Yellow Freight System, Inc. of Delaware
Yellow Freight System, Inc. of Delaware
Sales: $2.30 billion
Stock Exchange: NASDAQ
Yellow Freight System, Inc. of Delaware is one of the largest long-haul common carriers in the United States. Since the company’s rescue from bankruptcy in 1952, Yellow had been skillfully directed by three generations of men named George E. Powell, father, son, and grandson, each contributing to the Powell family’s record of unbroken success. In the early 1990s, George E. Powell III presided as chief executive over a company determined to continue its tradition of outstanding less-than-truckload (LTL) service and unusually healthy bottom line performance. Yellow Freight has not only survived but prospered through decades of mergers and the competition unleashed by the industry’s deregulation in 1980.
Yellow Freight was originally a franchise of the Yellow Cab Company in Oklahoma City, Oklahoma. Encouraged by the growing use of motor trucks for carrying freight after World War I, Yellow Cab’s owners decided that more money could be made hauling boxes than people, and in 1924 they exchanged the company’s cabs for a small fleet of trucks. Since there were as yet few dependable highways of any length in Oklahoma, Yellow Freight at first confined its business to Oklahoma City and its environs. Another handicap faced by early truckers such as Yellow was the dominance of the railroads, upon whom generations of business people had come to depend for their long-distance freight requirements. Conversely, since there had been as yet no real alternative to the railroads’ bulk transport system, manufacturers of smaller, fragile, or perishable items had not had an opportunity to develop the long-distance business that would support a large trucking industry. Yellow Freight was thus kept busy with primarily local and short-run business until the onset of the Great Depression in 1929.
The Depression subtly altered the relative competitiveness of the railroads and truckers. With money too scarce to leave tied up in inventory, shippers began to appreciate the flexibility of motor trucks, which could deliver as little as a single package to a specific locale at the precise time desired. The trucking industry enjoyed tremendous growth during the 1930s, when thousands of people started their own truck lines with little more than a single vehicle and their own labor. The upsurge in trucking resulted in intense price competition, but it was an important leap forward for the industry and signaled the beginning of the end of the railroads’ dominance in the transportation field.
For Yellow Freight, the 1930s saw the company expand its operations across state borders. By the middle of the decade, Yellow was shipping as far south as Houston, Texas, and north to Kansas City, Missouri, already displaying an orientation to north-south routes that would stand the company in good stead during the coming years. Most of the great railroad systems in the United States run east-west across the great plains; by expanding north and south, Yellow was able to serve the growing Texas economy without undue competitive pressure from the railroads. Yellow had also begun a policy of leasing both vehicles and terminals, an economical method of rapid expansion in times of low interest rates such as the 1930s, but always vulnerable to sudden inflation or a sharp drop in revenue.
Yellow prospered continuously through World War II and by 1950 was operating 51 small subsidiary companies, most of them using leased equipment. Its routes then covered many of the middle southern states, with special strength in Texas, and company revenue had reached the neighborhood of $7 million. Yellow’s heavy reliance on leased equipment, however, had so strapped corporate finances that after a quick change of ownership the company tumbled into Chapter 11 bankruptcy in 1951. Its troubles attracted the attention of George E. Powell, a Kansas City banker who was also vice chairman of a larger Midwest trucking line, Riss & Company. Powell surveyed the wreckage of Yellow Freight, and with the help of Michigan and Kansas City investors organized a purchase of Yellow’s stock in 1952. From Riss & Company the elder Powell brought along his son, 26-year-old George Powell Jr., and a number of other young managers, including Donald McMorris and Mark D. Robeson.
The combination of talents represented by the new owners would prove well adapted to the postwar era of U.S. trucking. Formerly composed of myriad small, independent operators, trucking was rapidly maturing into a more typical modern industry, with the need for efficiency and tight controls outweighing the importance of individual initiative. Many of the smaller operators were shortly to lose their businesses to the new giants, but Yellow Freight’s team of bankers and young managers was not wedded to the traditional strategies of the trucking industry. The Powells were primarily business people, and with insight into the need for organization and efficiency they put Yellow at the forefront of trucking innovation, with a new emphasis on customer service, information flow, and cost accounting.
Within five months Yellow climbed out of Chapter 11 and began making money. The expanding postwar economy provided a constantly increasing volume of freight, of which a greater percentage went to the truckers than ever before. From its bases in Oklahoma City and Kansas City, Yellow was able to serve as a bridge between the older industrial states in the Midwest and the growing population centers of Texas. The Powells pursued an expansion policy that took Yellow farther to the north and east, marked especially by the 1957 purchase of Michigan Motor Freight Lines, a company doing about two-thirds of Yellow’s $15 million in revenue. Although the largest of Yellow’s acquisitions to date, Michigan Motor required extensive pruning and realignment before melding successfully with the rest of Yellow’s operations. Yellow dropped many of the new company’s short-haul routes, having decided to concentrate its energies on the long-haul, primarily LTL freight market.
It was a time of rapid advance in tractor-trailer design, and Yellow maintained a policy of turning over its equipment inventory as quickly as possible. Here was another key difference between the early days of trucking and the postwar era. Since highway weight limits were largely fixed, and the Interstate Commerce Commission (ICC) regulated the rates charged by common carriers such as Yellow, one of the few ways to cut costs and increase income was by carrying more freight per pound of truck. New designs in both tractors and trailers made it possible to pull more cargo more efficiently than ever before, which gave an advantage to those companies large enough and smart enough to invest heavily in new equipment. Yellow’s policy of rapid turnover allowed it to capitalize on the latest trucking improvements, which in turn kept Yellow’s cost lower and its service faster than the older, smaller operators. As the latter continued to fall behind the industry standard, aggressive young companies like Yellow were able to buy them out and add hundreds of new routes to their systems—a much easier method of expansion than petitioning the ICC for permission to create new routes.
It was roughly in this way that Yellow developed into one of the superstars of the trucking industry during the next two decades. By the mid-1960s, its annual revenues had climbed past $40 million, making it the 13th-largest trucker in the country. In 1965 Yellow announced a merger that would radically alter the scope of its operations. Its new partner was Watson-Wilson Transportation System, an east-west carrier that was larger than Yellow, with annual revenues of $66 million, but had fallen on hard times for precisely the reason Yellow had thrived, the ability of management to cope with change in the industry. The larger part of Watson-Wilson was the former Watson Brothers Transportation Company, with routes westward from Chicago through Kansas City and St. Louis, Missouri, to the West Coast. Only one of the Watson brothers really knew the transportation business, and he ran the company with an autocratic style of management that served quite well. When he died in 1958, however, Watson-Wilson drifted through several ownership changes until it was sold as a money-losing venture to Yellow for about $13 million.
The purchase of Watson-Wilson was a risky move by the Powells, but by more than doubling Yellow’s size and opening up an entirely new axis of travel the acquisition was decisive in the company’s growth. Bringing the sprawling Watson-Wilson routes under the more disciplined aegis of Yellow, the Powells entered a 15-year period in which their company would emerge as the most efficient trucker in the United States. Yellow’s operating ratio—expenses as percentage of revenue—was consistently among the industry’s lowest. A fully computerized command center in Kansas City allowed Yellow to monitor shipments with a high degree of accuracy, improving customer service and refining operations at the crucial “break-bulk” centers. As of 1970, Yellow had nine of these large transport hubs, where shipments were broken down and repacked on new trucks for the next leg of their journey. Break-bulk centers require large amounts of labor and depend on precise coordination between the chain of trucks involved; by implementing a computer network earlier than many of its rivals, Yellow was able to hone its break-bulk operations to the point where freight rarely touched the ground on its way from truck to truck. In addition, Yellow was among the earliest of the truckers to experiment with automated handling systems, beginning in 1971.
By that time, Yellow’s revenue had shot up to $230 million, making it the third-largest trucker in the country. Its operations then stretched from the Atlantic to the Pacific coasts, an east coast firm having been acquired in 1969, and net income was rising at the very healthy rate of 24% per year. George Powell Jr. had taken over from his father as chairman of Yellow, in which the Powells retained a 22% family stock holding, and it would not be long before George Powell III began his tenure with the firm. The 1970s were perhaps the apex of Yellow’s success. Between 1972 and 1977 the company averaged a 32% return on equity—the best in the industry— doubled its revenue, and extended its operations to 44 states via 223 terminals, all during a time of unprecedented rises in the cost of fuel and widespread talk of industry deregulation. Yellow had never suffered a losing year under the Powells.
They were less successful in the oil and gas industry, into which they plunged in 1976, with the creation of Overland Energy Company. Although Overland never became a dangerous liability, it did soak up about $60 million before its dissolution in the early 1980s, when Yellow needed every penny to wage war on another front—deregulation. Yellow’s top management failed to predict the congressional approval of Ronald Reagan’s 1980 deregulation of the trucking industry. As a result, Yellow was forced to write off some $34 million in operating rights fees rendered obsolete by the advent of unrestricted route competition, a charge that pushed the company into the red for 1980. Of potentially greater significance was Yellow’s failure to keep up with its main rivals in the LTL market, which, because of the need for sophisticated break-bulk handling and widespread route systems, would become the specialty of the largest, wealthiest truckers after deregulation. Yellow found that it was not in a position to compete with Consolidated Freightways and Roadway Express for the valuable LTL freight and had to lay off 20% of its work force in 1981.
Powell Jr. and Powell III responded with a program of “hub and spoke” upgrading of the Yellow system, in which 17 terminals were converted into full-scale break-bulk centers in three years. Yellow’s LTL freight, as a percentage of its total tonnage, rose from 45% in 1979 to 1982’s 61.4%, and over the next four years the company increased its number of terminals to more than 600, a rate of expansion greater than that of any other trucker. In an era of unprecedented competition, which between 1980 and 1986 forced out of business a group of truckers with aggregate sales of $3 billion, Yellow enjoyed a revenue leap that solidified its hold on the number-three spot among U.S. trucking lines. By the end of the decade, sales were regularly over the $2 billion mark, and Yellow had largely completed the heavy expenditures needed to build its hub-and-spoke system.
In the early 1990s, under the direction of George Powell III, Yellow seemed well prepared to prosper in the mature trucking industry, which featured a small number of large, multifaceted organizations operating across the country. Perhaps mindful of Consolidated Freightways’ disastrous detour into the Emery Air Freight business, Yellow maintained a strict trucking-only principle in its investment decisions, more than happy to stay in the business it had mastered for many years. Indeed, the management philosophy of Powell III seemed remarkably like that of his grandfather; for both men, success in trucking had required strict quality control, accountability, and conservative investments.
Adley Canada Ltd.; Mission Supply Company; Overland Energy, Inc.; Yellow Freight System, Inc.; Yellow Freight System of British Columbia, Inc.; Yellow Freight System of Ontario, Inc.; Yellow Redevelopment Corporation.
“Yellow Transit—Trucker in a Hurry,” Business Week, August 28, 1965.