It is clear that Spencer Patton, the leader of a nationwide effort to raise awareness of the financial plight of FedEx Ground’s delivery contractors, will not go gently into that good night.
In a combative address before roughly 4,000 FedEx Ground contractors Saturday night in Las Vegas, Patton, one of the largest contractors in the FedEx Corp. (NYSE: FDX) unit’s network, threatened to shut his business on or about Nov. 25 if the unit fails to renegotiate his contract and ease the cost-inflation burdens plaguing his company.
Patton has said the unit has denied his company’s repeated requests for renegotiation. Many contractors seeking renegotiation have either been ignored or seen their request denied, he said Saturday.
Contracts between FedEx Ground and its contractors can be renegotiated during their terms. Contractors need to present FedEx Ground with detailed evidence to support the need for renegotiation. Contractors look to renegotiate their contracts to adjust their pay scales in an effort to offset rising costs.
FedEx Ground said last week that since January about 10% of all agreements have been submitted for consideration to be renegotiated. It added in Monday’s statement that, in the past 3 months, more than 1,600 contracts have either been newly negotiated or have been re-negotiated.
This year, Nov. 25 is the day after Thanksgiving. The day is known as Black Friday because of its heavy shopping volumes. Patton is calling it “Purple Friday,” a reference to FedEx’s primary logo color used on vehicles and aircraft. In communiques over the past 40 days, Patton has said FedEx Ground needs to provide adequate financial support to contractors by that time. If not, many may not make it through the holidays, he said.
According to various estimates, including Patton’s, between 20% and 35% of the contractor network is experiencing some level of financial distress. The pressure has been caused largely by rapidly escalating costs and a slowing of delivery volumes as e-commerce demand has leveled off since the pandemic.
Patton has formed a trade association, the Trade Association of Logistics Professionals, which he said is open to all contractors working on behalf of transport and logistics companies. Within that group is expected to be a 10-person committee that will act on behalf of FedEx contractors.
FedEx Ground has said it will only negotiate changes to contractors’ contracts on an individual basis and not through any form of third-party bargaining unit. The unit, whose parent has been adamantly anti-union for its 50 years in business, has interpreted Patton’s reference to Nov. 25 as a deadline and ultimatum.
Patton has publicly eschewed such specific language but said in his Saturday remarks “we need to have a timeline” to ensure contractors stay afloat to provide reliable service during peak season.
In a statement Monday, FedEx Ground said the model remains on solid ground, and that most service providers are committed to providing high-caliber peak-season service. The unit said it will discuss annual peak-season financial incentives, known in the network as “Schedule K,” in the next few days. The unit said it has stabilized field staffing levels and modernized dock operations to improve the quality and reliability of pre-load operations.
The unit also said it has made “multiple enhancements” to route optimization technology and the processes and data that support it
No more contingencies
Patton, whose Nashville, Tennessee-based company operates out of 10 states with 225 drivers and 275 trucks, said that for the rest of the year he will refuse FedEx Ground’s offers to provide as-needed support at other company terminals. These arrangements, known as “contingencies,” are designed to fill short-term service voids at designated terminals until FedEx Ground can find contractors to serve the routes those terminals support. Contingencies can also be provided by external third parties if no contractor can pick up the slack.
Because of their urgent nature, contingencies can cost FedEx Ground between two to five times more than what it would pay contractors to fulfill regular pickup and delivery commitments. Many contractors have become millionaires through their acceptance of contingencies. Contingencies have also allowed FedEx Ground to maintain service continuity during often adverse and unexpected circumstances.
However, Patton said he can no longer endorse the use of contingencies in his business because they do nothing but bail out FedEx Ground at a time when many contractors are struggling financially. Contingencies, he said, are no longer a “friend” to the contractor network.
Patton called on FedEx Ground to eliminate all Sunday deliveries since he says those services cost the company and its contractors dearly because there aren’t enough volumes to justify operations. FedEx Ground has suspended Sunday services to those parts of the network with low population densities. It has said 80% of the U.S. population will still receive Sunday deliveries.
Patton also announced the launch of a “purchasing alliance” to leverage the contractor network’s $15 billion in annual buying power to receive volume discounts on fuel, trucks and tires.
Patton peppered his comments with sharp attacks against FedEx Ground, contending top leadership and executives across the network have “lost their way” in understanding the needs of contractors and their role in making the business run as it has for most of its 25-year existence. Patton said FedEx CEO John Smith did not respond to requests to speak to the contractors attending the two-day Las Vegas conference.
Patton also criticized the FedEx unit for unilaterally imposing changes to its contractor networks and for doing so on such short notice. Line-haul drivers, who along with local pickup and delivery drivers make up the delivery network, get virtually no say-so in pay negotiations, Patton said.
FedEx Ground operates under a nonunion model with contractors typically working under 12-month contracts. Contractors get the exclusive right to deliver packages within specific territories. For years, most routes supported business-to-business (B2B) volumes, which had solid margins because the routes handled multiple packages per stop. The attractive economics have allowed many contractors to prosper each year they owned the territories and also when they sold them.
In the past five-plus years, however, residential deliveries have overtaken B2B due to the explosive growth of e-commerce. Business-to-consumer 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.
Residential deliveries also 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.
B2C delivery demand has leveled off as more consumers return to in-store shopping. To compound matters, staffing shortages at the unit’s ground network led to service problems and higher costs. The unit has maintained that staffing problems are behind it.
Optimism still prevails
FedEx Ground regularly produced double-digit annual operating margins for much of its existence. However, the pivot to lower-yielding residential deliveries and massive costs of re-engineering its delivery infrastructure to support the shift has compressed margins to high single-digit levels, a quite unfavorable trend for investors. The unit’s executives have vowed to sustainably boost margins into the double-digit range.
The catalyst for the latest set-to are labor shortages combined with surging costs of fuel and equipment. Tom Wadewitz, transportation analyst for JP Morgan Chase & Co. (NYSE: JPM) who attended the event, said in a Monday note he was told by many contractors that they are having trouble finding drivers and that the problem is expected to last through the rest of the year.
Contractors also complained about rising costs of new and used trucks, higher repair costs and parts shortages, Wadewitz said. In addition, volumes have weakened incrementally in recent weeks as higher fuel costs have eroded consumer purchasing power and economic activity, Wadewitz said in the note.
However, Wadewitz said most of the contractors he met boasted more than 10 years of service at FedEx Ground and still believe in the future of the model. Most of the concerns, he said, are addressable and should not lead to any interruptions in the unit’s business.