By Todd Maiden of FreightWaves,
With questions swirling around the fate of the nation’s third-largest less-than-truckload carrier, Yellow Corp., industry analysts have started looking at which carriers stand to benefit the most if the company fails.
Seemingly running out of options, Yellow filed a $137 million lawsuit against the Teamsters union on Tuesday. The suit alleges the union is unjustifiably blocking proposed operational changes that the carrier is contractually allowed to implement. Yellow asserts the union’s slow response and unwillingness to negotiate have added to the company’s deteriorating financial condition.
Yellow recently asked health and welfare and pension funds if it could delay contribution payments for the months of July and August in order to preserve its cash, which it says will be depleted by mid-July. Also, the lawsuit revealed Yellow unsuccessfully solicited the White House’s help brokering a deal.
“YELL’s situation creates huge benefits for the remaining, stronger LTL players that are able to profitably handle the extra volumes,” Deutsche Bank equity research analyst Amit Mehrotra told clients on Wednesday.
He said the negative press has likely resulted in more freight leaving the company.
A recent intraquarter report from Yellow showed its tonnage was down 16% year over year in April and May and 33% lower than in the same two months of 2021. Some of the declines can be attributed to recent yield improvement initiatives and the dislocation caused by a multiyear restructuring, which has allowed it to consolidate its four LTL brands and reduce its terminal footprint.
However, Mehrotra notes, customers are also seeking other transportation options given Yellow’s inability to reach a deal with the Teamsters.
“Based on all the developments over the last two weeks, we continue to think it’s more likely than not that a meaningful piece of Yellow’s business is diverted away to competitors.”
He also pointed to a final report issued Tuesday from the congressional oversight commission tasked with overseeing the 2020 COVID-relief lending program. The report noted numerous mistakes made by government agencies during the approval process of a $700 million Treasury loan to Yellow. It also advised the Treasury to unwind its debt and equity holdings in the company.
“These developments make it highly unlikely, in our view, for a last-minute deal via outside intervention,” Mehrotra said.
Yellow has narrowly averted bankruptcy in the past by orchestrating wages and benefits concessions from Teamsters as well as eleventh-hour debt restructurings. With the unfavorable loan commission report and the Biden administration’s recent pass on lending a hand, it doesn’t appear the government is interested in a bailout.
TD Cowen analyst Jason Seidl said union carriers like ABF Freight, an ArcBest subsidiary, and TForce Freight, a TFI International company, would likely be the biggest winners of Yellow’s $5.2 billion slice of the LTL industry.
He said these carriers are more compatible with the way Yellow operates and could hit the upper end of the earnings-per-share growth ranges he calculated. The high end of the EPS range was 32% for ArcBest and 14% for TFI. XPO had an EPS growth range of 9% to 35% but presumably with a lower confidence level assigned.
He doesn’t see Old Dominion as a big beneficiary due to its “strict pricing discipline and freight profile.” He also noted some “strong private carriers” would likely see incremental volumes if Yellow were to fail.
Seidl said he wasn’t predicting Yellow’s demise or its survival, just providing some math in case the carrier exits.
He drew on comparisons to the 2002 failure of Consolidated Freightways, the third-largest LTL carrier at the time. That company was generating more than $2 billion in revenue with 20,000 employees, 14,500 of whom were Teamsters.
Seidl said that competitor ArcBest reported an 11% increase in daily tonnage the month that followed the announcement of CF’s bankruptcy. ArcBest’s tonnage was down 2.4% in the month prior to CF’s bankruptcy.
However, Mehrotra said the events at Yellow create the potential for “massive earnings accretion,” noting Old Dominion and Saia could see their earnings increase by more than 20%. He said a “wall of freight” could present some execution challenges to network-centric businesses like LTLs, but believes high-quality service standards at Old Dominion and Saia will allow them to more effectively onboard any windfall.
“The bottom line is we continue to see significant further upside in LTL shares on the back of developments at YELL,” Mehrotra said.
Shares of YELL were down again on Wednesday, off 19% following a 22% decline on Tuesday. Shares of other LTL carriers were up slightly to as much as 4% on the day, following mid- to high-single-digit increases on Tuesday.
