This is Dominic Pino filling in for a vacationing Jim Geraghty. Starting tomorrow, Noah Rothman will take you through the end of the week.
On the menu today: Yellow, a unionized trucking company, goes under in the largest bankruptcy in the industry’s history.
The Slow, Quiet Demise of Yellow
Yellow Corporation has been around for 99 years, but it won’t make it to triple digits. The less-than-truckload (LTL) trucking company, known for its low rates and nationwide network, officially filed for bankruptcy on Sunday after slowly gliding out of business for years.
In the early 2000s, Yellow pursued an aggressive acquisition strategy, purchasing LTL carriers Roadway and USF, along with several regional carriers. The idea was to create one firm with national reach and do so with a unionized workforce.
That idea ran contrary to the general trend in the LTL industry, which has become less unionized over the decades. In 1993, nine of the top 25 LTL carriers were unionized, and they had a market share of 60 percent. Yellow was one of only three that were unionized this year, and those three had a combined market share of only 22 percent.
Before the trucking industry was deregulated, the federal government prevented most forms of economic competition between firms. It decided which firms ran which routes and what prices they could charge customers. That kind of regulatory environment led to large trucking firms, since it was difficult for new firms to enter the market.
Given the lack of competition, the Teamsters union, which represented most truck drivers before deregulation, could ask for just about anything and expect to get it. In competitive industries, unions are limited in what they can ask for because firms have to remain lean to stay in business. That wasn’t true of trucking pre-deregulation, and the Teamsters contributed to the industry’s inefficiency and expensiveness while becoming a highly corrupt organization.
The flaws in trucking became so obvious that Congress passed the Motor Carrier Act of 1980 with massive majorities, and Jimmy Carter signed it into law. No longer would the government set rates or approve routes. Since 1980, the trucking industry has increasingly been dominated by relatively small, non-union firms. Prices went down, and the supply of trucking services increased. The trucking industry today is extremely competitive, with a constant churn of firms entering and exiting the market.
Deregulation was great for consumers and shippers because it lowered prices. It changed the nature of truck-driving jobs by increasing the number of them and making them more flexible and frequently non-union — many drivers now are independent contractors and small-business owners rather than hourly employees. And it really hurt the Teamsters, who no longer had a stranglehold over just about everything that moved by truck in the United States.
Yellow, with 22,000 Teamsters members and 30,000 total employees, was an exception to the rule. It wanted to implement a major reorganization plan called “One Yellow” that would preserve the firm’s character as a union company while streamlining operations to cut costs. As a result of its past acquisitions, Yellow had many redundant facilities that could be combined and run more efficiently. It also had multiple regional networks within the company that didn’t work well together.
This reorganization process was made difficult by Teamsters opposition. In the western part of the U.S., Yellow was allowed to implement its plan, and it showed signs of success. But in the eastern part of the U.S., where the bulk of the company’s business is, the Teamsters were more obstructionist.
That obstruction increased when new Teamsters president Sean O’Brien took over in 2022. He campaigned for leadership on promises to be more confrontational with employers, and Yellow was one of the biggest buyers of Teamsters labor. Yellow had been on the verge of bankruptcy a few times before, and the Teamsters, seeing that it was one of the only LTL carriers that wanted to be a union company, made concessions to keep the firm afloat. O’Brien promised to reverse that policy, and he kept his word. For example, the Teamsters posted a picture of a tombstone that read “Yellow 1924-2023” on social media.
Yellow sued the Teamsters in June, alleging breach of contract and saying that the union’s obstruction had made it impossible to run the company. The Teamsters did not change course, continuing to oppose One Yellow and refusing to even negotiate with the company. Yellow management blamed the Teamsters for the company’s demise. CEO Darren Hawkins said in a press release, “All workers and employers should take note of our experience with the International Brotherhood of Teamsters (“IBT”) and worry.”
It’s not entirely the Teamsters’ fault that Yellow went under. The two other major unionized LTL carriers, TForce and ABF, both successfully negotiated new contracts with the Teamsters this year. Yellow’s business strategy was risky, and the risk did not pay off. The firm has had years to make it work, and everything didn’t collapse just in the past few months.
But it’s nonetheless true that if you’re a non-union LTL carrier, you probably want to stay that way. Most of your competitors aren’t unionized, and they have the flexibility to adjust to the rapidly changing freight market without needing Sean O’Brien’s sign-off. And it’s not just management that is opposed to Teamsters representation. Non-union carrier XPO had one of its locations, covering about 70 of its 12,000 drivers, vote to unionize in 2021. Earlier this year, those drivers voted to decertify the union, saying that the Teamsters weren’t representing their interests.
In other words, Yellow’s 22,000 unionized jobs are unlikely to come back elsewhere in the industry. The people will probably be employed somewhere else, and Yellow is working with the American Trucking Associations to help them find new jobs, but they almost certainly won’t be represented by the Teamsters wherever they end up working.
What Happens Next
Yellow was seen as an important LTL carrier due to its nationwide presence and roughly 10 percent market share. It handled about 50,000 shipments per day and had revenue of $5.2 billion in 2022. Major customers included Walmart, Home Depot, manufacturing companies, and the Department of Defense.
That last customer is part of the reason that Yellow received a $700 million loan from the federal government in 2020 as part of a Covid-relief program. In exchange for the loan, the Treasury acquired a roughly 30 percent stake in the company. Yellow is supposed to make about $1.3 billion in debt payments in 2024, including the government loan. It has already paid down $230 million of principal and $54.8 million of interest on the government loan.
The federal government’s special inspector general for pandemic recovery audited the Yellow loan in May. It found, “Treasury did not have specific, measurable objectives, nor did it have finalized loan approval policies and procedures in place prior to the approval and disbursement of Yellow’s loan.” The loan has drawn congressional scrutiny, and Treasury Secretary Steven Mnuchin was questioned on it in December 2020.
Whether taxpayers will be fully paid back remains to be seen. Yellow has said it wants to pay back the government loan in full and believes it will be able to do so. But other creditors might be ahead of the Treasury in the repayment line. The Treasury’s 30 percent stake in the company will likely be lost because creditors must be repaid before shareholders in bankruptcy.
Yellow might not default on its debts. The Chapter 11 bankruptcy filing reported $2.15 billion in assets and $2.59 billion in liabilities. S&P downgraded Yellow’s debt from CCC- to CC with a negative outlook. It would still have to downgrade it two more times to reach default territory.
Foreseeing the bankruptcy, shippers have been shifting their freight to other carriers in the past month. That means relatively few shipments are stranded in Yellow facilities as the company shutters its operations. LTL demand has been lower this year than it was last year, so there was some excess capacity in the market, but it will likely be entirely eaten up by Yellow’s demise. As a result, LTL rates are likely to rise by 5 to 10 percent.
Non-union LTL carrier XPO has been one of the top beneficiaries of Yellow’s collapse. It saw shipments increase by 9 percent year-over-year in July and plans to add capacity in response. That includes buying more tractors, building more trailers, expanding terminals, and hiring more drivers. Applications to work at XPO have increased threefold per position, the company said on its second-quarter earnings call. Three other beneficiaries mentioned by Barron’s are non-union: FedEx, Old Dominion, and Saia.
The increase in prices and shifts in carriers will no doubt cause headaches for logistics managers around the country, and 30,000 former Yellow employees will need to find new jobs. This is a major disruption to the LTL sector that will likely yield major changes in the industry. But it speaks well of the resiliency of the post-deregulation trucking industry that a firm as large as Yellow can go out of business with only a single-digit increase in rates and numerous other firms ready to pick up the slack. Competitive industries with relatively low levels of government intervention deliver the most value to consumers and are best able to adapt in times of crisis. It also helps to not have organized labor blocking profitability.