A new labor contract with the Teamsters and heavier Investments in technology are being viewed as two of the main curatives for YRC’s disappointing performance of late, which culminated in a $16.4 million decline in the LTL conglomerates third quarter EBITDA (earnings before the deduction of interest, tax and amortization expenses) numbers when compared to the same period in 2012.
On top that, despite a 1.3% improvement in consolidated third quarter operating revenues of $1.253 billion compared to the same period last year, YRC’s consolidated operating income decreased from to $5.8 million – a $21.5 million decline compared to the third quarter of 2012.
Yet in a conference call with analysts and reporters this week, James Welch, CEO of YRC Worldwide and YRC Freight’s president, characterized those results as a “speed bump” due in large part to “out of cycle” freight resulting from a major operational shift initiated by YRC Freight back in May – a one-time event he doesn’t expect to occur again.
“Obviously we’re not pleased at all with our performance; we hit a rather large ‘speed bump’ in the third quarter,” he explained. “We didn’t have enough drivers relocate [as part of YRC’s operational change] to terminals with the most freight volumes, and that manpower shortage led to service declines in certain lanes.”
The shortage also resulted in higher than expected overtime pay, increased purchased transportation in certain lanes, and lower productivity, Welsh added. “Finally, yield was negatively impacted by increases in our weight per shipment, loss of volume from higher yielding channels and declines in weight and inspection revenue,” he said.
Yet Welsh stressed that, while the carrier “admittedly” took a step backward in its network optimization strategy, YRC Freight isn’t planning to make any other changes of this magnitude to its operations in the foreseeable future.
To help forestall any more “self-inflicted wounds” of this nature, Jamie Pierson, YRC’s CFO, said the company is planning to focus more of its near-term capital expenditures on technology investments – especially new handheld devices – to help boost productivity.
“This is where we see the most bang for the buck,” Pierson explained. “All of our drivers in YRC Freight and our regional companies have handhelds, but we’re piloting new ones at [regional carriers] Holland and Reddaway along with YRC Freight. Those will help us improve our load factor and workforce productivity.”
Eric Starks, president of research firm FTR Transportation Intelligence, told Fleet Owner that technology is increasingly being viewed as a “game changer” in terms of long-term productivity enhancements across the trucking landscape.
“Over the next two years, technology will just get better and better in terms of how it can improve productivity and not just in terms of routing,” he said. “If they can embrace it and learn how to use it effectively, it can produce notable productivity improvements.”
Yet YRC’s Pierson also noted that the carrier is cutting back on its tractor-replacement effort as a result of its focus on technology investments – a move that worries some industry analysts.
“CapEx [capital expenditures] remains one of the biggest issues facing the company, in our view,” explained analysts at Wall Street firm Stifel Nicolaus & Co. in a report issued this week on YRC’s third quarter performance.
“Fleet age remains at elevated levels, and given performance in the quarter, management plans to cut back on what we perceive as already insufficient ‘normal’ CapEx spend,” Stifel pointed out. “Beyond the obvious maintenance cost issues, we fear that old tractors, and tired overtime drivers may be contributing to inflated BIPD [bodily injury and property damage] numbers.”
FTR’s Starks also cautioned that there is “no magical single bullet” in terms a particular technology package’s ability to restore performance and profitability – especially in YRC’s case.
“They’ve had so many problems for so many years, and with [freight] market dynamics changing, it’s hitting them harder than some others,” he said.
For example, Stifel noted that YRC’s degradation in service and on-time performance in the third quarter caused a loss of business in local channels, driving tonnage per day at YRC Freight down by 0.5%, with revenue/hundredweight falling 2.2%, which included the departure of higher-yielding business.
“Management commented that the loss was temporary, but in our view, managing the churn, let alone the departure of higher-quality freight, will be no easy task,” Stifel said in its investor report. “These combined revenue and cost headwinds drove negative margins, even on an adjusted basis, and will make refinancing discussions with the lenders more difficult.”
Restoring tonnage loss is one thing, the firm noted, but restoring high-yielding tonnage that has departed because of poor service amidst reduced momentum in sales force efforts is a much more serious hurdle, the firm added.
Those issues are also forcing YRC to re-open contract negotiations with the International Brotherhood of Teamsters (IBT), Welsh noted during the conference call.
“We’ve listed to our market and it resoundingly said we need a more competitive contract from the IBT,” he explained. “Not only is that important for the job security of our 26,000 union employees but it substantially increases the likelihood of YRC refinancing its debt obligations in 2014 and 2015.”
Though Welsh did not provide any insight into how those negotiations are proceeding, industry experts believe a more “competitive contract” with the IBT is critical to helping YRC Freight overcome its current troubles.
“IBT Negotiations are currently ongoing, as management approached Teamsters leaders for a five-year extension to the current labor contract, which entails, among other items, 15% in wage concessions,” Stifle noted in its report.
Yet Stifel’s analysts think this proposed extension will encounter serious resistance from the voting Teamsters membership, and, even in the best case, may drive workers' comp claims back in the wrong direction if it passes.
Still, YRC’s Welsh voiced confidence that much of the carrier’s major troubles are behind it, though he admitted a bumpy road remains ahead.
“Our load factor improved about 3.3% in October and our regional companies are doing pretty well,” he said. “It’s good to see progress in October but we know we still have tough months ahead. We need to get back to a repeatable, consistent, and reliable freight delivery cycle. We thought we’d be further down the road by now but we’re just not there yet.”