So it’s not the 2008 financial crisis, but in the FXG Contracted Service Provider world, it could ultimately prove to be worse.
A combination of events has spawned a crisis that we foreshadowed back in August of 2021 in our post: the Dark Side Of Density.
What we described in that post has ultimately proven to be true, and is now exacerbated by the quickly deteriorating economic conditions.
As business owners, solving problems is a daily occurance. This one however is going to need full attention, for an extended period of time.
Let's begin our look at what to do about all this by analyzing the root causes of why the issues now exist...
There have been many difficult situations over the history of FedEx Ground. Many have been very serious, but this one, if not addressed by everyone, has the potential to be devastating to everyone involved. It’s in everybody’s best interest to put the anger aside and let’s see what we all can do to get past this mess.
Identifying The Problem
The first step in problem resolution is to identify the problem.
Ideally, CSP's should be able to operate smooth, productive and profitable operations based on their negotiated contract charges. The charges should reflect CSA characteristics and give a CSP a shot at above market profit margins.
Currently, severe inflation to contractor's major expense categories, like labor, fuel, maintenance & insurance, is so acute that most operating margins have evaporated. It's important to note that current contract charges were likely negotiated in a much less severe inflationary period.
Additionally, volume levels for peak did not reflect forecasted levels and currently, most contractors are experiencing flat to slightly weakening volume, which puts additional pressure on operating margins.
As a result, CSP's are struggling to pay bills needed to keep their operations afloat. Even historically strong operators are feeling the pinch.
If the issue remains unaddressed by both FXG & CSP's, many CSP's could cease operating, thereby causing service disruptions to FXG, and some CSP's could lose the investments in their businesses.
While CSP's can only control the things they can control, there are things that can be done to attempt to make it through the crisis.
While many look to FXG for the solutions, it is important to recognize that CSP's need to try to help themselves as much as possible.
We are here to help CSP's solutions to these problems, and we will share them over the next few weeks.
The dynamics that contribute to everyone’s current margin contraction are very real and very painful. So much so that a Letter Of Concern has been circulated and signed by a large number of contractors.
While this is getting national press and attention, we will need to be the bearer of bad news: FXG is not going to wave the money wand and shower money on its contractors.
The economic environment is pinching their margins too. They have obligations to their shareholders to provide a return on their investment.
Now, as we’ll discuss later, their contracts with contractors shield them from some of the pain (and transfer it to you) in the short term. However, since they will never abandon the contractor model, it will be necessary to see to it that contractors survive.
So keep this in mind as we walk through all of this.
If you insist that the answer is for FXG to purely inject capital into their contractors’ businesses, and that is the only answer, then we may need to help you discuss your exit strategy.
The inflation rate for February came in at 7.9% for consumer prices.
That’s bad. But here’s what’s worse for FXG contractors.
Through our eTruckBiz payroll & compliance services, we have seen contractors’ driver wages rise 14.8% in the first quarter of this year alone. This is on top of significant increases for all of 2021. This compares to a national average of 5.7%.
Wages make up the largest cost for a P&D contractor. Wage growth like this alone can cripple a contractor’s profit and loss statement.
Add to this, fuel prices that have been on the rise since the third quarter of 2020, and are now near or at record highs. Fuel is a P&D contractor's 2nd largest expense and in many cases is up over 100% from 2020’s lows.
All other operating expenses are up as well and are contributing to the expense squeeze too.
Inflexible Contract Charges
While it’s obvious that increased expenses are eliminating already thin operating margins, it’s not obvious that contractors don’t currently have a way to effectively combat this problem like most other businesses do.
Contractor’s cannot pass inflationary trends along to their customers like most other businesses can.
FXG will raise their base rates along with other surcharges and various pricing increases and will eventually be able to catch up to the rising inflation monster.
At first glance, it appears that the only thing a contractor can do is increase its efficiencies, because they can’t just raise their rates to its customer.
Outside of the per stop fuel surcharge , none of the other standard charges have any volatility or inflationary considerations built into them.
So, as expenses rise for you, they don’t for FXG (in this case).
THIS is what needs to be discussed with FXG. Not across the board relief payments. If I were a betting man, I’d bet on seeing this in the future.
Peak Projections & The Schedule K
There is no doubt that FXG’s peak projections were “off” to put it lightly.
FXG would like to shift the blame to customers that gave them bad projections. Whether or not the customers didn’t see people leaving their houses to shop in stores again, or whether people did their Christmas shopping in October, whatever it was resulted in bad projections.
All we will say about this is that contractors need to really analyze the potential benefits vs. possible risks before they enter into these agreements in the future.
If the thresholds look too high to you, then they are. We have an analysis we can do to simulate increased stop amounts on your operation, and marry it up with staffing plans that make sense for you to implement during peak. These plans are probably pretty foreign to most folks, but many of our clients do very well during peak times by thinking outside the box. Start by thinking 4x10’s (for those of you who have been to the Transportation Business Academy).
Missing the projections were one thing, but there was a hidden consequence to the schedule K, and it’s not the failure to hit the thresholds.
The payment of the Peak Service Charge in a lower than forecast volume environment allowed for inefficiency to creep into many operations,
Carrying extra people “in-case” the volume spiked led to keeping extra folks after the Peak Service Charge was over. This added to the already tremendous problem of labor as a percentage of revenue being way out of control.
Our financial analysis of many operations who participated in the schedule K showed that this was a way bigger problem than anyone was aware of.
The Bottom Line
Net operating income for FXG contactors is under attack.
Everyone would like to look to FXG to fix this problem, but it is likely that they are not going to directly interject (enough) cash to do so.
We believe that it is in their best interest to address the problem indirectly, and we think that they will.
As always though, most of the adaptation to the situation will be on the contractor’s plate.
CSP's will have to solve this issue while not counting on FXG's help.
Since this is going to be a big pill to swallow, we are going to commit a great deal of time and effort to try to give some meaningful support to CSP efforts to solve this problem.
Over the course of the next couple of posts and weeks, we will put forth several actions that can be taken to solve or lessen some of the issues. Some will require FXG to take action, some will require CSP action. Most will require action from both FXG & Contractors.
Please stay tuned to these blog posts and web meetings as we help you tackle answers to most of the problems, one crisis at a time.