YRC jumps early contract hurdle, faces restructuring challenges

John D. Schulz, Contributing Editor -- Logistics Management, 1/15/2008

WASHINGTON—With the Teamsters’ rank-and-file ramification likely on a new five-year labor deal, YRC Worldwide hopes it has stemmed freight diversion to non-union competition as the nation’s largest group of LTL carriers hopes to rebound from one of its worst years in its 84-year history.

With its stock having lost 53 percent of its value in 2007, YRC is in the forefront of a trucking recession that has hurt virtually every carrier. But because Teamster-covered YRC operates in the relatively flat $33.4 billion LTL sector—with its Roadway and Yellow units facing high fixed costs while operating in the sluggish long-haul subsector—it has been hammered harder than most.

The bright side for YRC is it has obtained labor peace for at least the next five years. Although the new National Master Freight Agreement had not been ratified by press time, there was every likelihood it would be signed a full six weeks head of its March 31 expiration of the old contract.

YRC, at $10 billion a year in revenue, is already struggling for profitability. All its major units posted operating ratios in the high 90s in the final quarter before the deal. Any further deterioration in freight volumes would have likely pushed some units into an operating loss. Already YRC has announced a $700 million write-down on some underperforming units. Some analysts are predicting additional restructuring charges and write-downs are likely.

First, the good labor news. On Jan. 8, leaders of Teamsters freight local unions from across the country overwhelmingly endorsed the tentative NMFA, paving the way for members to ratify the contract. All ballots were due Feb. 8, and an announcement of ratification was expected shortly afterward.

The Teamsters, who represent about 55,000 YRC workers at Roadway, Yellow and regional units formerly known as New Penn and USF Holland, seemed aware of current slack conditions throughout the long-haul sector.

“While the long-haul trucking industry is operating in a difficult economic environment, this tentative agreement protects existing jobs, maintains a strong wage and benefit package and provides new language allowing growth at the largest carriers,” said Tyson Johnson, Director of the Teamsters National Freight Division and lead negotiator.

In exchange for what the union called “solid economic gains,” YRC is getting important operational flexibility in the deal. In order to better to compete with non-union carriers such as FedEx Freight and scores of solid regional carriers nationwide, YRC is obtaining gains in subcontracting and worker flexibility.

In an important cost-saving measure, YRC has won the right to subcontract out as much as 9 percent of its line haul to non-union carriers by the end of the contract. Even more importantly, YRC has won the right to start a new class of worker—called “utility employee”—at every terminal. These workers would be allowed to work as road or city drivers, dock or yard workers, without regard to local union jurisdiction. Unionized carriers have long complained that current work rules hamper their operations and raise costs during slack times when they are forced to maintain a larger-than-necessary work force because of the many classifications of Teamsters workers.

In exchange, Teamster members are getting solid economic compensation. Those “utility employees” will be paid $1 an hour more than regular workers. The agreement includes a record $5 per hour increase in health, welfare and pension contributions. The deal also calls for wages increases of $2.20 per hour and 5.5 cents per mile over the life of the agreement, retaining the cost-of-living increases and improved sick leave.

The dissident win of the union, Teamsters for a Democratic Union, has blasted the contract as a “dangerous” giveaway to YRC. In fact, former Teamsters President Ron Carey, who engineered a 24-day strike against the unionized freight carriers in 1994, called the contract a “complete sellout.” But TDU represents only a fraction of the 55,000 YRC workers, and it doesn’t appear it had the votes to scuttle the deal.

Another sticking point is use of non-union drivers. The proposed tentative freight agreement has language called “Substitute Service,” which would allow the carriers to immediately run 4 percent of their line haul miles by nonunion carriers, and that increases each year to 9 percent by 2012.

“Nine percent nonunion road drivers?” asked one Teamster member who asked not to be identified. “Why would we agree to that?”

Still, other Teamsters point to what they see as positives in the contract. For instance, when there are layoffs at a terminal and the average overtime per Teamster exceeds 10 hours per week, a fraction of the laid-off Teamsters must be recalled to bring the average OT down to 10 hours.

The contract does not come cheaply for YRC. Analysts estimate that YRC’s total compensation costs (wages, benefits and pensions) will increase at an annual rate of 3.9 percent over the next five years. That compares with abut a 3.4 percent annual rise for YRC in the old contract and 4.1 percent annual rise for UPS in its new deal.

But the early agreement likely will save YRC in the long run as those shippers who had contingency plans in the event of a strike never had to use them. The risk of freight diversion in the final months of an old contract is real, and many non-union carriers had begun preying on those fears.

Now that the contract is behind them, YRC officials have some hard choices. One likely scenario is a partial closure or sale of parts of its regional business. There is also a chance of potentially merging the Roadway and Yellow brands, a move management has resisted but might be its best hope for profitability and long-term competitiveness.