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trucking turnarounds

Friday 30 November, 2012

The Turnaround Management Association of the Midwest in Chicago held an event titled Planes, Trains, & Automobiles: The Outlook for the Transportation, Shipping, and Logistics Industries which I attended, although the discussion centered around trucking in the US more than anything.  While aviation gets the headlines, trucking flies under the radar.  It’s a mature industry with low growth, is capital intensive, fuel sensitive, highly regulated, has low margins, & has labor & other legacy issues.  The 2008-9 recession was worse for trucking than the overall economy & 15-20% of the industry’s capacity was removed during that time. Diesel fuel is 1/3 of all costs as is the cost for drivers, which are both problems.  Trucking is actually a complex industry & all macroeconomic drivers affect it.

YRC became too leveraged with $2B worth of acquisitions 2003-6 & many were poorly integrated.  Revenues dropped from $10B in 2006 to $6B in 2010 as the # of drivers fell 50% & the fleet shrank 40%.  Capital expenditures sank from $300M to $26M as the fleet aged.  Rising maintenance costs + falling mileage led to a downward spiral.  Reinvestment is required, but limited structural EBITDA leads to maintenance being deferred.  The Teamsters didn’t help, but they did come to the table, although with unrealistic expectations about restructuring.  The Teamsters is an intensely political organization that advocates aggressively, but does not necessarily represent the interests of all employees.  Ultimately the unions did deliver cost reductions as drivers wages declined from $37.05/hour to $28.70/hour.  Drivers control the cost structure as their driving habits/behaviors determine fuel costs.  Driver turnover is 100% in some cases, which obviously leads to shortages of drivers.  As baby boomers retire, young people simply don’t want to drive a truck.  The median age of a driver is 47 & rising.

Restructuring multi-employer pension plans is an emotionally-charged issue.  Cutting pension benefits cannot be considered because drivers are old dudes.  There are different grades of plans & participation levels.  There is no 1 company or even group of companies that can solve the problem, so a government solution may be required.

Many reasons have kept YRC out of bankruptcy.  They’ve been able to retain customers.  They have little intellectual property.  Lenders have not pushed Chapter 11 because they don’t want equipment back because the values for used equipment are too low.

Q&A

Fortune 500 companies order by the truckload & pay on time.  Trucking is a quick turnover industry, so some truckers took parts & equipment rather than their last paycheck when they were let go.

There don’t appear to be any viable solutions to pension problems.  There are no other alternatives & nowhere else to go.

Private equity firms & hedge funds have gotten involved in the industry & have been willing to put their money where their mouth is, if only to protect their investments.  Some wish they hadn’t invested, thinking the trucking industry looks simple.   EBITDA of 6-9% 5-6 years ago worked, but lack of investment in maintenance hurt their investments.

Shipping coal via rail has already surpassed shipping via truck because it’s far more fuel efficient.

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