[FedEx’s less costly contractor drivers were supposed to give it
an edge. But labor shortages are hobbling services.]
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HIGHLY PAID UNION WORKERS GIVE UPS A SURPRISE WIN IN DELIVERY WARS  
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Thomas Black
November 4, 2021
Bloombert
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_ FedEx’s less costly contractor drivers were supposed to give it
an edge. But labor shortages are hobbling services. _

,

 

Dave Helminski will drop off his last package for United Parcel
Service Inc. [[link removed]] on Christmas
Eve 2022 and retire after four decades as a driver in Chicago. He
joined UPS after four years in the Marine Corps and a yearlong stint
installing carpet. He put in a few years loading trucks, then became a
driver and was set for life. After Helminski drops off that last
package, he’ll have pensions that provide almost the same $100,000 a
year he makes now. “I came out of the lower middle class, and I’m
living the dream,” Helminski says, wearing a face covering with the
Marines emblem as he heads home from his shift at a large UPS facility
in the northern suburb of Palatine.

Helminski’s dream industry has lately become more of a nightmare
scenario at rival FedEx Corp.
[[link removed]] The massive labor shortage
that’s rocked the U.S. since the pandemic and disrupted
long-established employment relationships hasn’t had much impact on
UPS, which pays its unionized drivers the highest wages in the
industry. That’s helped it maintain a stable workforce and rising
profits throughout the current disruptions. Meanwhile, lower-paying,
nonunionized FedEx racked up $450 million in extra costs because of
labor shortages. And while UPS easily beat earnings expectations
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predicted a rising profit margin in the U.S. for the fourth quarter,
FedEx signaled
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its profit margin will fall further. The lack of workers is taking a
toll on its reliability, too. FedEx’s recent on-time performance for
express and ground packages has sunk to 85%, while UPS has met
deadlines on 95% of those packages, according to data collected by
ShipMatrix Inc.

With strong package demand and delivery prices jumping more than 10%,
FedEx’s struggles have left investors puzzled, says Amit Mehrotra,
an analyst at Deutsche Bank. The company’s travails have laid bare
some structural inefficiencies in its business model, too. Unlike UPS,
FedEx operates two distinct delivery networks: one for its overnight
air delivery business, which is handled by FedEx employees, and
another for its ground parcel service, which uses independent
contractors
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make final-mile deliveries employing their own nonunion drivers.

Refined by FedEx founder Fred Smith, the model was supposed to benefit
the company by pushing variable labor costs and the expense of
vehicles to the contractors that operate local routes. And it worked
well in a market dominated by commercial packages, Mehrotra says. But
the ground parcel business has expanded rapidly with the growth of
e-commerce in the past decade, resulting in far more residential
deliveries. Such home service requires the contractors handling those
deliveries for FedEx to drive more miles between stops and leave fewer
packages at each location, boosting costs. When the pandemic hit,
residential deliveries exploded, forcing contractors to hire more
drivers and FedEx to add more package handlers. “There’s
definitely been a loss of confidence in this business” among FedEx
investors, Mehrotra says. “There’s something wrong.”

FedEx defended its contractor model as innovative, highly flexible,
and scalable, said spokesman Perry Colosimo in an e-mailed statement.
The model “has been instrumental in helping us navigate a difficult
environment and will continue to play an essential role in positioning
our business for long-term success,” the statement said.

Investors have long pushed FedEx to combine its express and ground
networks. Smith agreed to acquire the ground network at an opportune
time in 1997, less than two months after a 15-day union strike ended
at UPS. His use of contractors allowed FedEx to expand the business
quickly without the expense of buying vehicles or managing drivers.
FedEx Ground became the growth engine for the company and posted
profit margins in the midteens.

But the pandemic led many U.S. workers to question whether jobs with
low wages and challenging work conditions were worth returning to.
FedEx, Amazon.com Inc. [[link removed]], and
other companies that pay their operational employees wages and
benefits lower than those received by many unionized workers are
struggling to hire people even though they’re now raising salaries.
FedEx Ground has seen average wages for workers in its sorting
facilities jump 16% from a year earlier.

FedEx has warned that its labor problems will persist into this
quarter, and analysts predict the ground unit’s operating margin
will sink to 6.8%, from 7.5% a year earlier. Analysts expect UPS’s
fourth-quarter profit margin for its U.S. domestic business will rise
to 9.9%, from 8.8% a year earlier.

The difference in performance predates the worker shortage. Even while
paying union workers almost twice what FedEx Ground drivers make, UPS
earns a return on invested capital that’s more than double its
rival’s. In the last full year, UPS and FedEx each had sales of
about $84 billion; UPS banked $7.7 billion of operating income, while
FedEx earned $5.9 billion. Investors have taken note: UPS shares have
risen 27% this year; FedEx’s have dropped 9%.

Smith defends operating the two networks despite inefficiencies,
including when FedEx Express drivers on company payroll take an
overnight package to the same location where a ground parcel is
dropped off by contractor drivers. Yet, while Smith has been able to
hold union organizers at bay by relying on contractors, FedEx
Ground’s savings on labor lately hasn’t filtered down to the
bottom line. That’s because its 5,600 contractors are mom and pop
outfits, many with fewer than 10 employees. They face the same
elevated costs inherent to small businesses. They pay full price for
vehicles, tires, oil, parts, maintenance, and other items that UPS
buys at scale. Each contractor has the same back-office work and often
farms it out to third parties, adding to expenses.

FedEx Ground keeps contractors small by design to avoid becoming too
dependent on one company in a service area. That lowers the risk when
contractors fail, which isn’t uncommon. FedEx Ground can call on
other contractors to plug the hole in service, paying them extra per
package to entice them to send teams to the area.

Contractors spend a lot of their time recruiting drivers—turnover
ranges from 30% to 60% of the workforce each year. In some cases, they
poach drivers from other FedEx contractors. UPS’s richer pay package
makes it easier for the company to hire part-time workers at the
sorting hubs, where it also offers the incentive of moving into a
delivery driver job that can eventually pay, as in Helminski’s case,
almost $100,000 a year, with overtime. This creates a stable workforce
at the hub and a steady pool of driver candidates whose work habits
are already known to the company.

FedEx’s sorting hub in Portland, Ore., is operating with only 65% of
the staff needed. That forces the company to reroute packages to other
facilities, incurring costs for the extra transportation and reducing
the efficiency of the network, officials said on a September
conference call with analysts. In total, FedEx says the ground unit is
rerouting 600,000 packages a day because of labor issues.

UPS does have to worry about strikes during labor contract
negotiations every five years. The current contract expires in 2023.
For now, UPS and its workers are doing well, says Helminski.
“We’re making a good living,” he says. “We’re the gold
standard.”

_THOMAS BLACK is a Bloomberg News industrial reporter._

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