FedEx Contractors Say Soaring Fuel Prices Could Ruin Them

  • FedEx contractors say profits are shrinking, and spiking fuel prices may push them out of business.
  • The fuel surge is the latest in a list of rising costs compounded by FedEx operations shortcomings. 
  • If contractors bow out, the cost of keeping packages moving could further threaten FedEx’s profits. 

For FedEx, the supply-chain crisis and e-commerce boom of the past two years have meant record revenue, but also a litany of challenges. The company has struggled to keep costs in check, despite leaning on a contractor model designed to do just that.

And for the roughly 6,000 small companies that complete the doorstep deliveries for its largest service, FedEx Ground, the same forces driving up costs are threatening their survival.

Some of those contractors say that high labor costs, operational missteps by FedEx corporate, climbing truck prices, and increasingly tough negotiations with the company have landed some of them in financial trouble, and pushed others to sell out as returns dwindle. 

Now, soaring fuel prices — in part a result of Russia’s invasion of Ukraine — that threaten to keep consumer prices climbing are compacting already squeezed profit margins.

“This is as lean as I’ve ever seen it as a contractor,” said one business owner, who’s been delivering for FedEx for a decade. 

“We are being squeezed quite a bit,” said Vikram Sekhon, who has been a FedEx contractor in California since 2017. “And our contracts are changing. If you look at historically what we are getting paid per stop — that has reduced by 30 to 40%.”  

Insider spoke to four FedEx Ground contractors, most of whom declined to be named to avoid jeopardizing their relationship with the company. Three said a wave of contractors walking away from the business out of necessity has already begun, starting with those without the financial cushion to absorb rising costs.

The pain may start with the contractors, but it’s coming for FedEx, which is already in a precarious spot. For months, it has watched its on-time-delivery rate trail that of rival UPS. It has struggled to turn record revenues into commensurate profits, with the lowest profitability in the ground business. (FedEx reports its fiscal third-quarter earnings Thursday.)

A FedEx spokesperson declined to answer specific questions regarding contractor concerns. “As our industry undergoes new and unprecedented challenges brought on by the explosive growth of e-commerce and rapidly shifting market dynamics, we remain committed to collaborating with service providers to create opportunities for success,” the spokesperson replied in an emailed statement. 

What’s clear, though, is that the cost of filling the gaps left by contractors that throw in the towel could further raise FedEx’s operational costs and make its financial struggles even more daunting.

‘We need help fast!’ 

FedEx contractors have been vocal about the challenges they’ve faced. In January, 800 of them signed a letter directed at FedEx Ground detailing their problems.

“We need help fast!” the letter read. Drivers said that from the 2020 to the 2021 holiday season, their payouts decreased by 20%, although package volume was roughly the same. 

“The FedEx Model over the last two years has not quite kept up with what we are seeing in the economical landscape of business,” it read, saying vehicle costs were up $10,000 and wages 30% lower compared to one year ago. It pointed to inaccurate forecasts from FedEx that made labor planning difficult, shoddy operations in the parts of the ground network that FedEx itself controls, and poor communication on the part of the company.

The letter focused on the 2021 holiday season, when FedEx sees a seasonal rush in business. But contractors told Insider the issues aren’t particular to any given quarter. 

One Midwest contractor told Insider it is increasingly difficult to make ends meet, and that any complaints about policy changes are met with threats to end or shrink workers’ contracts. 

“We were not grossly negligent. We didn’t overpay ourselves. We should be doing better than we are,” the contractor said. 

Costs are piling up

Doing business with FedEx has become increasingly pricey and painful, some contractors said. 

When e-commerce boomed in 2020 because of the coronavirus pandemic, and FedEx’s package volume and top-line revenue soared, many contractors took on debt to expand and meet the increased demand.

“The capital investment that we planned on making in the next three or four years, we had to make in three months,” Vikram Sekhon said.

The green light to expand was quickly followed by inflationary pressures. Sekhon calculated that his expenses this year, factoring in labor and fuel, will be around 26% higher than last year if current conditions last. 

FedEx charges customers a fuel surcharge, but some contractors want it to send more of that income their way. 

“They are being opportunistic with the fuel surcharge, and I think we’re going to continue to really see that come to fruition here in the next 90 days,” said Josh Dunham, cofounder of the shipping data firm Reveel. “We haven’t even really seen the impact of the Russia-Ukraine conflict yet.” 

On top of rising costs, the company rolled out a new system in 2020 for forecasting how many packages each contractor would receive, to indicate how much staff to schedule each day. For months, its projections were off by as much as 50%, according to Sekhon, leading contractors to schedule and pay for more labor then they needed. 

For some contractors, the challenges of the pandemic and the crush of packages that followed reinforced the historically adversarial relationship between FedEx Ground employees and contractors. 

“The ground employees have never been entrepreneurs,” said one contractor. “They’ve never run their own business. Many of them don’t know how to read a P&L. They don’t understand what it’s like to meet a payroll.” 

Between new contractors rushing to cash in on e-commerce, veterans that haven’t put in the time and money to modernize their technology, and contractors that took on debt last year without selling part of their business for the cash — this could be the biggest mass dropout the company’s ever seen, the contractors said. 

Covering for contractor collapses 

When a FedEx contractor goes out of business suddenly, the company has two main ways of covering, according to contractors. It may first offer the newly available routes to an operator working out of the same hub, or one nearby.

But if it can’t immediately find a replacement, FedEx hires contractors from farther afield as “contingencies” — and pays them up to five times the usual rate, multiple contractors said. 

That’s another stress on the bottom line for FedEx. 

One contractor — who described contingencies as “harvesting the corpses of the contractors that are no longer around” — told Insider that even moderate concessions to contractors could help FedEx avoid overpaying to replace those that fail. 

“We really need FedEx Ground to step up and offer some added compensation, even if it is for a six-month period of time,” another contractor said.

A FedEx spokesperson didn’t respond to a question regarding contingency spending, and the company doesn’t break out that spending in its financial reports. The spokesperson said FedEx has supported the success of thousands of independent businesses. 

“As our industry undergoes new and unprecedented challenges brought on by the explosive growth of e-commerce and rapidly shifting market dynamics, we remain committed to collaborating with service providers to create opportunities for success,” the spokesperson said via email. 

FedEx Ground’s vice president of business development solutions, Kim Whigham, responded to the contractors’ letter in early February. She wrote that the company heard and understood the contractors’ concerns and had plans to address them. As of early March, one contractor reported some small improvement in operations.