The Journal. - After 99 Years, Yellow Heads for Bankruptcy. What Went Wrong?

Episode Date: August 4, 2023

Yellow, a nearly century-old trucking company and a major player in the American logistics industry, hit the brakes on operations and told its workers it plans to file for bankruptcy. WSJ’s Paul Page says Yellow’s financial woes have been decades in the making. FURTHER READING: - Trucking Giant Yellow Shuts Down Operations  - Why Trucking Giant Yellow’s Shutdown Could Cost Taxpayers Money  FURTHER LISTENING: - How the White House Blocked a Rail Strike  - The Supply Chain Saga at One Port  Learn more about your ad choices. Visit megaphone.fm/adchoices

Our colleague Paul Page covers supply chains and the logistics industry. And what's your favorite color? My favorite color is mauve. Mauve? I'm not sure what mauve is, but it's the first thing that came to mind. Yellow wasn't the first color that came to mind? Oh. You want me to try that again? Ah, no!

Yellow, both a primary color and the name of a major player in the world of logistics, one that's been around for almost 100 years. Okay, for people who have not heard of Yellow, tell us what it is. Yellow is one of the biggest trucking companies in the United States. They are sort of the nuts and bolts that moves goods between factories and distribution centers, between distribution centers and stores. We see their trucks all over the highways, and I know they kind of blend into the background for most people, but they've been sort of a binding force in the American economy. But over the decades, Yellow's business has had a rough ride.

So Yellow has been in almost continual, perhaps even periodic crisis, and somehow they've always pulled rabbits out of the hat. They've somehow managed to survive over time. They've gotten lenders to come in, they've restructured their finances in some ways, and they've managed to keep things going. But they've been stepping up to that cliff, really, over the last 20 years several times. And this week, yellow seems to be going over that cliff. Yellow on Sunday ceased all of its operations. They simply stopped moving freight at all, and they told their unionized workers that they were going to declare for bankruptcy. This would be the biggest

failure of a trucking company ever, really. Welcome to The Journal, our show about money, business, and power. I'm Kate Leinbaugh. It's Friday, August 4th. Coming up on the show, how Yellow, one of America's biggest trucking companies, finally ran out of gas. With Uber Reserve, you can book your Uber ride in advance. 90 days in advance. Perfect for all you forward thinkers and planning gurus. Reserve your Uber ride up to 90 days in advance. 90 days in advance. Perfect for all you forward thinkers and planning gurus. Reserve your Uber ride up to 90 days in advance. Uber Reserve. See Uber app for details.

U.S. trucking really took off in the 1950s, thanks to the creation of the National Highway System. Already, the interstate system is shortening the distance between terminals and making every community accessible. Travel and shipping times are less, routes more direct, and fragile and perishable goods arrive fresher and in better condition. Suddenly, truckers could drive from New York to Chicago, Chicago to New Orleans, Miami to L.A. It was faster and it was cheaper. These kinds of long runs connecting distributors, farmers, manufacturers to faraway markets in the U.S. took hold and companies like Yellow

came out and profited a great deal, and they knitted the country together. Yellow was one of only a handful of trucking companies. There wasn't a lot of competition, and the industry was heavily unionized. Yellow is also part of what looks increasingly like a long-ago economy, an industrial economy that has been disappearing for several years, for decades, really. They went hand in hand with the Teamsters and the Teamsters grew as the company grew, just as other trucking companies. And the Teamsters will tell you that they worked hand in hand with trucking companies to expand their business. And as those businesses profited and grew, the Teamsters profited and grew. What happened that sort of upset that apple cart was deregulation of trucking in 1980 under President Carter.

Wait a minute. Trucking was regulated by the government? Trucking was, in fact, regulated, highly regulated by the government. Rates and service were regulated, were overseen by a regulator, and they all worked hand in hand. The free market was just down the road, but there wasn't as much of a free market as we have today. Deregulation allowed new companies to pop up, specialty carriers. Their services cost more than Yellow's low-price shipping, but many weren't unionized, and these companies were quicker and nimbler. A lot of trucking companies sprang up, non-union trucking companies,

and they went head-to-head with companies like Yellow. That presented a real challenge. It kind of siphoned away at a continual pace a lot of the shipments that were going to Yellow and some of its competitors in that business. And what did Yellow do? They tried to grow by buying companies. I mean, this gets to some business strategy issues.

They got bigger by buying other companies. They didn't grow organically with the market. They didn't go out there and try to, at least back in that era, grow as much as other companies were growing with specialized services. They grew by buying companies. Those acquisitions allowed Yellow to build out a coast-to-coast network of trucks and shipping terminals.

And in 2003, it bought a big rival, a company called Roadway, for about a billion dollars. They bought Roadway because they simply wanted to be a bigger company because they saw value in getting a lot bigger. The business guys call that economies of scale. You can spread out your costs over a larger, wider area of business. And when you buy a trucking company, you're not just buying their trucks and all the other operations. You're, in a sense, buying their customers. So when Yellow bought Roadway, they bought all of Roadway's customers. So they had a sort of

a bigger reach into the American economy. And was Roadway also unionized? Roadway was unionized. And so that was a factor. They bought another unionized company. It was important to the acquisition because combining unionized and non-unionized operations can be very difficult. You've got things that are governed by union contracts, and if you bring in a non-union operation alongside a union operation, it's going to cause a lot of tension. And how did Yellow integrate Roadway into its operations? Part of the problem with Yellow is that they didn't actually integrate Roadway into its operations? Part of the problem with Yellow is that they didn't actually integrate Roadway into its operations. They tried to keep Roadway running as a separate operation alongside, as if you have two different stores next to each other and you're just operating them separately, as if Walmart bought a Target next door and then they just simply run it as Target.

In many ways, the easy way out is just to let things keep running. But the easy way out doesn't really help you in the long term. And how did Yellow finance the acquisition? They took on more debt at the time. That also put them into debt. That also added to their debt load. And ultimately, there are so many things that Yellow had to deal with over the years, but that kind of debt load kept piling up. At the beginning, Yellow kept its network of trucks and terminals

largely separate from roadways, which ended up hurting Yellow. What they ended up with was having three trucks with three different drivers showing up to the same customer door. Not an efficient way to run a business. So why didn't Yellow integrate its business with roadways? Because integrating companies is very hard and they, in a sense, didn't make the tough decisions they needed to to integrate those companies and get their

finances in order. That sort of ate away at their finances over time. And how did Yellow perform after the Roadway acquisition? Yellow got bigger, but the problem is Yellow has sort of trundled along, kind of steaming down the highway, as it were, kind of barely eking out a profit. They were all about bringing in revenue, all about market share growing at all costs. And the problem is you're growing at an unprofitable business. And that just gets worse and worse as you get bigger. Yellow's former CEO, who oversaw the roadway deal, said in retrospect, Yellow should have integrated the two companies sooner.

It wasn't until two years ago that Yellow started a program to fully combine its acquisitions. But that didn't end well. That's next. At AirMiles, we help you collect more moments. So instead of scrolling through photos of friends on social media, you can spend more time dinnering with them. How's that spicy enchilada? Very flavorful. Yodeling with them.

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When all of us were stuck at home ordering stuff online, truckers became essential workers. And many trucking companies started making money hand over fist. But not yellow. Yellow, oddly enough, didn't profit as much as other companies. Yellow was the low price option, and they had a very difficult time with their customer base raising prices and getting the kind of returns that other companies were getting. It gave them some breathing room, but we saw some enormous profits from some of Yellow's competitors, from trucking companies. Yellow profited, but they didn't profit enough to have the kind of meaningful impact on their balance sheet and clear away debt that they really needed to.

And why did Yellow need to clear away its debt? Yellow had enormous debt. They needed to keep servicing that debt. Therefore, they needed to keep the revenue going in. They couldn't afford to lose revenue and to lose customers, so they kept that churning along. The problem is, you know, there's again that tough decision that you don't make. And the easy way out was to keep everything the same and just keep moving along. In 2020, the company warned it would struggle to make its debt payments. People started looking at Yellow.

We started looking at Yellow and saying, look, this company isn't going to last. And somehow they pulled another rabbit out of the hat. And this time the rabbit was the federal government. Somehow they pulled another rabbit out of the hat, and this time the rabbit was the federal government. The government loaned $700 million to Yellow as part of a COVID rescue package. The Treasury Department classified Yellow's services as important to national security because of its contracts with the Pentagon. The loan was originally a lifeline. It gave Yellow some room to operate and it gave them money to fund the kind of new trucks,

new equipment that they needed. Yellow was not known for operating, you know, the best, most up-to-date, well-maintained equipment out there. And so they were able to do that. Yellow also paid off millions of dollars in debt and used some of the money for missed healthcare and pension payments to its workers. Then, in 2021, the company set out to finally integrate its businesses,

a plan called One Yellow. It wanted to close some terminals and consolidate operations. On the ground, it wanted to have drivers do more work helping out at the docks of truck terminals. But this also meant changes to its contracts with the Teamsters. And the union wasn't having it. The Teamsters said, whoa, wait a minute. You're changing work rules. This isn't allowed in the contract. We need to go back into the contract. You can't just unilaterally tell people, this is now your job. You know, the job is defined in the contract. So that created something of a standoff. Things escalated in June this year when Yellow tried to delay $50 million in pension fund payments. The Teamsters threatened to strike,

in pension fund payments. The Teamsters threatened to strike, and that prompted Yellow's customers to take action. People started shipping away from Yellow, and Yellow in turn said, look, we're losing business. It's because of you, the Teamsters, that we're losing business.

And they filed a $137 million suit. That was how much money Yellow said they had lost. That was how much business Yellow said they had lost from the Teamsters confrontation. And they blamed that on the Teamsters. How did the Teamsters respond? Well, the Teamsters weren't happy. That really started the finger pointing back and forth. And it sort of created this, in a sense, a family fight, right? They were working hand in hand together. Well, now it was not so much hand-in-hand, right? And so it looked at that point like the Teamsters' relationship, this symbiotic relationship that had gone on for decades, really was broken. And that became very clear last weekend.

Yellow started laying off workers and closing its operations. According to the Teamsters, Yellow notified its workers that it's preparing to file for bankruptcy. A longtime board member called it an incredibly sad situation. That bankruptcy filing hasn't happened yet. I mean, really, ultimately,

the issue here is there are 30,000 jobs and 30,000 workers. And there are a lot of big business issues here, but I keep going back to that. These are blue-collar jobs. These are hardworking people. People have spent, as they say, 20, 30 years with this company and really have worked hard for it given their life's blood over the years. And very abruptly, that seems to be turning off right now. It's not really

a business story for them. It's a personal story. It's their life story. Will Yellow's bankruptcy cause a major disruption for trucking and logistics in the U.S.? Yellow is failing at kind of an interesting time. If this had been two years ago, it would have been a major disruption. The fact is, there's not that much stuff moving right now. There's plenty of space available. We heard from one of Yellow's competitors

that, look, we have 30% of our capacity going unused right now. So, oddly enough, as big an event as it is, it seems to be, in fact, already absorbed. Companies have already absorbed all of Yellow's business, all of the shipments out there. And I'm not hearing about big disruptions here or there. So what's the lesson from Yellow? It ran out of rabbits? It reached one too many times into

that magic hat and really didn't find any rabbits in there at the end. It's a business lesson. Make the tough decisions when you need to. Don't take the easy road. Don't take the easy way out. Think long term. Think about where you expect the company to get to, where you expect it to be. Not really what's the best thing just for today. expect it to be, not really what's the best thing just for today. A lot of that sort of short-term thinking is what led yellow to where it is today. That's all for today, Friday, August 4th. Additional reporting in this episode from Sarah Nassauer. The Journal is a co-production of Gimlet and The Wall Street Journal. Brewer, Maria Byrne, Pia Godkari, Rachel Humphreys, Ryan Knutson, Matt Kwong, Jessica Mendoza,

Annie Minoff, Laura Morris, Enrique Perez de la Rosa, Sarah Platt, Alan Rodriguez-Espinosa, Heather Rogers, Jonathan Sanders, Pierce Singey, Jivika Verma, Lisa Wang, Catherine Whalen, and me, Kate Leinbach. Our engineers are Griffin Tanner, Nathan Singapak, and Peter Leonard, with help this week from Sam Baer. Our theme music is by So Wiley. Additional music this week

from Catherine Anderson, Peter Leonard, Bobby Lord, Emma Munger, Griffin Tanner, Nathan Singapak, and Blue Dot Sessions. Fact-checking by Nicole Pasulka.

Thanks for listening. See you Monday.