Pension Lifeline: How Pandemic Aid Can Boost the Trucking Sector
The signing of the 1.9 trillion coronavirus aid package by President Biden has brought a glimmer of hope to the trucking industry, particularly for unionized trucking companies. The provision offers a fiscal lifeline to struggling multiemployer pension plans, which has the potential to significantly boost carriers like ArcBest Corp. and Yellow Corp.
Unionized Carriers and Pension Plans
Decades of financial instability in multiemployer pension plans have raised risks for unionized carriers, such as ArcBest Corp. and Yellow Corp. The Teamsters’ Central States Pension Fund, the largest of the plans, is projected to become insolvent in 2025. This raised concerns that carriers could face increased pension contributions, which would increase their operational costs and potentially harm their financial stability.
Artists from Citigroup Inc.'s transportation analysis team, Christian Wetherbee, highlights that 'there was always the lingering risk that if there was severe risk of underfunding, you'd have to pay extra into the Central States.' However, the recent legislation offers substantial relief, removing this risk for many carriers.
Multiemployer Pension Plans and Their Risks
Multiemployer pension plans operate under agreements between unions and multiple companies in specific sectors. These plans have faced financial instability due to demographic changes, shifting business trends, and a decline in union membership, leading to many plans becoming underfunded. The Pension Benefit Guaranty Corporation (PBGC) backstops benefit payments for about 10 million participants in these plans, but the fund is projected to run dry in 2027.
These risks are particularly concentrated in the less-than-truckload (LTL) sector, where carriers combine shipments from multiple customers on a single truck. Major LTL carriers like Yellow and ArcBest's ABF Freight segment are facing these challenges, which are exacerbated by the higher pension and benefits costs typical of unionized operators.
Benefits of Pension Lifeline to Trucking Companies
The legislation from the pandemic aid package provides an estimated $86 billion in grants to qualifying multiemployer plans to cover benefits through 2051. This provision removes the financial risk that carriers may have faced if a plan like the Central States collapsed. Analysts predict that this relief will significantly reduce ongoing financial pressures on carriers, allowing them to focus more on operational efficiency and growth.
For ArcBest, the federal backing removes a significant valuation overhang, which has previously contributed to a sizable discount compared to higher quality peers. Analysts expect to see the company's valuation spread to premium LTL carriers narrow substantially. In a statement, an ArcBest spokesman emphasized that the aid is "encouraging news," particularly for Teamster-represented drivers, dockworkers, and retirees in the ABF Freight business.
Furthermore, the provision in the bill may help ArcBest and Yellow compete for drivers and dockworkers because it provides greater retirement benefit certainty for unionized workers. Yellow spokeswoman Heather Nauert noted, 'This relief will secure the hard-earned retirements of many front-line American workers including members of the Yellow team and hundreds of thousands of retirees in other industries.'
For UPS, the bill offers a chance to reduce or eliminate potential liabilities related to the Central States fund. This is significant as UPS had agreed to withdraw from the fund in 2007, and any insolvency could have resulted in increased contributions.
Conclusion
The pension lifeline provided by the 1.9 trillion pandemic aid package represents a major development for the trucking industry. It offers substantial relief to carriers facing increased pension costs and financial instability, potentially boosting their operational efficiency and competitiveness. As the industry navigates post-pandemic challenges, this relief is undoubtedly a crucial support.