Continued Concern Over Future Capacity

We’ve been raising red flags since last fall about the excess capacity caused by a contraction in shipping volumes, and how the lack of demand has led a large number of small Truckload (TL) and Less-than-Truckload (LTL) companies to close their doors. The true effect of our stagnant economy, with emphasis on the lack of production and transportation, was notably evident during the first quarter of the year. We saw losses reflected in the operating ratios of almost every publicly-traded LTL carrier. Old Dominion Freight Line (Thomasville, NC) was the only such carrier to report a profit.

With most major players in the LTL industry losing money in the first quarter, and a slow recovery in truck tonnage predicted, analysts in the sector predict that we will see fallout, possibly involving a major LTL company, as early as the third quarter of this year. There are still estimates of anywhere between 15-25% excess capacity in the LTL sector despite mitigating factors such as workforce reductions, the virtual non-existence of new truck buys, company closures and mergers.

In the short term, this has allowed for very aggressive pricing in the marketplace as companies compete over a severely diminished pool of available shipments. While lower shipping costs do have the effect of easing the pain for shippers who are being impacted from all sides by the economy, there is a general consensus among carriers, analysts and industry experts that the current condition of the transportation sector is not sustainable.

We have previously reported that YRC Worldwide (consisting of the former entities of Yellow and Roadway as YRC National and Holland, Reddaway and New Penn as YRC Regional) has been particularly affected. Although YRC is certainly not the only carrier facing difficult times, the problems they are facing are compounded by several factors beyond the current economic constraints. Here are a couple of prominent issues:

The longhaul LTL market is shrinking as a part of an overall change in supply chain strategy in the US. As more companies move to regional distribution centers, market share is shifting to shorter lengths of haul. Yellow and Roadway have traditionally competed in the long-haul market, and the amalgamated corporation continues to seek that market.

As parties to the Central States Pension Fund, YRC, along with ABF (Arkansas Best Freight), carry nearly all of the responsibility to fulfill the Fund’s obligations. As participants, YRC and ABF are forced to fund pensions for former employees of union companies who once participated in the plan, but are now defunct.

When presenting an industry financial assessment at the semi-annual SMC3 event in June, 2009, Dave Ross of Stifel Nicolaus told those in attendance that he did not expect YRC to be an entity by this time next year. Soon after, a report by John Larkin and Stifel Nicolaus was excerpted in Transport Topics advising that, “Without further concessions, the company will likely run out of cash this fall as operating losses and interest payments chew up remaining cash availability.”

Comments like this are abundant in industry publications and on the web. This is not to say that YRC isn’t doing everything in its power to become more profitable; it simply shows the magnitude of the obstacles they are facing and calls many to question if they will be able to survive in the face of such overwhelming adversity.