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FedEx CEO Waives Off Contractor ‘Perception Issue’

FedEx Corp. president and CEO Raj Subramaniam cast off concerns of driver discontent in the company’s Ground contractor ranks as the broader business looks to dig itself out of declining parcel volumes by slashing costs and increasing shipping rates.

The updates came Thursday with the company’s earnings results for its fiscal first quarter, which it had already warned investors would come in lower than previously stated guidance.

FedEx has been criticized by a former Ground contractor, who started an association aimed at the company’s network of 6,000 contractors and other logistics professionals, for not being more proactive in addressing business challenges. Spencer Patton, the former contractor, has urged the company to work with contractors to renegotiate their contract terms, while cutting Sunday operations and doorstep delivery in rural markets. 

Subramaniam called what’s been reported on Patton’s accusations related to contractor discontent a matter of perception. 

Patton’s association, the Trade Association for Logistics Professionals (TALP), recently released findings from a survey of 1,200 FedEx Ground contractors, who are either currently active or active in the past year. TALP said 97 percent of those surveyed voted no confidence in FedEx Ground CEO John Smith, with 89 percent saying their current businesses are not profitable. 

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“As far as the perceived issues on the Ground side, let me just assure you, first of all, that the service levels at FedEx Ground are now [at] pre-pandemic levels,” the CEO said. “And we are very well positioned for peak.” 

Subramaniam said of the company’s 6,000 Ground contractors, 96 percent have taken up the peak incentive program, known as Schedule K. Contractors sign up for the optional program, agreeing to raise their number of daily stops during the peak holiday shipping season in exchange for a bonus. 

Subramaniam said the sign-up rate is ahead of where it was last year. 

“So a lot of those [that] were in the media, they’re all much more of a perception issue than reality,” Subramaniam said. “And we are well positioned for peak, and we have the support from our team.” 

FedEx filed a lawsuit against Patton and his Tennessee consulting and brokerage firm Route Consultant late last month alleging he created “a fictionalized crisis” between the company and its contractors. 

The delivery company alleged in court the “exaggerated and misrepresented… financial hardships” depicted by Patton have created concerns among customers of FedEx, while also creating opportunity for competitors to attempt to nab some of its current customers. 

Even with the criticisms being lodged against the Ground business, it managed operating income growth of 3 percent in the August quarter, aided by fuel surcharges and FedEx Home Delivery.

The FedEx Freight business saw operating income growth of 67 percent, also due in part to fuel surcharges. 

Meanwhile, FedEx Express fell sharply with operating income in the quarter slumping 69 percent on account of what chief customer officer Brie Carere cited as macroeconomic weakness. 

The company last week warned investors of a decline in package volume in the remaining few weeks of the quarter, with Subramaniam telling CNBC at the time of the preliminary results update “economic conditions are not really good.” 

FedEx revenue for its fiscal first quarter ended Aug. 31 totaled $23.2 billion, up 5.5 percent from a year earlier. The company’s net income slid to $875 million, compared to $1.1 billion in the year-ago period.

The company hopes to offset the weakening operating environment by removing between $2.2 billion and $2.7 billion in costs this fiscal year. It said it already managed to cut $300 million during the August period and will see about $700 million in cost reductions in the current quarter. 

Part of the savings will come from reduced Sunday operations in some markets, shuttering 140 FedEx Office locations, closing at least five corporate offices and ceasing any projects deemed “non critical.”  

The number of daily flights to be cut will be in the range of 11 percent on Trans-Pacific routes, 9 percent in the Transatlantic and 17 percent for planes jetting between Asia and Europe 

To further address the current environment, FedEx also said it will raise rates beginning Jan. 2 across its Express, Ground and Home divisions by 6.9 percent on average. The company said freight rates will tick up an average of 6.9 percent to 7.9 percent. 

“Listen, I can’t comment on what our competition is seeing or not seeing,” Subramaniam said in response to an analyst question on why FedEx competitors are not currently experiencing similar headwinds. “All I can say is the trends that we are seeing in the marketplace, and we want to get out ahead of this. At the end of the day, the macro is going to ebb and flow. It’s really the activities that we do that matters at the end of the day, and we want to take control of what we can control. And that’s why we are being very aggressive on our cost actions.”