FedEx Corp.’s (NYSE: FDX) ground-delivery unit announced late Thursday that it will suspend Sunday residential deliveries in certain “lower-population” markets beginning the week of Aug. 15, a response to concerns raised by many of the company’s independent delivery contractors that the service is a money-loser for the company and is eroding contractor margins.
FedEx Ground stated in an email acquired by FreightWaves that Sunday operations had “presented different obstacles” to the provider network, which is made up of over 6,000 contractors employing many thousands of drivers. According to FedEx Ground, the adjustment provides an opportunity for the business and the supplier network to “recalibrate operations for current market conditions.”
The unit did not specify which markets will lose Sunday service, but it said the suspension would be aimed at markets with a “lesser impact on shippers.” FedEx Ground stated that even after the decrease, the Sunday service will still reach nearly 80% of the US population.
The business introduced the Sunday service in early 2020 to boost the fluidity of its distribution network and to provide a delivery option not accessible through its primary competitor, UPS Inc. (NYSE: UPS). Contractors, on the other hand, claimed that the rapid nationwide rollout of the service put significant demand on the unit and its contractor network.
Spencer Patton, a Nashville, Tennessee-based contractor with 225 drivers and 275 trucks in his 10-state zone, claimed in a letter to top FedEx executives on Wednesday that the service has been a $500 million profits drag on the company and isn’t improving. At the same time, Sunday deliveries have reduced provider profit margins by more than one-third in just one year. Contractor margin erosion is worsening, according to Patton.
According to Patton’s letter, Sunday deliveries have been an “incredible struggle and a financial disaster for all parties concerned.”
The FedEx announcement comes amid growing schisms between the company and its contractor workers. Patton’s letter made it obvious that many contractors are fighting to stay in business in the face of substantially growing prices and the inherent poor margins of delivering an increasing share of low-cost e-commerce packages from one residence to the next. Contractors that invest significant resources in purchasing delivery territory in the expectation of turning a profit and later selling out at a profit are seeing those chances diminish, according to Patton.
Patton requested in the letter that the unit boost contractor pay for each stop made by 50 cents on all FedEx Ground and e-commerce stops. According to Patton’s proposal, the raise will be in force for 12 months before being reevaluated in 2023. Line-haul pay would also be increased by 20 cents per mile on all solo and team runs between hubs. Compensation for spot runs would be increased by 10%.
About half of the contractor network will meet in Las Vegas on August 20 and 21, where a 10-person committee will be appointed to speak on behalf of all contractors. The committee’s primary aim, according to Patton’s letter, will be to negotiate cost modifications to contractor contracts. He stated that the “timeline for these negotiations will remain open” until Nov. 25, when the holiday delivery season officially begins.
Patton stressed that he was not imposing a deadline or making any threats against FedEx Ground. However, without extra financial support from the unit, many contractors will be unable to hold out until or after that date.
FedEx Ground offered an across-the-board six-month wage rise to contractors in 2020, as the COVID-19 epidemic raged in the United States, according to Patton. However, the situation now is even worse than in 2020, and the unit has taken no action. Patton stated that he had requested changes to his network’s cost structure in the last two months to help offset the rising expenditures. He said that all of his requests had been denied.
