If FedEx Corp.’s (NYSE: FDX) ground-delivery unit wanted to extend an olive branch to driver contractors concerned about rising costs and slowing volumes, while at the same time protecting its competitive flank, it could have done worse than suspending Sunday deliveries across part of its nationwide network.
Late Thursday, FedEx Ground said it would halt Sunday residential delivery services as of mid-August in what it described as “lower-population” markets where shippers would not be greatly affected. The unit did not specify which markets it would target. However, it is apparent the move will focus on rural and less-populated suburban areas. About 80% of the U.S. market will retain access to Sunday deliveries after the downsizing, according to FedEx Ground.
Spencer Patton, a Nashville, Tennessee-based contractor who runs 275 trucks across 10 states and has pushed the unit to rethink the viability of Sunday deliveries, told FreightWaves on Friday that about 15% of the contractor network will lose the service. Two of Patton’s terminals were told they will cease operations this Sunday, he said.
In a memo to contractors, FedEx Ground said Sunday operations, which began nationwide in early 2020, have “posed various challenges” to the roughly 6,000 contractors, known as Contracted Service Providers (CSP), who deliver the unit’s packages. The change is an opportunity for the unit and the provider network to “recalibrate operations for current market conditions,” FedEx Ground said.
Patton had railed against the service earlier this week in a well-publicized letter warning FedEx management of a crisis caused by rapidly escalating expenses that many contractors are struggling to cover. In a Friday email, he said the move doesn’t address the core problems besetting the 6,000-member network. Yet for the terminals losing the service, “no longer having to run on Sundays is a very nice cost reduction. I just wish it impacted more contractors,” Patton said.
The idea behind the Sunday service was to improve the fluidity of FedEx Ground’s package flows, while offering merchants and consumers a niche service that its chief rival, UPS Inc., (NYSE: UPS) does not. However, Patton said the speed and the scope of the rollout wreaked havoc on the unit’s ability to accurately focus the next day’s volumes. Without accurate forecasts, “CSPs struggle to align their costs to match the actual packages that are made available for delivery each day,” he wrote in the letter made public Wednesday.
FedEx Ground’s continued inability to resolve the forecasting errors has resulted in a $500 million earnings drag and erased more than one-third of provider profit margins in just one year, Patton wrote.
Satish Jindel, founder and president of ShipMatrix, a parcel and LTL consultancy, said it will remain mostly business as usual on Sundays for FedEx Ground. According to ShipMatrix data, Sunday volumes represent the equivalent of about 7 percent of the average daily volume generated during the five weekdays. What’s more, rural ZIP codes account for less than 9% of overall daily deliveries, ShipMatrix said. The combination of the two figures indicate few Sunday deliveries will be impacted by the network downsizing, Jindel said.
Jindel, who has worked with FedEx for 25 years, said the move makes sense in light of a leveling off of e-commerce activity and, by extension, residential deliveries. Because UPS does not deliver on Sundays and the U.S. Postal Service mostly delivers on that day for Amazon.com Inc. (NASDAQ: AMZN), there likely will be no competitive ramifications for FedEx Ground unless market conditions change, Jindel said.
Battles to come
The downshift in Sunday service is the first step in what is likely to be an eventful next four months for FedEx Ground and its non-union contractors, who, in turn, employ many thousands of drivers. Over the past decade as e-commerce has grown exponentially, FedEx Ground’s volume mix has shifted to residential service and away from the more lucrative business-to-business segment where a contractor could pick up and deliver potentially hundreds of packages per stop. Residential deliveries, by contrast, lack the per-stop density of B2B, which makes it more costly and less efficient for contractors to plan their routes.
The shift to residential service accelerated during the pandemic as e-commerce demand exploded. In response, FedEx Ground added 73 facilities and 22 million square feet over the past three years. This, in turn, forced contractors to ramp up capital investments in labor and equipment over an 18-month period starting in mid-2020. When delivery demand slowed as pandemic concerns waned, many contractors found themselves saddled with high fixed costs and lower capacity utilization.
The result, Patton said in his letter, is many contractors are running on financial fumes and may not make it unless FedEx Ground increases per-stop compensation for pickups and deliveries, and line-haul rates for shuttling packages between hubs. Contractors responsible for drivers and trucks may choose to simply walk away from their routes and hold out hope they could sell their vehicles at a decent price in the aftermarket. This is already forcing FedEx Ground to hire expensive purchased transportation providers, most of whom are unfamiliar with the nuances of running the network, to fill the void, Patton said.
Patton called on the unit to increase contractor pay per stop by 50 cents on all FedEx Ground and e-commerce stops. The increase would stay in effect for 12 months and be reevaluated in 2023 under Patton’s proposal. In addition, line-haul pay would increase by 20 cents a mile on all solo and team runs between hubs. Spot runs would receive a 10% increase in compensation. The unit has not commented on the proposal, though it acknowledged the challenges many contractors face.
About half of the contractor network is set to convene Aug. 20 and 21 in Las Vegas, where it is expected to nominate a 10-person committee to speak on behalf of all contractors. The committee’s focus will be to negotiate cost changes to contractors’ contracts, Patton said in the letter. He said the “timeline for these negotiations will remain open” until Nov. 25, which coincides with the formal launch of the holiday delivery season.
Other than its pilots, FedEx has been non-union for its entire history. Founder and Executive Chairman Frederick W. Smith has no patience for third-party bargaining units and only accepted the Air Line Pilots Association (ALPA) on the property because it already represented pilots at the old Flying Tiger Line, which FedEx acquired in 1987. Patton has said he isn’t setting any deadlines or implying any threats against FedEx Ground. Without additional financial support from the unit, however, many contractors will not be able to hold out to or beyond that date, he said.
In 2020 as the pandemic was raging in the U.S., FedEx Ground offered an across-the-board, six-month compensation increase to get contractors through that cycle, Patton said. However, the situation today is much worse than two years ago, and the unit has taken no action to remedy it, he said.
Patton said in the past two months he has requested adjustments to his network’s cost structure to help it offset the higher costs. All of his requests, he said, were denied.
Dean Maciuba, who spent 35 years at FedEx and was involved in building the Ground unit following its launch in 1998, said at any given time 10% of all CSPs are disgruntled due to disappointing profit margins. Today, however, that percentage may exceed 20%, said Maciuba, who is managing partner, U.S. for Crossroads Parcel Consulting and who still has close ties to the contractor network through his years at FedEx Ground.
“Profitability is down across the board for nearly all CSPs,” said Maciuba, noting a softening economy that adds to the pressure of steadily rising costs. This, in turn, puts service quality and reliability at risk, he said.
Larry Fader
FedEx has made decades of bad decisions. Combing Express and Ground into one building is a shell game with zero savings. TNT acquisition was a $2billion tech failure. Express Roads DRA mapping is using a 10 year map. Management has spent billions with Quintiq on a planning/schedule program called Valet that does not work. Management creates an paper schedule to get around the Valet disaster. Upper management will motivate accept the truth. EStar was built in house on a cheap budget and the program is riddled with flaws. Programmers keep leaving. Setback after setback. Executive compensation is now tied to the stock price so we won’t ever admit there are failures. Foward looking statements are hugely optimistic. FedEx was struggling pre-pandemic. Now losing covid related volume, losing market share, inflation driving customers to reduced shipping means the outlook is extremely poor. First scrap Valet and let Sr Mgrs drive performance. Stop the insanity of hiring freezes. Nobody applies to FedEx. It’s not a good nor desirable job. Stay on top of hiring or there is no chance of a good service level. Get rid of the MD level which does nothing but simple emails saying Team, protect service on Monday. MDs have no value. Ramps and hubs are struggling and major flight delays are common. Every package was always attempted for delivery. Now we bring back thousands of packages without a deliver attempt. New hires get no training. Scrap the second wave Response sort. Customers hate FedEx showing up in the morning and then again later in the day. If only management would listen. Promotion from within was how we improved and used sort experience. Now outsiders come and go. They have no transportation or sort experience. By the time they have minimal knowledge they go to another company. Your losing your most experienced staff and the knowledge is going away without any plan to transition. FedEx is doomed. FedEx will join Airborne and Emery.
Grant GulliKson
People like me who had lived in parts of Europe as a young boy or has moved away from this country with so much.problems in almost every way . Examples are , The age of consent in most European places are 14 to 16 . Compared to the Puritanical US . The France and Dutch and Scandinavian peoples have legalized prostituion and marijuana . The World is traveling more to those countries too . At the age of 70 in The Scandinavian countries , the older citizens don’t pay Taxes on anything and get free health insurance and Education .In Holland you must be 16 to work as a Sex worker in a brothel .Sure their Taxes are higher . The younger people foot the bills for all Social programs in the Scandinavian countries .Plus a couple more too .The US incarcerates 5 times more than any other country over Petty Crimes that are accepted in Europe .
Captain
I am a contractor, and 100 percent of the building I am in, is in dire straits. One just went bankrupt. Others are already lining up. We won’t make it to Christmas. Fedex’s greed through the pandemic has done this to us!
Sarah Warner
this