FedEx Ground contractor forms advocacy trade group

Any effort to represent a collective of contractors will sit poorly with FedEx. It has been mostly nonunion for its entire history, though its pilots were already unionized in 1987 when FedEx acquired the old Flying Tigers all-cargo airline. In a memo last week to FedEx contractors, FedEx Ground CEO John Smith said the unit has no intention of discussing or negotiating contractual terms with individuals or groups representing multiple contractors. FedEx Ground’s policy is to negotiate with contractors on an individual basis, Smith said.

Patton, who runs a Nashville, Tennessee-based company that operates a 10-state territory, said Wednesday he has invited Smith to speak at the Las Vegas gathering.

In a video that accompanies the announcement, Patton said the group’s purpose is to “exercise all logistics professionals’ First Amendment rights to promote legislative advocacy and … if necessary, participate in legal challenges to secure rights that would benefit members.”

According to several sources, about 35% of FedEx contractors, who in turn employ thousands of drivers, are at levels of financial distress that could threaten their ability to stay in business. At the same time, FedEx Ground is under intense and renewed pressure by activist investor D.E. Shaw & Co. to improve operating margins, which have been stuck in the mid-single-digit range for a couple of years.

The unit has acknowledged the challenges faced by its contractor base. In a move that will reduce the costs of some contractors, FedEx Ground said it will end Sunday deliveries in certain less populated markets by mid-August. Patton, who has called for FedEx Ground to rethink the viability of Sunday deliveries in the wake of high costs and inadequate volumes, said the move will impact about 15% of the nationwide Sunday network.

In a statement Wednesday, the unit said that it has a “long history of maintaining open lines of communication directly with individual service provider businesses and their owners,” and that it remains “committed to engaging in a productive dialog with each business to understand and address any challenges they may be facing.” The statement did not address the invitation for Smith to speak at the Las Vegas meeting.

FedEx Ground has always operated with a nonunion driver network, with contractors serving as the conduits between the unit and its drivers. Each contract gives a contractor the exclusive right to deliver packages within specific territories. Territories have historically been bought and sold, and as the unit has grown, many contractors have prospered while operating their territories and if they sold them.

For years, most routes supported business-to-business (B2B) volumes, which had very solid margins because the routes handled multiple packages per stop. In the past four or five years, however, residential deliveries have overtaken B2B due to the explosive growth of e-commerce. Business-to-consumer (B2C) traffic is generally priced at lower levels than B2B. As a result, contractors are typically paid about 40% less on residential packages than on B2B shipments, Amit Mehrotra, an analyst for Deutsche Bank, estimated in a note last week.

In addition, residential deliveries impose a greater operating burden on contractors because their drivers are delivering one or two packages per residence rather than dozens, if not, hundreds, of packages per stop as is common in the B2B segment.

FedEx Ground dramatically expanded its delivery infrastructure to respond to the surge in residential volumes. This, in turn, required contractors to invest more of their own capital in drivers and equipment. However, B2C delivery demand has leveled off as more consumers return to in-store shopping. This has left drivers with high fixed costs but less volume.

To compound matters, staffing shortages at the unit’s ground network led to service problems and higher costs. The unit has said that the staffing problems are behind it.

At the same time, contractors are facing much higher fuel, equipment and insurance costs than during the early days of the pandemic, which was the last time that FedEx Ground provided additional support to its contractors. All of this has led to an increase in contractor churn, according to Patton. This has forced FedEx Ground to introduce so-called “contingency pay” to bring in third-party capacity, he said.

Contingency pay rates are generally two to five times higher than what the unit pays regular contractors, Patton said. What’s more, service levels are compromised because the third parties are not nearly as familiar with the routes as contractors who regularly operated them, he said.