A trade group formed in part to support the financial interests of FedEx Ground driver contractors said Tuesday that it has asked for a no-confidence vote on unit CEO John Smith.
The Trade Association for Logistics Professionals (TALP) drafted a list of six questions that has been distributed, or is being distributed, to the unit’s approximately 6,000 contractors. One of the questions is whether respondents have confidence in Smith to continue leading the FedEx Corp. (NYSE: FDX) unit. Another is whether contractors fear retaliation from FedEx Ground should they voice dissenting opinions on how the unit is run.
The four other questions address each contractor’s profitability levels, the level of satisfaction with their current financial relationship and whether they have been able to renegotiate their contracts either as a renewal or in the middle of a cycle.
FedEx Ground’s contractors work under contracts that run between 12 and 18 months. Contractors can apply to renegotiate their contracts during a cycle, though FedEx Ground must approve the requests for renegotiation.
The replies to the questions are due by 6 p.m. EDT on Friday. At that time, Spencer Patton, a former FedEx Ground contractor who formed the trade group, will work with an unidentified “global advisory firm” to review and confirm the data’s accuracy, TALP said.
In a statement Tuesday, FedEx Ground did not address the trade group’s action. The unit said “we are committed to creating opportunities for [contractors] to thrive in a competitive market.” The unit said it recognizes that each contractor business is “unique and is managing through these conditions differently.”
Patton, a former FedEx Ground contractor leading an effort to address what he maintains is a financial crisis within the contractor ranks due to rapidly rising operating costs, was stripped of his 10-state territory 11 days ago. According to a source close to FedEx Ground, 91 of Patton’s driver employees were affected by the move at the time it was made public. Of those, about two-thirds have found jobs with other contractors, the source said.
In the statement announcing the no-confidence vote, the trade group repeated its claim that more than one-third of the contractor network has either walked away from their contracts or will soon be forced to do so. This will result in FedEx Ground “being unable to deliver packages in a timely manner” during the peak season, TALP warned.
In its statement, FedEx Ground said it is undertaking initiatives that will “ensure a successful peak season” this year but did not elaborate.
Patton has said FedEx Ground needs to boost the compensation to its contractors or else many will not make it through the year. The unit has implemented fuel surcharges that have expanded its profit margins by 30%, all the while not passing those increases to the contractors that consume the fuel, the trade group said in Tuesday’s statement.
The FedEx Ground source said the unit is unaware of any recent scenario where it has been able to expand its profit margins by 30%. In fact, the unit for several quarters has experienced margin compression due to increased cost inflation and, in particular, a severe labor shortage at its ground network that forced up labor costs and triggered expensive delivery inefficiencies.
It is also unclear how Patton’s group arrived at such a large number of contractors that were in such dire financial straits that they would soon be forced to abandon routes. Contractors are technically required to serve out the duration of their contracts. However, contractors have been known in the past to walk away from routes should financial conditions become too difficult.
Should that happen, FedEx Ground implements contingencies where other contractors, for a hefty price, will step in to fill the void left by departing colleagues. Many contractors have been enriched over the years through contingencies, while the unit has used the program to maintain service continuity in the event of an unexpected problem.
Before he and FedEx Ground parted ways, Patton had said he would not be able to operate his routes beyond Nov. 25, otherwise known as Black Friday, unless FedEx Ground provided some level of financial assistance.
Last week, FedEx Ground notified contractors about what are known within the unit’s ecosystem as “Schedule K” payments.
The payments are in two phases: The first, which runs from September through November, provides contractors with funds up front so they can add labor and equipment to manage the upcoming peak-season parcel-delivery spikes. The second phase, which kicks in at the start of peak season in late November, provides contractors with variable compensation tied to specific delivery productivity metrics. The compensation levels are adjusted weekly depending on the unit’s forecasts for peak season volumes.
The Schedule K formula has been restructured given the financial challenges facing many contractors, according to the FedEx Ground source. The unit believes the structure in place accurately reflects the current macroenvironment, the source said.
FedEx is the Titanic
It’s easy to find out where Spencer got his large number of contractors that have or might fail because of financial issues. Talk to the contractors. FedEx keeps saying they are having discussions with each individual business but that’s a false state. FedEx reported the 30% margin increase from additional fuel surcharges in their Q4 earnings report in June. My current contract was handed to me in April of 2021 and it started in September of 2021. All of my rates were lowered including fuel during a time period when all of our costs were increasing. Every business that I do business with was raising their prices to make up for their increased costs … including FedEx. But my rates went down. On top of that my contract was based on a 8% to 11% growth for 2022. Year over year I’m seeing a 10% to 22% decline each week. FedEx has flat out ignored my request to renegotiate my contract. Any statement from FedEx saying that they are working with us is a flat out lie. I’ve been with FedEx a long time and have enjoyed my time with the company. But today, I no longer trust FedEx. The 1 thing that any investor should know about this company is that FedEx can’t pay us to do pickups. We lose money every we have to pickup packages. It’s been this way for a long time and has got worse over the last few years. So we no longer seek out businesses for new shippers. In fact, I’d drop all of my shippers if I could. This is the only way FedEx makes money and they are basically paying us to push away new accounts. The shippers we have the most influence over are the small and medium sized accounts because we deal with the owners of those companies. Those companies also have the highest margins for FedEx because they don’t ship enough to get all the discounts like a Walmart. So when an analyst asks the question “Why are FedEx margins so low?” That’s the reason. The contractors, which run the entire network for FedEx ground, are not being paid to pickup packages from shippers and we can’t afford to lose more money. Fedex’s answer to fix their margin issue is “pay the contractors less” but this is just amplifying the problem. It’s kinda funny … I watched a video this morning from UPS’s CEO talking about why their margins are so high. She said the revenue from small to medium sized accounts has exploded and that has given them extraordinary growth in their profit margins. I guess UPS has figured it out. She also stated in her last earnings call that they have new business that will be starting the 2nd half of the year. Packages that will be entering their network that are currently not in their network. I wonder where those packages will be coming from??? FedEx has major issues and the “leaders” of FedEx are making it worse.
Thomas J
Fedex is in damage control mode.
JT
Anyone involved in sharing cost and profitability had better be aware of the provisions of both federal and state Anti-Trust Laws. Independent businesses cannot legally form what the government calls “Trusts.” They cannot work together to raise prices for their group, legally at least. It’s unheard of!
Consult with proper legal counsel and do your legal due diligence, so you know what you might be getting into.