FedEx Corp.’s (NYSE: FDX) ground-delivery unit said late Thursday that it will suspend Sunday residential deliveries in certain “lower-population” markets starting the week of Aug. 15, a nod to concerns voiced by many of its independent delivery contractors that the service is a money-loser for the unit and is damaging contractor margins in the process.
In an email obtained by FreightWaves, FedEx Ground said that Sunday operations have “posed various challenges” to the provider network, which is composed of about 6,000 contractors employing many thousands of drivers. The change is an opportunity for the unit and the provider network to “recalibrate operations for current market conditions,” FedEx Ground said.
The unit did not specify which markets would lose Sunday service, but it said it would be targeted at markets where the suspension would have a “lesser impact on shippers.” FedEx Ground said that the Sunday service would still reach nearly 80% of the U.S. population even after the downsizing.
The unit launched Sunday service in early 2020 as a way to increase fluidity in its delivery network and to offer a delivery option not available through UPS Inc. (NYSE: UPS), its main rival. However, contractors said that the rapid introduction of the service on a nationwide scale created major strains on the unit and its contractor network.
Spencer Patton, a Nashville, Tennessee-based contractor with 225 drivers and 275 trucks in his 10-state territory, said in a letter sent Wednesday to top FedEx executives that the service has been a $500 million earnings drag on the unit, and that the situation isn’t getting better. At the same time, Sunday deliveries have erased more than one-third of provider profit margins in just one year. The margin erosion for contractors continues to worsen, Patton said.
Sunday deliveries have been an “incredible struggle and a financial disaster for all parties involved,” Patton said in the letter.
The FedEx announcement comes amid deepening fissures between the unit and its contractor workforce. Patton’s letter made clear that many contractors are struggling to stay alive amid dramatically rising costs and the inherently low margins of delivering an increasing proportion of cheaply priced e-commerce shipments from one residence to the next. Contractors who incur significant capital expense in purchasing delivery territories in the hopes of making them profitable and eventually selling out at a healthy profit are seeing those opportunities evaporate, Patton said.
In the letter, Patton called on the unit to increase contractor pay per stop made by 50 cents on all FedEx Ground and e-commerce stops. The increase will stay in effect for 12 months and would 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.
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 that will speak on behalf of all contractors. The committee’s focus will be to negotiate cost changes to contractor 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.
Patton emphasized that he wasn’t setting any deadline 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.
In 2020, as the COVID-19 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 what was experienced in 2020, and the unit has taken no action. Patton said that 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.