‘Contractor-mageddon’ unlikely at FedEx Ground heading into peak

Two weeks before the Black Friday shopping craze hits, it appears the scenario of large-scale defections by financially troubled FedEx Ground delivery driver contractors — and the potential damage such departures could have on the FedEx Corp. unit’s peak-season operations — will not come to pass.

Some profit-squeezed contractors have walked away from their routes, and more than a few are unhappy with lower levels of financial incentives offered by FedEx (NYSE: FDX) to allow it to hire drivers and upgrade fleets for the peak period. By and large, the warnings about as many as 35% of the unit’s 6,000 contractors dropping out of the network by the end of the year due to financial difficulties have not become reality.

“There is zero chance of a ‘Purple Friday,’” said a source close to the situation who spoke on condition of anonymity in referring to an informal timeline set by Spencer Patton, a former FedEx Ground contractor, to ensure contractors had the wherewithal to stay afloat to provide holiday deliveries. Purple Friday is a reference to FedEx’s primary logo color used on its vehicles and aircraft.

Patton, who led a very public effort to highlight the financial perils facing many contractors, was stripped of his routes in late August. The Trade Association for Logistics Professionals (TALP), which Patton established to represent the needs of contractors, did not respond to FreightWaves’ request for comment.

On a mid-September earnings call, FedEx President and CEO Raj Subramaniam said 96% of the unit’s contractors had signed on to the peak incentive program, which was ahead of last year’s pace at that time. FedEx Ground’s service levels, which have struggled over the past few quarters due to acute worker shortages, had reached pre-pandemic levels as of mid-September, Subramaniam said.

That doesn’t mean everything is rosy. FedEx, in general, is experiencing even lower demand than it originally forecasted in mid-September, when it preannounced subpar fiscal 2023 first-quarter results due largely to a sudden and unexpected drop in traffic at its FedEx Express air and international unit. Last month, FedEx Ground told its contractors that peak domestic volumes would be weaker than expected.

As a result, the peak incentive payouts to contractors will be less than in recent years. This, in turn, will put the onus on contractors to fund any peak-season expansion plans, the source said.

Many contractors have grievances over the state of the relationship. FedEx Ground executives have been meeting with contractors around the country to discuss those concerns.

Under the FedEx Ground model, contractors receive compensation from the company to run their own businesses, which includes buying equipment and hiring and firing drivers. Contractors can sell their routes on the open market. Patton runs a company called Route Consultant that brokers the sale of delivery routes. FedEx Ground operates about 60,000 routes nationwide.

Another potential flash point, though one unlikely to emerge during peak, concerns liability issues in the event of an accident. As part of a three-year cost-cutting plan, FedEx has said that by its 2025 fiscal year, which begins June 1, 2024, it plans to have shaved about $1.1 billion in operating expenses from FedEx Ground. Part of those savings will come from what company executives called “reduced liability costs.” The source said this could trigger disputes over how much, or even if, the company will provide financial support to contractors in the event a driver is involved in an accident. 

Low profile

Patton has kept a low profile since he was stripped of his routes. Yet his impact on the carrier-contractor relationship remains front and center, according to the source. Patton ensured that top management at FedEx Ground, which has had the reputation for being too far above the contractors to be aware of their situations, knew what was going on out in the field. Patton “gave a voice to contractors” who may have felt their concerns were being ignored or given short shrift, the source said.

There were also those, however, who thought Patton was in it for himself and his myriad of businesses that sell to contractors. There were also questions over whether Patton was speaking for a critical mass of contractors. In September, TALP mailed a survey to the contractor network with the central question being if contractors had confidence in John Smith, FedEx Ground’s CEO. Of those who responded, 97% said they had no confidence in Smith. However, only 1,200 of the 6,000 contractors actually responded.

Patton’s influence may be felt in other ways. FedEx Ground has floated the idea of a “tiered” compensation system based on the “gold, silver and bronze” Olympic Games medal formula, according to the source. Medals would be awarded based on each contractor’s safety and efficiency performances, according to the source. Gold medalists would receive richer compensation packages, while bronze medalists would be effectively weeded out, the source said. A FedEx spokesperson declined comment.

The source said the initiative, if it passes muster with contractors, would be implemented sometime in 2024. According to the source, Patton was not the catalyst behind the endeavor.

“This should have been implemented a long time ago,” the source said.

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Editor: Mark Solomon