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Labor Uncertainty Impacted YRC Worldwide's First Quarter, But New Deal Provides New Opportunities


YRC Worldwide (NASDAQ: YRCW) reported a $31.7 million consolidated operating loss on first quarter 2019 revenue of $1.182 billion. The loss widened from a year ago and revenue fell slightly, down from $1.215 billion in the first quarter of 2018.

CEO Darren Hawkins placed the revenue decline on labor uncertainty and severe weather. The weather was the easy culprit to blame. Hawkins said that nearly half of the 63-day first quarter saw severe weather impact operations, primarily the company's YRC Freight and Holland divisions. Holland, he said, saw 25 percent of its network either down or severely limited due to weather over a two-week period in late January.

The unknown is how much labor uncertainty played a role in the results. The company recently reached a new Master Freight Agreement with three of its operating units. The contract covers Teamsters workers at YRC Freight, YRC's long-haul less-than-truckload (LTL) unit, and at Holland and New Penn Motor Express, two of its three regional units. Workers at the third YRC regional unit, Reddaway, are governed by a separate union contract.

The five-year deal will increase the workers' per hour wage by $4 over five years and YRC has agreed to increase its contributions to workers' health and welfare plans. It will also return one week of paid vacation that union workers had given back in 2010.

Labor contract a turning point

"Leading up to the approval of the five-year agreement, we experienced the effects of some customer concerns around the uncertainty of the negotiations process," Hawkins said. "While we cannot precisely quantify the revenue loss related to the labor agreement, our first quarter results were adversely impacted."

The labor contract was a critical point in the future of the company. Ernie Soehl, head of the Teamsters' freight division, issued a warning before the union vote that the three YRC units could go out of business before the end of May if the contract was rejected because shippers would pull freight from the struggling businesses.

Nearly 78 percent of eligible Teamsters turned out for the vote, with 60 percent approving the contract.

"We were very transparent with our customers during this process; however, we do believe our customers were holding back freight until the contract was approved," CFO Stephanie Fisher said.

Since tentative approval of the contract was announced, YRCW has seen an improvement in freight tonnage, which was down approximately 5 percent in April versus 8 percent or more in the preceding months. Analysts on the earnings call suggested that many of YRCW's competitors were seeing bigger drop-offs in April.

"We put out our tentative agreement on March 21, and we certainly saw some noise around that, but part of the improvement in April is having a tentative agreement in place," Hawkins said.

"We believe this contract will provide the foundation for YRCW to grow ... over the next five years," he added.

One more hurdle

The labor deal is still not technically complete, as one of 27 supplemental agreements – the Joint Council 40 supplement – has not been approved. The union and YRC have until May 31, 2019, to get that approved, at which time the entire contract will go into effect, but that is not stopping the company from making plans for life under the agreement.

Hawkins said that the wage increases will be partially offset by a 30-cent per hour lower rate for health and wellness benefits in the new contract. Benefits will remain "top-notch," he said, and combined with the higher wages will benefit the company as it seeks to attract new drivers.

Hawkins noted that in 2018, 5 percent of revenue was spent on overtime and the addition of expensive cartage drove up costs. "All of those pieces are being addressed in this contract," he said.

"We have immediately turned our attention back to implementing a plan that takes advantage of the opportunities presented in the contract," Hawkins said, including a network optimization plan.

"The new contract provides significant opportunities to improve operations that will provide us between $60 million and $80 million in network efficiencies and cost reductions in 2020," he added.

Fisher said those numbers could grow over time as the improvements are implemented, which include the selling of 15 to 20 terminals that are no longer vital or being used in the network.

Opportunity to grow

The new contract also allows for the hiring of non-CDL drivers, which Hawkins said will result in an expansion of the box truck program.

"This will allow us to replace costly third-party carriers, reduce dense terminal operations ... and build a driver workforce," Hawkins noted.

The contract adds part-time opportunities for dock workers that gives YRCW the chance to build a career path for workers, allowing them to start part-time and eventually move to a full-time dock worker or a full-time non-CDL driver and eventually to a CDL driver.

The company has also revamped its sales efforts to consolidate those tasks, allowing a single account representative to sell across business units in an effort to keep customers within the YRCW family.

The results of all these programs will be a reduction in "costly overtime," improved network efficiency and increased flexibility to meet customer needs, Hawkins said.

The post Labor uncertainty impacted YRC Worldwide's first quarter, but new deal provides new opportunities appeared first on FreightWaves.

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