America has lost a major logistics player. The sudden closure of Yellow Corp. may be easy to decipher in context, what 30,000 now-former employees will do for household income is less obvious. Perhaps the only good news in this story is that it spotlights the resiliency of the transportation infrastructure in the United States. That last point seems irrelevant at a moment of insider shock and bystander awe.
Yellow was the third-largest less-than-truckload (LTL) carrier in the United States, behind Fedex and Old Dominion. This point is important. Rather than move fully-loaded rigs to single destinations, Yellow gathered small, pallet-sized shipments from various companies, consolidating and distributing that cargo through some 300 terminals nationwide. They were known in the industry as a low-cost competitor. In 2022, Yellow processed around 50,000 shipments daily.
Yellow was a fount of missteps. Despite its 99-year heritage, the firm had nearly gone bankrupt three times over the past decade, in part because those trucking companies it acquired were more-or-less allowed to operate independently, creating system-wide redundancies. We are less interested in the post-mortem on distinct management decisions, though, than we are in take-away lessons from the corporate failure. These marque points are as relevant to sprawling enterprises, as they are small companies.
Beware the financial engineering. Yellow carried on its books some $1.5 billion in debt, the largest chunk of which was a $700 million pandemic-era loan from the US government. In this case, a debt-to-sales ratio of around 30% is reasonable, except when you consider the precarious nature of this trucking company and the relentless restructuring in its industry. Bankers were probably accommodating because of comparables in the high-debt and distantly-related airline industry, providing cover for Yellow’s borrowing profligacy. “Everybody does it” is a bad way to manage a balance sheet when you are having trouble funding pension liabilities.
Embrace labor issues as opportunities. Union negotiations tend to be situation specific, so we are cautious in over generalizing. In this case, there was such animosity between Yellow management and the Teamsters Union that the labor chief tweeted out a picture of a tombstone with the Yellow name on it in late June. The Teamsters may have overplayed their hand in their unwillingness to endorse an essential restructuring plan. We wonder if that spitball contest could simply have been avoided in the first place, given Teamsters representation on the Yellow board. We admit the militant shift in the Teamsters’ engagement style afforded a barrier here.
Manage the business for the long-term. The very idea of a Teamsters strike, which started to rumble through the industry two months ago, led a growing number of Yellow’s recurring customers to abandon the firm. That turned into a death spiral by late July. The point is that confidence in a going concern may be more important in services than in other sectors of the economy. Management needs to stay focused on long-term implications of day-to-day decisions. Yellow’s reputation as a “cat with nine lives” was unstable ground for even loyal relationships. In contrast, UPS—another pallet shipper—offers a rock-solid pedigree.
One sideshow to the Yellow affair is the exposure to the US taxpayer. In June, the Congressional Oversight Committee, set up to probe Covid relief disbursements, determined that the Treasury Department should never have approved the $700 million emergency loan in 2020, taking an equity position in exchange. The government determined that Yellow was not “critical to maintaining national security,” despite its role in distributing food and electronics to military bases around the country. We see a congressional mud brawl in the works.
The freight system in the US can absorb the demand for Yellow’s capacity because of the recent downturn in the shipping business. The Federal Reserve is now referring to a “freight recession.” The true impact of the Yellow collapse could be just a touch inflationary. Companies will have to pay more for pallet shipments, given that Yellow was usually the low-cost provider. Those costs, in turn, are likely to be passed to the consumer. In the United States, for instance, that swank $860 office chair may now cost $880. ■
Our Vantage Point: A buoyant economy usually affords cover for bad management; a more volatile backdrop leads to cracks, fissures, and implosions. We suspect there are more firms like Yellow out there, however outrageous the features of this case example may be. Operational integrity is the new valuation metric.
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