Will UPS, FedEx Lose Out To Amazon?

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Amazon recently revealed plans to lease about 20 Boeing 767 Freighters in an attempt to start its own air delivery business. Apart from this, the company has also purchased many trucks and trailers which will aid in ground delivery. Furthermore, Amazon has announced Amazon Prime Air (the company’s drone delivery service) in addition to Amazon Flex (gig-economy based intra metro delivery service). ((Amazon Prime Air — Attack of the Drones? www.airwaysnews.com)) What this suggests is that the e-commerce giant is ready to cut back on its reliance on UPS (NYSE:UPS), which has been Amazon’s third-party shipping partner for quite some time now. If this happens, the Atlanta-based UPS could be in for a financial shock that could affect revenues beginning as soon as 2016.

See Our Complete Analysis of UPS

Over the past couple of quarters, business from e-commerce has been on a steady rise as customers have opted for the more convenient online shopping options to purchase products. This trend has led to significant increases in package volumes that have put immense pressure on shipping companies like UPS and FedEx (NYSE:FDX). In the 2013 holiday season, due to bad weather and higher than anticipated volumes, UPS failed to fulfill almost 2 million Amazon orders.  This deeply hurt the reputations of both the companies, while costing UPS about $200 million in revenues. [1] In an attempt to repair strained ties, the e-commerce website decided to refund shipping costs and give $20 gift cards to the affected customers. Even in the current year, logistics research firm ShipMatrix (as reported by the Wall Street Journal) estimates that FedEx has managed to deliver only 95% of the packages for the week that ended December 4, while UPS’s performance was even worse, with a 91% delivery success rate. [2] It, therefore, comes as no surprise that Amazon is looking for alternate shipping methods to make sure such inefficiencies are averted in the future.

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As mentioned previously, Amazon is planning to lease about 20 Boeing 767F (freighter) jets. It is estimated that leasing one such aircraft costs roughly $600,000 to $650,000 a month. Hence, the cost for leasing 20 such jets at the current price for a year will add up to roughly $156 million a year. Even after adding all the other costs such as fuel and labor, the final figure could be significantly lower than the $8.7 billion that the company spent on shipping last year. [3] Shipping costs for the company have been on the rise in recent quarters. In Q3 this year, Amazon’s expenses related to shipping totalled about 11.7% of all expenses (up from 10.4% a year ago).

The initial investments and costs are bound to weigh on revenues initially, but with time, could yield great results as the company will save millions on costs in the future. However, such a move from Amazon will definitely hurt UPS, with some analysts expecting to see lower revenues starting as early as 2016.

See our complete analysis of FedEx here

High volumes from the e-commerce boom have definitely helped both UPS and FedEx boost their top-lines in the last few quarters. In the most recent results, UPS recorded a 3% increase in its business to consumer shipments, which account for about 45% of its total Domestic Package shipments, primarily driven by the surge in e-commerce. [4] Amazon happens to be one of UPS’s biggest clients, accounting for over $1 billion of the total business. Therefore, it seems likley that UPS will lose out on revenues in the quarters to come. Apart from the financial standpoint, UPS is also under the threat of losing out on reputation. Furthermore, this news is bound to have a negative impact on investor confidence, especially once Amazon’s plans become clearer.

If  Amazon succeeds in establishing a delivery business, there is a chance that further down the line it could become a strong competitor to the already established shipping giants. If this happens, Amazon could most likely threaten further losses in revenue for both UPS and FedEx, while eating up some of the company’s market share. However, at the moment, Amazon’s ground delivery lacks the infrastructure, especially in Mid-American states.

With so many uncertainties, it seems too early to speculate about what’s in store for the U.S. shipping industry on the whole. It’s very possible that with Amazon’s expertise and knowledge on the e-commerce industry, the company can really make a dent in the market. But there are too many factors to consider, at the moment. Only time will tell how much the dynamics of the logistics industry will change in the quarters to come.

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Notes:
  1. Amazon Seeks to Ease Ties with UPS, www.wsj.com []
  2. Has Amazon Lost Faith in FedEx, UPS? www.bidnessetc.com []
  3. Amazon is Squeezing UPS Out, www.seekingalpha.com []
  4. UPS Q3 FY15 Earning’s Call Transcript, www.seekingalpha.com []