FedEx Ground acts to appease contractors by suspending Sunday delivery
If the FedEx Corp. ground delivery unit (NYSE: FDX) wanted to extend an olive branch to driver-contractors concerned about rising costs and slowing volumes, while protecting its competitive flank it could have done worse than suspending Sunday deliveries on part of its National Network.
Late Thursday, FedEx Ground announced it would halt residential Sunday delivery services beginning in mid-August in what it described as “low population” markets where shippers would not be greatly affected. The unit did not specify which markets it would target. However, it is obvious that the move will focus on rural areas and less populated suburbs. About 80% of the U.S. market will retain access to Sunday deliveries after the downsizing, according to FedEx Ground.
Spencer Patton, a Nashville, Tenn.-based contractor who operates 275 trucks in 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 would lose service. Two of Patton’s terminals have been told they will cease operations this Sunday, he said.
In a note to contractors, FedEx Ground said Sunday’s operations, which began nationwide in early 2020, “posed various challenges” for the roughly 6,000 contractors, known as suppliers. service providers (CSP), which deliver the unit’s packages. The change is an opportunity for the unit and the supplier network to “recalibrate operations for current market conditions,” FedEx Ground said.
Patton spoke out against the service in a high-profile letter warning FedEx management of a crisis within the contractor network caused by rapidly escalating expenses that many contractors are struggling to cover. In a Friday email, he said the move doesn’t address fundamental issues besetting the 6,000-member network. However, for terminals that lose service, “no longer having to run on Sundays is a very nice reduction in costs. I just wish it had an impact on more entrepreneurs,” Patton said.
The idea behind Sunday Service was to improve the smooth flow of FedEx Ground parcels, while providing merchants and consumers with a niche service that its main rival, United Parcel Service, (NYSE: UPS) does not offer. not. However, Patton said the speed and scale of the deployment took its toll on the unit’s ability to accurately concentrate the next day’s volumes. Without accurate forecasts, “CSPs struggle to align their costs with the actual packages that are made available for delivery each day,” he wrote in the letter released Wednesday.
FedEx Ground’s continued failure to address forecasting errors has resulted in a $500 million decline in profits and wiped out more than a third of supplier profit margins in just one year, Patton wrote.
Satish Jindel, founder and president of ShipMatrix, a parcel and LTL consultancy, said FedEx Ground would continue to operate as usual on Sundays. According to data from ShipMatrix, Sunday volumes represent the equivalent of approximately 7% of the average daily volume generated over the five days of the week. Additionally, rural postcodes account for less than 9% of overall daily deliveries, ShipMatrix said. The combination of the two figures indicates that few Sunday deliveries will be affected by network downsizing, Jindel said.
Jindel, who has worked with FedEx for 25 years, said the move made sense given the leveling off in e-commerce activity and, by extension, residential deliveries. Since UPS does not deliver on Sundays and the US Postal Service primarily delivers on Sundays for Amazon.com Inc. (NASDAQ: AMZN), there will likely be no competitive ramifications for FedEx Ground unless the Market conditions do change, Jindel said.
The downgrade of Sunday service is the first step in what is expected to be turbulent over the next four months for FedEx Ground and its non-union contractors, who, in turn, employ several thousand drivers. Over the past decade, as e-commerce has grown exponentially, FedEx Ground’s volume mix has shifted toward 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, on the other hand, lack the per-stop density of B2B, making it more expensive and less efficient for contractors to plan their routes.
The shift to residential service accelerated during the pandemic as e-commerce demand soared. In response, FedEx Ground has added 73 facilities and 22 million square feet over the past three years. This, in turn, forced contractors to increase their capital investments in labor and equipment over an 18-month period starting in mid-2020. When delivery demand slowed as pandemic concerns subsided, many contractors found themselves struggling with high fixed costs and lower capacity utilization.
The result, Patton said in his letter, is that many contractors are operating on financial steams and may not get there unless FedEx Ground increases per-stop compensation for pickups and deliveries, and freight rates. online for parcel shuttle between hubs. Contractors responsible for drivers and trucks may choose to simply stray from their routes and hope they can sell their vehicles for a decent price in the secondary market. That’s already forcing FedEx Ground to hire expensive purchased transportation providers, most of whom don’t know the nuances of network management, to fill the void, Patton said.
Patton asked the unit to raise the contractor’s pay per stop by 50 cents on all FedEx Ground and e-commerce stops. The increase would remain in effect for 12 months and would be reassessed in 2023 under Patton’s proposal. In addition, line transport pay would increase by 20 cents per mile on all solo and team trips between hubs. One-time runs would receive a 10% increase in compensation. The unit did not comment on the proposal, although it acknowledged the challenges many entrepreneurs face.
About half of the Entrepreneur Network is scheduled to meet Aug. 20-21 in Las Vegas, where a 10-person committee is scheduled to be appointed to speak on behalf of all entrepreneurs. The committee will focus on negotiating contractor contract cost changes, Patton said in the letter. He said “the schedule for these negotiations will remain open” until Nov. 25, which coincides with the official launch of the holiday delivery season.
Besides its pilots, FedEx has been non-union throughout its 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 in the former Flying Tiger Line, which FedEx acquired in 1987. Patton said he did not set a deadline or imply any threat to FedEx Ground. Without additional financial support from the unit, however, many entrepreneurs will not be able to make it to that date or beyond, he said.
In 2020, as the pandemic raged in the United States, FedEx Ground offered a six-month total compensation increase to get contractors through this cycle, Patton said. However, the situation is now much worse than two years ago, and the unit has taken no action to address it, he said.
Patton said over the past two months he has requested adjustments to his network’s cost structure to help offset higher costs. All of his requests, he said, were denied.
Dean Maciuba, who spent 35 years at FedEx and helped build the Ground unit after it launched in 1998, said that at any given time, 10% of all CSPs are unhappy because of disappointing profit margins. Today, however, that percentage may exceed 20%, said Maciuba, who is managing partner, US for Crossroads Parcel Consulting and still has strong ties to the contractor network throughout his years at FedEx Ground.
“Profitability is down across the board for almost all CSPs,” Maciuba said, noting a slowing economy that’s adding pressure from steadily rising costs. This, in turn, jeopardizes the quality and reliability of the service, he said.
FREIGHTWAVES’ Top 500 For-Hire Carriers list includes FedEx (#1) and UPS (#2).