FedEx partners threaten to stop holiday shipments

New York
CNN Business

People hoping to get their holiday shopping delivered on time may be caught in the middle of a growing battle between FedEx and the thousands of contractors who deliver most FedEx packages.

Many of the contractors used by the company’s FedEx Ground division say they are losing money, even as revenue at that unit grew more than 60% since before the pandemic. As a result, a group of contractors are threatening to close their operations just before Black Friday.

FedEx (FDX) Express depends on FedEx (FDX) employees to move its shipments, but FedEx (FDX) Ground depends on a network of more than 6,000 independent businesses to make deliveries. Many of them have dozens, or even more than 100 drivers. Most consumers probably don’t realize that the FedEx (FDX) field drivers who stop at their doors, wearing FedEx (FDX) uniforms, are actually working for contractors, not FedEx (FDX) itself.

Higher costs for fuel, trucks and driver payments have caused up to 30% of those contractors to lose money, according to an estimate by Deutsche Bank. Many of the contractors are in the process of forming a trade group to pressure FedEx to improve the terms of the compensation packages they receive.

Contractors are not allowed to coordinate a lockout, the way employees can go on strike under US labor law. Such concerted action would be considered a violation of antitrust law that prevents separate companies from working in concert with each other.

But talk of a shutdown before Black Friday is spreading among contractors who are more vocal about the need for change.

“My business is losing money every day,” said Spencer Patton, one of the largest contractors and the most vocal critic of FedEx Ground’s relationship with its partner network. “And my business will not be able to continue operating after November 25th. The peak season is one of the highest operating cost periods of the year. I need to double the number of trucks, hire drivers. I won’t do that unless things change.”

His suburban Nashville-based company, Patton Logistics, has 275 trucks serving hundreds of FedEx Ground routes spread across 10 states in the central US. Its trucks delivered about 6.5 million FedEx packages last year.

He said the wages he has to pay to keep drivers have risen 37% in the last year, while truck prices have risen 30%. Although the average oil price is down 14% from the record set in June, it is still 52% higher than a year ago, according to AAA.

“Fuel prices have fallen by a wave and this has definitely been a benefit. But wage pressures remain heated,” Patton said. “We’re actually competing against FedEx for drivers.”

Patton has been a contractor for 10 years. He started making his deliveries on a single route before the business grew. He said he historically had about a 10% profit margin excluding interest, taxes, depreciation and amortization. Now he said he is losing 5% to 10% on that basis.

Meanwhile, FedEx reported that revenue at its FedEx Ground unit rose $2.7 billion, or 9%, to $33.2 billion in the fiscal year ending in May compared with the prior fiscal year, although its operating profit fell 17% to 2.6 billion dollars.

FedEx Ground is refusing to provide the kind of blanket financial relief to its contractors that Patton and others are seeking. He said that since January, only 10% of contractors had sought relief.

“We recognize that current economic conditions are presenting new challenges,” FedEx Ground said in a statement. “We remain committed to working individually with service provider businesses to address challenges specific to their situation. Our goal is to enable success for both FedEx Ground and service providers.”

Patton said almost none of the contractors who have asked for better terms from FedEx Ground have been given them. FedEx did not comment on what percentage of contractors have had their contract terms improved, although it said more than 1,600 contractors are operating under newly negotiated or renegotiated agreements. Many, if not most, of those contracts would be renegotiated under the terms of the previous agreements.

FedEx Ground also would not comment directly on the threat of closing several contractors just before the holiday shopping season.

“We are committed to providing exceptional service to shippers and consignees, and we believe the vast majority of service providers are as well,” the company said in a statement. “We are confident in our contingency planning and ability to deliver for our customers during this time as we deal with economic changes.”

FedEx Ground provided CNN Business with the names of several contractors it said are doing well financially despite economic problems at several other contractors. But some of them also expressed concern about what would happen if a significant number of contractors ceased operations due to financial problems.

“I know there are others who are getting hurt, but luckily I’m not in the red,” said Troy Fulsom, a Fresno-based contractor with about two dozen drivers. “Luckily for me, I have an area where we are thriving, expanding. But our profit margins are slimmer. Your heart goes out to those in the position of having to issue the ultimatum. This is a real concern if some people are closing operations, and what it would do to the business and the customers leaving. With the conversations out there, it’s a scary thing.”

Some of the contractors who say they are losing money said they have no choice but to try to absorb the losses and can’t afford to join any shutdown efforts.

“It’s not something I’m going to be able to do,” said David Dorner, a contractor based in Medford, Oregon, about the possibility of a halt in operations. “I’d like to join. But that would put me in a situation where FedEx could step in and take my business away.”

Dorner is about to have a new contract with FedEx take effect in October, and he hopes it’s enough to get him back in the black. But even if it doesn’t close as part of a pre-Black Friday sale, he said it won’t be able to continue indefinitely unless it becomes profitable again soon.

“I’m in survival mode, just trying to get trucks out there every day,” he said. “It will be sad if nothing changes and we have to close our doors.”

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