On July 30th, 2023, Yellow announced that they would cease operations after 99 years and declared Chapter 11 bankruptcy just a week later. As with all things that are real but not simple, more than one problem led to the company’s downfall.
In this week’s episode of Dial P for Procurement, I retrace Yellow’s journey – from a single horse-drawn cab on the streets of Oklahoma City in 1906 to the events and business decisions that prevented them from reaching the 100-year milestone.
Despite their early success, by 1952 the company was faltering. That bankruptcy led them to new ownership and the transition to long haul freight services. Yellow continued their growth through acquisition, buying Roadway and USF, to become the third largest small freight trucking company in the United States, after FedEx and Old Dominion.
By December of 2022, Yellow operated a fleet of almost 13,000 tractors, 42,000 trailers, and 300 facilities across North America. They delivered more than 14 million shipments last year, equivalent to 7 percent of the nation’s LTL volume.
Unfortunately, Yellow had become a ticking time bomb with four major problems about to converge.
Problem #1: Lack of Operational Integration
Although Yellow acquired Roadway and USF, they didn’t truly integrate them into their operation. They allowed the companies to operate independently, creating significant redundancy in their network over time. It might have been a fine choice from a branding or market segmentation, but Yellow’s whole value proposition is based on being a low cost provider.
As a procurement professional, this problem actually makes me feel a bit sick. Overhead reduction is what we do best. It would not necessarily have been easy work, but their team could have followed a pretty standard playbook of post-acquisition consolidation and streamlining.
Just think about all of the duplication: people, equipment, and facilities. Consider all of the underleveraged demand. Given the similarity of the three companies, there would have been potential economies of scale everywhere.
Timing was not on their side either. The 2008-2009 recession led to a freight downturn and saddled Yellow with a mountain of debt. In fact, that $1.5 Billion in debt is the second force working against them.
Problem #2: Crushing Debt
Yellow’s $1.5 Billion in debt created a huge burden given their low cost positioning and slim margins.
About half of the debt was from their acquisitions of Roadway and USF, and the other half was owed to the U.S. government. Regardless of the source, the Teamsters union was standing between the company and their efforts to refinance – but more on that in a moment.
Problem #3: Complicated Relationship with the Federal Government
Yellow’s problems with the U.S. government were two-fold. They defrauded the Department of Defense (oops!) and received a CARES Act loan in error – which they used for expenses other than the funds were intended (also oops).
Yellow’s YRC unit had a defense department contract to ship meal kits, protective equipment and other supplies to military bases. They were overbilling the government for that freight by inflating the weight and then covering up the discrepancy in their records when they were challenged about the cost.
They eventually settled without having to admit wrongdoing, but they were assessed a $6.85 Million fine – adding more weight onto their pile of debt.
Half of that debt was a $700 Million loan, by far the largest provided to any company through the program. The U.S. Treasury Department received a 30 percent equity stake in Yellow to secure the loan.
The funds were intended to cover pandemic-related losses, and they were given on the premise that Yellow was essential to national security because of their DoD contract – the one they overbilled for.
In June, a congressional probe found that the loan was issued in error. Even though Yellow counted the Department of Defense among their customers, they did not meet the standards to qualify for the business loan. Other freight companies could have made those deliveries to the military bases.
If those three problems make it sound as though Yellow’s position couldn’t get any worse, you may want to sit down. The fourth is the biggest of all: the International Brotherhood of Teamsters.
Problem #4: The Teamsters as Represented by General President Sean O’Brien
According to Satish Jindel, President of transportation and logistics firm SJ Consulting, Yellow’s wages were “lower than any competitor.”
We know Yellow had a low-cost business strategy. Apparently it included less than competitive wages. Perhaps that is why the Teamsters did not feel inclined to play ball with Yellow in their efforts to refinance their debt or in the renegotiation of their contract.
In late June, Yellow sued the Teamsters over claims that the union was blocking their attempts to restructure their business and refinance their debt. One month later, they narrowly avoided a strike tied to health-care benefits – but the damage was done.
Companies could see the writing on the wall and did not want their freight to get caught in the crossfire. By the time the deal was inked, Yellow had lost 80 percent of its freight. Bankruptcy – and the loss of over 20,000 union jobs – was all but inevitable.
Hindsight is 20/20, but I do wonder if this scenario was even on the board when the decision was being made at Yellow whether they should acquire Roadway and USF. I do know that they should have better leveraged the capabilities of their procurement team to drive efficiency.
One more story that keeps the world of supply chain on the front page of the paper… there’s never a dull moment.