FedEx investors need a metric they don’t have

Investors are eager to understand what’s happening at FedEx Corp’s Ground unit, which has been the company’s crown jewel of rising sales and profit for a couple of decades. That’s why almost a dozen Wall Street analysts and two big FedEx investors traveled to Las Vegas over the weekend to hear the view of contractors that make the last-mile package deliveries for Ground.
From the earnings trend, investors can see that something is off-kilter. While revenue has jumped more than threefold to $33.2 billion since 2012, operating profit has increased only 50% to $2.6 billion as margins sank by 10 percentage points to 8%. Since 2012, package volume has more than doubled, and the average revenue per package rose to $10.65 from $6.67.
These results raise questions about why margins are falling and why large numbers of Ground’s 6,000 contractors are so upset.
Is this a temporary hiccup from the combination of Covid-19, the Great Resignation and inflation? Is it more of a structural change with the rapid growth of e-commerce and changes FedEx made to cope with that trend? Do the inefficiencies at Ground lie with the contractors or FedEx? Do contractors make too much money? After all, FedEx’s contractor model has spawned several absentee owners.
These are all valid questions. Unfortunately, the answers differ depending on whether you ask FedEx, an upset contractor or a satisfied one. And, yes, there are many of those. One sure method of gauging the health of FedEx Ground is the trend of payments the unit makes to cover for failing contractors. For now, that information is closely guarded but should be made available to investors.
Keep in mind that FedEx operates two distinct package networks. In contrast to Express, which owns the planes and trucks to move packages and hires all workers including drivers to handle them, Ground doesn’t own any vehicles or have any drivers on payroll. Instead, the unit pays contractors to take packages from a FedEx facility to the final customer and the reverse for package pickup.
At the contractor gathering in Las Vegas, Spencer Patton, who organised it, didn’t make a firebrand speech to rile these small-business owners into action. Instead, he said that he loves FedEx Ground. If FedEx Ground does well, then contractors do well and vice versa, he said. Most contractors feel this way and don’t want to blow up the business, but they want to earn like it was 2012 and not 2022.
Patton did touch on three key factors about why contractors are in a rebellious mood. With a bit of a wink and a nod to antitrust laws, he said it would be up to other contractors whether to follow his lead. Judging by the applause during his speech and the standing ovation at the end, there are likely hundreds willing to follow him.
First, he repeated a statement that without a change to make the contracts more lucrative for his businesses — he operates about 225 trucks in 10 states — he wouldn’t be able to continue operating past November 25. That’s a serious threat because the date falls just before Black Friday kicks off the heaviest package delivery season.

—Bloomberg