LEHMQ.PK last September, the company has lurched from crisis to crisis.
"YRC is doing what it should have when times were good," said Morningstar analyst Keith Schoonmaker. "But it's only in the crucible of truly trying times that YRC can effect real change."
So far this year YRC has secured seven amendments to its $950 million credit facility from creditors, persuaded the Central States multi-employer pension fund to take property instead of cash for pension payments, plus convinced its Teamster union-represented workers to take a 10 percent pay cut in return for a 15 percent stake in the company.
Chief Executive Bill Zollars said in mid-June that these measures had given the company a strong chance of surviving and winning back more clients who fled as YRC struggled earlier this year -- and have begun to trickle back.
"All we have to do now is make sure we execute on our plan," Zollars said then. "As we get traction with our plan we expect the number of customers returning will accelerate."
In late June, however, YRC said it would start talks on a fresh round of concessions from the Teamsters.
"The sad truth is YRC cannot survive without help from a number of sides," said Jason Seidl, an analyst at Dahlman Rose. "They are no longer in control of their destiny."
WHO STANDS TO GAIN?
Should YRC fail, the market should be able to absorb its business given the spare trucking capacity caused by the bad economy. LTL companies have idled trucks and drivers that could be brought back into the market quickly to deal with the extra freight.
"In a normalized market, there would not be enough capacity to handle the shock of YRC's collapse," Seidl said. "But now I think the market could absorb it."
YRC's operations would likely not disappear completely either, as there could be a restructuring in bankruptcy and parts of the company could be saved or sold off.
In a sign of how negative the outlook is, though, on June 18, R.W. Baird & Co analyst Jon Langenfeld downgraded YRC to "underperform." He said that despite its manifold efforts to weather the storm, "in the end we do not expect YRCW to be able to manage through the current crisis."
Baird said this would boost the rest of the LTL sector, especially Con-way Inc (CNW.N) and Old Dominion Freight Line Inc (ODFL.O). FedEx Corp (FDX.N) and United Parcel Service Inc (UPS.N), which both have LTL units, could also benefit.
Analysts say Arkansas Best Corp ABFS.O would also get a boost, though as a unionized operator it could suffer from YRC's withdrawal from multi-employer pension funds as it would have to assume more of those funds' costs.
"No one wants to see a fine American company go under," Morningstar's Schoonmaker said. "But it would be natural if one of the weakest performers were to leave the market."
He added that Con-way and FedEx could benefit most from a YRC failure thanks to a strong emphasis on service.
YRC's competitors would also be able to raise prices as supply would be more in line with demand.
Dahlman's Seidl said that according to his sources within the industry, the expectation is that large shippers would see "upper single-digit" rate increases while smaller shippers would see their rates rise "well into double digits."
"Freight rates would up and for the first time in a long time, LTL companies would have some pricing power," he said.
(Reporting by Nick Carey, editing by Matthew Lewis)