Are unions or trains hurting Yellow Roadway?

Conspiracy theories aside, management is to blame for the slide toward bankruptcy. Yellow Roadway creditors deserve to get paid no matter what.

By James Dlugosch Dec 30, 2009 5:38PM

Jamie DlugoschThe struggle to avoid bankruptcy continues for YRC Worldwide (YRCW). The consolidated freight company announced today that it had once again extended the deadline for approval of a debt-for-equity swap.

 

Without approval, which would give debt-holders up to 95% of the equity in the company, the unionized trucking company will likely be headed toward bankruptcy.

 

The company has extended the deadline for the swap multiple times but is still short of the already-reduced approval rate necessary to free operating capital from banks.

 

Most interesting in the latest development is Teamster complaints against banks and hedge funds that it says are deliberately blocking the swap in order to profit from a credit default swap trade. Such a trade would be profitable if the company fails.

 

The unions are clearly appealing to public opinion, saying it's un-American to profit from the demise of such a fine working-class company.

 

The banks and hedge funds would argue that the demise of the company falls squarely on the shoulders of the unions. With a cost structure that is higher because of union obligations, YRCW can't compete.

 

In reality, YRCW's problems are the same as those that befell many companies and individuals during this economic crisis. Its debt level was simply too great.

 

During the recession, sales plummeted and the company had little margin for error. Not even cuts agreed to by the union could save the company from its current fate.

 

Simply put, debt-holders must be paid. If not, something has to give.

 

To criticize speculators for making investments based on an expected outcome is about as foolish as blaming the unions for this mess.

 

Much of the blame should fall on the shoulders of those managing the company. The decision to expand using debt was ultimately a failed strategy.

 

There is a more subtle problem at work here. Many at Yellow are complaining that competitors are lowering prices in an effort to destroy the financially strapped company.

 

That conspiracy theory fails to hold water. For starters, basic economics suggest that companies will act in their best economic interest when making pricing decisions. It is unlikely for any company to leave money on the table, even if can hurt a competitor by lowering prices.

 

Instead, one reason prices in the industry are suffering is because of competition from the rail industry. Trains have become the real competitive threat to the trucking industry.

 

There is a very good reason why Warren Buffett agreed to acquire Burlington Northern in early November. It is cheaper and more energy efficient to ship goods by train than by truck. (In fact, long-term trends are pointing to a surge in the railroad sector. Read "5 Reasons You Should Be Buying Railroad Stocks Now" for more on my view of this sector.

 

As gas prices increase, such a dynamic will further hurt the trucking industry. It is not the unions that killed trucks. It is the trains doing the most damage.

 

Related Articles:

5Comments
Report
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
Categories
100 character limit
Are you sure you want to delete this comment?

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

118
118 rated 1
270
270 rated 2
472
472 rated 3
714
714 rated 4
624
624 rated 5
608
608 rated 6
623
623 rated 7
445
445 rated 8
319
319 rated 9
125
125 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
AAPLAPPLE Inc10
ATVIACTIVISION BLIZZARD Inc10
BIDUBAIDU Inc10
BMYBRISTOL-MYERS SQUIBB CO.10
CELGCELGENE CORP10
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.