Amazon’s Latest Attacks on the FedEx/UPS Duopoly

Amazon and Fedex

Amazon has been putting the pieces of a delivery service in place for years now, on top of being an online retail mogul. And in its annual filing with the Securities and Exchange Commission in early 2019, the company made it official: “Our businesses are rapidly evolving and intensely competitive, and we have many competitors in different industries, including physical, e-commerce, and omnichannel retail, e-commerce services, digital content and electronic devices, web and infrastructure computing services, and transportation and logistics services…”

This demonstrated to the delivery industry — in case Amazon’s aircraft purchases, patents for robot delivery vehicles, and development of a last-mile delivery fleet of vans hadn’t already done so — that Amazon intends to compete in this space, and has the capacity to. 

For years, Amazon has described itself as a partner to Federal Express and United Parcel Service, as well as the U.S. Postal Service. It’s been by far their biggest customer, since close to half of purchases made in the e-commerce market are made through Amazon. Third-party shipping carriers have welcomed the business. They’ve also restructured their services and pricing models to meet Amazon-induced demand for two-day delivery and free shipping.  

But Amazon has made it clear that it intends to disrupt the FedEx/UPS duopoly and establish itself as a major player in the shipping industry. The only question remaining, really, is when. 

Amazon and FedEx at Odds 

In June, however, FedEx proved that it wants to compete. The company chose not to renew its Express domestic contract with Amazon. Express services include air delivery in the U.S., which means FedEx will no longer be delivering packages for most Prime shipments — at a time when Amazon is trying to make Prime service twice as fast, from two-day delivery to one-day shipping, in some markets.

FedEx Ground will keep moving Amazon packages, provided Amazon will keep its contact with that department. And for now, that seems likely — Amazon’s delivery fleet is still far to small to move its huge volumes nationwide. 

FedEx will lose a large contract, to be sure, although the company says Amazon’s contract with Express only accounts for 1.3% of company revenues. 

And at the same time, FedEx announced the addition of Sunday delivery in May just a month before it declined to renew the Amazon contract with Express. That suggests that FedEx is anticipating increased volumes anyway. Analysts agree that the future of e-commerce includes more and more online shopping. FedEx is betting that Amazon won’t have a monopoly on that growth.

As for Amazon, it appears that the bulk of the company’s work toward a delivery fleet so far has been aimed at completing same- or next-day deliveries. Amazon is investing in last-mile delivery in the form of robots, vans, and drones. The company is also developing an air fleet and a network of air hubs. They are not investing in trucking. In other words, ground shipping is not among Amazon’s top priorities — which means that for customers who do not use Prime or choose not to purchase Prime products, Amazon will still need to provide delivery via another shipping carrier. 

Amazon Moves Toward Air Delivery 

In June, the Puget Sound Business Journal reported that Amazon was expanding its Prime Air fleet by leasing 15 Boeing 737 cargo jets. 

Those aircraft bring Amazon’s air fleet to at least 55 jets. The company owns stakes in Air Transport Services Group and Atlas Air Worldwide Holdings— both freight delivery airlines. 

Amazon also owns more than 200 acres of land near the Cincinnati/Northern Kentucky International Airport and is leasing 900 more. It’s in the process of dropping $1.5 billion to build an Amazon Air hub there. 

A Morgan Stanley analyst predicted in December 2018 that, if Amazon were to handle more of its own air deliveries, it could cut costs by $1 billion to $2 billion per year. $1 billion only comprises about 3 percent of Amazon’s global shipping costs, but it’s still enough to cover the cost of the Cincinnati investment in less than two years. 

Amazon also expects to start operating a regional air hub at Alliance Airport in Fort Worth sometime in 2019. The Fort Worth hub will support “multiple daily flights,” and include package sorting and processing infrastructure, the company says. 

That same airport houses FedEx, which uses it for up to 30 flights per day. 

Making Sense of Amazon’s Impact on the Parcel Industry

For a while, it looked like Amazon was particularly interested in last-mile delivery. But the company’s strategic decision to invest in air delivery shows that its vision is far bigger. Amazon appears to be building in the direction of a fully built-out delivery service — one that could potentially fulfill all of its orders. 

Ravi Shanker, the Morgan Stanely analyst who shook FedEx and UPS stock prices in December, predicted that both companies could lose as much as 10 percent of their total revenues to Amazon Air by 2025. He believes Amazon Air’s 40-jet fleet could easily grow to 100 planes within five years and that Amazon’s routes could overlap with about two-thirds of those currently operated by UPS and FedEx.

Air shipping makes up about 20 percent of business for both UPS and FedEx — a number Amazon could cut in half in less than six years. 

The threat to UPS and FedEx is real and immediate. The future of e-commerce delivery is up in the air, so both companies now face a critical choice: continue moving packages for Amazon and collect their competitor’s money, or recognize Amazon as an equal and begin cutting ties. FedEx has chosen the latter. 

The Reveel App uses AI and machine learning to provide an unparalleled look into what’s impacting your bottom line. Through invoice audits, peer benchmarking, and rate modeling/simulations, you can see the health of your operation and assess pricing changes from parcel carriers like FedEx and UPS. Sign up for a free Reveel account today to see how you can leverage automation to synthesize your data, ship more for less, and reduce the time needed to identify issues and action items.

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