What if the Ground ISP Model Fails?

Discussion in 'FedEx Discussions' started by MrFedEx, Nov 15, 2010.

  1. MrFedEx

    MrFedEx Engorged Member

    Here's an interesting "problem". Perhaps we over here at Express should actually be rooting for the ISP not to fail. Think about it. In order to shift E2 and SOS over to Ground, FedEx has to make substantial improvements in the Ground system. That means increased Express oversight and interference, more pay for drivers, and an increasing chance that the ISP model will be declared ilegal. If that happens, and Ground drivers actually do become employees, there will be an increased incentive to make the shift based on higher pay and more competent employees. Whether or not it will be worth it for Fred is debatable, because he isn't paying new Express employees that much more than he would need to pay new Ground employees. Presumably, they would also share in the new combined insurance package as well. If the Ground cost structure remains less than Express, you'd have to figure the Evil One will head in that direction.

    That would also mean a buyout of contractors, and since we know that Fred isn't exactly generous, that would also create some new legal battles over what routes/vehicle are worth. Think Fred would offer top dollar? Think again.
  2. bbsam

    bbsam Moderator Staff Member

    Lot's of "if's" there, no?
  3. 59 Dano

    59 Dano Well-Known Member

    As half-baked as that idea is, it needs lots of ifs!

    Express can't just pass freight to Ground for delivery. They operate as separate companies under the FedEx Corp parent company. The scenario, as MFE presents it, would cause "Fred" all sorts of legal problems. In particular, the SEC would rip "Fred" 48 new ones for using the assets of one company to generate revenue for another company as it has been presented here, and people could end up in jail. That's above and beyond the civil penalties that FDX Corp would be subject to.

    On the other hand, Express can pay Ground 90 cents (or whatever amount they come up with) on the dollar to take on the extra freight. Not that it makes any sense to do that, as the Ground network isn't designed to be compatible with Express', nor is it integrated with air ops. But... it's (more or less) legal.

    Then there's yet another fact that our resident investment guru who doesn't really need the FX money, but he sticks around takes the abuse anyway should be aware of. Shifting the freight legally would have only a negligible effect on FDX stock, and that's assuming that it went as planned, and the cost of bringing the Ground network to parity with the Express network is incalculable at this time.

    I wish people would think things through.
  4. vantexan

    vantexan Well-Known Member

    Book'em Dano! I guess that's why it hasn't happened because if it were legal and would increase profits then FedEx would have done it by now. But there's nothing illegal about making Express an overnight service only and reducing our hours. If Ground improves it's system to where it can handle 2 day freight then most likely it will happen. What's to prevent FedEx from using planes under the Ground banner to move freight? Are there laws in place that would keep Ground from buying it's own planes? If not then SEC rules can be circumvented.
  5. MrFedEx

    MrFedEx Engorged Member

    Remember, Ground is already moving on Express planes every day.
  6. MrFedEx

    MrFedEx Engorged Member

    Welcome back. I missed your "critical" input. From what I've heard, Fred is already experimenting with Ground delivering Express in test markets. How is that passing the legal test of separation? He's also moving Ground freight every day on Express aircraft. I've provided many examples of markets where this is happening and my other resident critic (quadro) backs me up on it. So he's already using the assets of one company to generate revenue for the other. Perhaps a long letter to the SEC with appropriate evidence would get Fred's hand slapped for making such a big "mistake". Maybe a E2 and SOS shift isn't happening right away, but many of us think that's where he's headed if he can preserve the low-cost structure of Ground and also improve service levels. The legal question is a big one, and the "degree of control" aspect of it is the critical point of contention.

    I'm just curious how you know that shifting the freight would have a neglible effect on FDX stock? The logical mind would assume stock prices would go up reflecting the reduced costs of the Ground structure and the elimination of Express positions. I disagree that the costs of bringing the Ground network to parity with Express are "incalculable". FedEx has been headed down this path for quite awhile, and they most likely have cost projections in place that take into account several different possible scenarios.

    So, as usual, you're just plain wrong.
  7. 59 Dano

    59 Dano Well-Known Member

    Sure, Ground can buy its own (or rent or lease) planes and Express can reduce hours --legally-- for whatever reason they want. No one who believes that they might do something like that is giving any consideration to the cost effectiveness of doing so. They'll say, "They can use cheaper Ground labor to deliver Express pkgs," but that's about it. Let's look at it.

    Two Day and Express Saver packages have accounted for an average of over $2.5 billion/year in revenues the past few years. What does that mean? It covered over 97% of Express' fuel expenses this past FY. The average revenue per 2D/ES pkg is greater than average revenue per PO/SO envelope and generates about a billion dollars *more* revenue a year. Express would be better off if it lost all overnight docs. Those back burner pkgs make a big impact!

    Let's assume that they will do it anyway. OK, now Ground gets some planes and can deliver 2D/overnight/whatever anywhere in the lower 48. Soooooooo.... "Fred" just spent a billion bucks buying planes, equipment, hiring ramp/hub employees, paying airport fees, etc. Ground's operating expenses just went through the roof, it's gonna take years to recoup the capital expense of starting it up, and all "Fred" did was create something that he already has to provide the services that he already provides. Imagine the stock price...
  8. 59 Dano

    59 Dano Well-Known Member

    It's difficult to speculate considering that all you have is gossip and rumors. Hell, you don't even know *that* it's happening, let alone the particulars of it!

    All you've ever provided is *gossip*. How about proof?

    You can't read very well. If one pays the other for whatever you allege they're doing, there's no problem with it. You missed that part, y'know.

    So you go ahead and write your little letter to the SEC! Make sure you tell them that you know what you're talking about because you'be been at FedEx for 25 years and you have gossip contacts all over the country who give you the juiciest gossip. Considering that they get hundreds of boring letters daily that say things like "XYZ Inc. is in violation of 23 USC 222(a)(1)(ii) because the revenue on line 12 of their statement of cash flows is derived from securities that were purchased by John Smith, who did not hold a series 7 license at the time," I'm sure yours would be a refreshing change of pace.

    For Ground to take on that additional service on a national level, they'll either have to buy airplanes or pay for space on airplanes and their expenses go up. With increased volumes comes increases in employment expenses (handlers and so forth). Let's not forget that you think Ground drivers are stupid trailer park idiots who probably couldn't make service anyway. What about the air freight? Here are the options:

    a) Use higher-paid Express employees to handle Ground freight, which defeats the purpose.
    b) Use Ground employees who make relative chump wages, which probably isn't a good idea.
    c) Pay Ground employees Express-level wages, which defeats the purpose.

    Then there's the ridiculous notion that Express would give up a little more than half of its domestic revenue while its infrastructure costs (especially air) are roughly the same. Good luck with cutting all the FT employees down to PT PO-only shifts. I'm sure that'll work out swimmingly.

    That all boils down to the simple reason why it would have a negligible benefit to FDX stock: to provide Express-level service, you're going to have to pay Express-level money. There's no way around it. Even if "Fred" is the devil, he's still not greater than the fundamentals of accounting, finance, and economics.
  9. MrFedEx

    MrFedEx Engorged Member

    Funny how you show-up whenever something comes out that makes FedEx look bad. Ground already moves on Express aircraft...FACT. The freight that would go over to Ground already moves on Express aircraft....FACT. The rest of what you have to say isn't even worthy of a comment. Study-up on what our airplanes already carry and then make an intelligent post.
  10. vantexan

    vantexan Well-Known Member

    Fair enough, but I think that anyone who has been around awhile knows that the company will continue to come up with ways to maximize profit, often at employees' expense. I do believe that they will eventually have a system in place that will all but eliminate OT, and I doubt they'll make up for it with higher wages. You don't really think they've done all they can do or are going to do, do you? It's a matter of when, not if.
  11. MrFedEx

    MrFedEx Engorged Member

    59 Dano doesn't seem to understand how Ground and Express really work. "Ground's operating expenses just went through the roof?" Really? Fred has the lowest costs around because he doesn't have any "employees" who ask for things like, say, insurance for them and their families. Even with the State AG lawsuits (a drop in the bucket for Fred), FedEx undercuts UPS expenses by around 40%. Think that's a competitive advantage? Just imagine what he could save by paring away a few thousand Express employees and sending their work over to Ground.

    vantexan has it exactly right. They aren't done with us yet. Not by a long shot. 59 Dano doesn't get it.
  12. quadro

    quadro New Member

    In reference to your first post if "if's" and "but's" were candy and nuts.....well, you know how that goes.

    As I recall, the only thing that I backed you up on was that Ground moves by aircraft to Alaska and Ground pays Express for that. I have seen no evidence of Ground routinely moving to other destinations by aircraft. I also doubt that Ground is delivering Express packages. Provide a tracking number and we can see how it moved.

    And as for SOS and E2 moving to Ground, I don't think we'll see that either. Ground would have to use aircraft to move the coast to coast stuff and employees or not, their cost structure would go up because it simply costs more to move something by air than by truck. Secondly, Express couldn't survive without the SOS and E2. Express can't simply operate as only an overnight system. There wouldn't be enough income and revenue to support the network. You would reduce some costs in terms of labor, vehicles, etc but you still have to have some sort of aircraft and vehicle fleet. Personally, I don't think you could reduce expenses enough to offset the loss in income and revenue.
  13. FedExer267

    FedExer267 Member

    Well now you know where Smiths cut of the ground scheme has gone. He has made millions off Ground while the little guys have paid for the cost of doing his business. He has no employees which means no taxes, no insurance, no salaries to pay, no expensenses that all goes to the little people. Sure he had to flip the bill for a some buildings and some managers to run around and really run the show but I am sure he has stockpiled millions in what he makes from the Ground business. So yes it would cost a pretty penny to get things going on the Ground side however he has been making millions off Ground since he bought RPS. I for one believe he already has the money to get the ball rolling. So its just a matter of time.
  14. MrFedEx

    MrFedEx Engorged Member

    Ground moves to other points besides Alaska, and Ground trucks bring Ground-sourced Ground freight to Express ramps for movement all the time. That's more fact. As for Ground already delivering Express, someone posted that FedEx was experimenting with it a few months ago. That's just a rumor. An Express composed almost entirely of PT employees would be a dream come true for Fred. If he can somehow make it legal, SOS and E2 already move by aircraft in areas that can't be reached via trucks. The only difference would be getting the E2 and SOS air containers to the Ground terminal instead of to Express stations, which would get all of the FO and PO products.
  15. quadro

    quadro New Member

    Not really fact. Provide a ramp that has Ground moving via aircraft to a point other than Alaska and I'll gladly check it out.
    A rumor? Really? Around here? Say it isn't so!
    The problem with this is that when a customer pays for Express service, they expect an Express courier to show up with their package. Customers by and large will not pay for Express shipments only to have them delivered by a Ground courier. And FedEx cannot charge Ground rates for SOS and E2 as the cost of moving products by air is more expensive than by truck. The business model you are suggesting won't support itself. That's my opinion and we can come back to this post in a few years and see if I was right or wrong.
  16. 59 Dano

    59 Dano Well-Known Member

    Since you're asserting things with no evidence, I'll dismiss them with no evidence.

    Why don't you take that tuition reimbursement program and make use of it?
  17. 59 Dano

    59 Dano Well-Known Member

    That's certainly valid, but to pay the astronomical costs to create an air transport infrastructure to compete with your existing air transport is risky at best. As for wages, they'll have to reflect the level of service that's being sold. Express-level service won't be delivered without Express-level pay, nor should it.
  18. 59 Dano

    59 Dano Well-Known Member

    I said the Ground expenses go through the roof IF GROUND BUILDS AN AIR NETWORK. Learn to read. PLEASE.
  19. bbsam

    bbsam Moderator Staff Member

    What if Ground doesn't "build an air network"? Our Ground and Air terminals are within two miles of each other. Ground terminal literally across the street from the airport. What is instead of taking all freight to Express some is diverted at that point to Ground?
  20. 59 Dano

    59 Dano Well-Known Member

    You don't understand -- "Fred" is evil and he can overcome all of that by the force of his will, which is the evilest evil that ever eviled!! ;)

    But in all seriousness, it only takes a look at the data to see what a silly theory this whole thing is. MFE ignored it, but in FY10 the domestic 2D/ES revenue alone paid for almost 98% of the fuel for the entire Express company. Shifting SO, 2D, and ES to ground would wipe out around half (give or take) of Express' domestic revenue. There's no way Express could cut enough expenses to compensate for that, even with the reduction in paid hours of labor.

    That's not an opinion, it's a fact that can be substantiated with only three letters: D H L.