YRC Deal With Teamsters Expected to Save $870 Million

This story appears in the July 20 print edition of Transport Topics.

YRC Worldwide’s latest cost-cutting agreement with the Teamsters is expected to save $870 million over 18 months and help the company regain its financial footing, analysts and company officials said.

The tentative deal includes a 5% wage cut on top of an earlier 10% cut, an 18-month halt to pension payments, and reduced company contributions to health and welfare benefits for Teamsters.

In return, the union would get an additional 20% stake in the less-than-truckload company, a seat on its board of directors and job preservation provisions.

“This is another step in our ongoing strategic plan to restore the financial strength of our company,” said William Zollars, CEO of YRC Worldwide. “Modifications to the labor agreement will help us reduce our cost structure, preserve operating capital and increase our competitiveness.”

Ratification by the union’s rank and file is needed, with results expected Aug. 6. Teamsters approved earlier concessions by a 3-to-1 margin. The company estimated that 35,000 Teamsters are currently active, leaving about 10,000 laid off.

The halt in pension payments, which YRC will not have to repay, also must be approved by trustees of the funds that pay retirement benefits to union members. The funds agreed earlier to swap second-quarter cash contributions for real estate collateral (click here for previous story).

YRC sought new concessions after its unrestricted cash balance fell by $76 million to $249 million during the first quarter, when it lost $257.4 million. That loss featured a 31% revenue decline, partly because shippers shifted freight to competitors, and was exacerbated by restructuring costs.

The latest deal, which follows a 10% wage cut in January for which the union got a 15% stake in the carrier, would potentially

bring the total of YRC’s cost reductions up to about $1.25 billion a year — the combined effect of wage reductions, pension payment cuts and earlier moves to merge operations, cut jobs and sell assets.

Prior to the latest announcement, YRC said annual savings from the earlier wage cut and from combining its national LTL operations would be more than $650 million. If the new agreement passes, YRC pegged next year’s savings at $600 million, $50 million monthly, and $45 million monthly in the second half of 2009.

Analysts said the deal would have a beneficial effect on YRC’s finances.

“The Teamster concessions are substantial and could result in meaningful near-term cash flow improvement,” said Chris Ceraso, a Credit Suisse analyst, in a report. “If shippers have some reassurance that YRCW is not going bankrupt any time soon, they are likely to divert at least some of their freight back to the company.”

Ceraso said he believes the new deal also could help persuade bondholders to swap debt for equity and keep the company operating.

YRC said earlier this month it had hired three financial advisers and commissioned one of them to discuss debt restructuring with bondholders.

“If ratified, this would likely mean the company hangs on longer than many expect (into 2010), though it does not get them out of the woods,” analyst David Ross of Stifel, Nicolaus & Co. said. In an investor report, Ross said he believes the cuts won’t restore 2009 profitability, because the revenue decline will exceed the amount of cost reductions.

Ross estimated an operating loss of about $650 million for this year, excluding any possible gains from the new agreement, with revenue declining to $5.45 billion — about 40% below 2008 levels — and costs of $6.1 billion.

Further changes in YRC’s cost structure could force competitors to seek additional pay cuts, Ross said.

Among those companies is ABF Freight System, whose union members have the same contract. ABF faces a “huge labor cost disadvantage” of more than $10 an hour, Ross said.

ABF spokesman David Hum-phrey said that the proposed Teamsters union-YRC agreement “is not appropriate for our company,” and expressed concerns about its legality. He added that ABF is continuing to work with the union to preserve jobs.

Other details of YRC’s agreement with the Teamsters include:

• Company pension contributions would resume in January 2011 — or sooner if the company meets certain financial targets.

• Teamsters wouldn’t get pension credit for time worked between July 1, 2009, and the end of 2010.

• The scheduled $1 increase in health and welfare benefits on Aug. 1 would be reduced to 20 cents — and to 40 cents from $1 in 2010. However, the $1 increases scheduled in 2011 and 2012 would remain in effect.

• Full wages would be restored in the event of a YRC bankruptcy.

• Nonunion workers throughout the company, including management, would be required to have compensation cut by at least as much as union workers through steps such as higher health-care costs and suspension of some pension provisions.

• YRC agrees to restore work for U.S. employees whose jobs were transferred overseas.

• A “designated officer” would be created, answerable only to Zollars and with authority to make operational changes.

• YRC shareholders would have to approve additional stock issuance, as when they backed the earlier

15% stake.

The company is scheduled to announce second-quarter results on July 30.