Amazon’s potential threat to FedEx and UPS

More freighters are likely to follow the fortieth 767-300F delivered last month to Amazon Air’s fleet. Today, a research note from Morgan Stanley added that “the market is missing the risk” that Amazon Air poses to growth at United States-based integrators FedEx and UPS.

Of course, the idea that Amazon may intend to become an integrator itself is not new. The company has made substantial investments in developing its last-mile delivery capabilities in the US and elsewhere, and 2018 has seen the fallout from those investments begin to impact other express delivery services. German newspaper Handelsblatt reported back in June that while the e-commerce giant has not yet moved entirely to delivering its own parcels in Germany, its delivery service in that country is significantly cutting into Deutsche Post-DHL Group’s Post-eCommerce-Parcel division, which in DP-DHL’s third-quarter earnings statement recorded an EBIT loss of  €209 million. More recently, in September, Amazon announced that it had placed an order with Mercedes-Benz for 20,000 delivery vans to support its “Flex” last-mile delivery program in the US, which will at the very least substantially reduce Amazon’s future reliance on its current delivery partners, and potentially be a major step toward expanding Amazon’s third-party delivery capabilities.

However, according to the Morgan Stanley note, Amazon Air’s growing fleet likely poses a challenge that is “just as relevant” as the build-out of its last-mile capabilities. Alongside a growing hub at Cincinnati/Northern Kentucky Airport (CVG), which could potentially offer enough ramp space for 100 freighters, last month Amazon announced it will open a new “air gateway” and package-sorting center at Wilmington Air Park, only sixty miles away from its main CVG hub. That facility is set to begin operating eight flights daily in 2Q 2019. Amazon is also rumored to have an RFP circulating for the lease and operation of at least six more 767Fs beyond the forty already flying for Amazon Air.

Amazon still has a long way to go before it can truly rival FedEx or UPS, however. In a presentation in New York in September, the president and CEO of FedEx’s express business, David Cunningham, said that the massive infrastructure FedEx and UPS have built up over the past several decades gives them a scale that is not easily achieved in only a few years. Regardless, Morgan Stanley estimates that Amazon Air’s current routes overlap with two-thirds of the volumes flown by FedEx and UPS, and on an opportunity cost basis, Amazon has already undercut FedEx’s and UPS’ potential revenue by 2% this year, which will likely grow to at least 10% by 2025. Given the share of overall revenues that US domestic air makes up at UPS and FedEx – 17% and 19%, respectively – Amazon Air’s growth is likely to have a “significant impact” on both companies, in Morgan Stanley’s view. Exactly how the integrators will respond to the growing threat from Amazon Air remains to be seen, but FedEx’s ATR 72-600 and Cesna turboprop acquisitions indicate that growing a diversified freighter fleet is likely a major part of the strategy to remain competitive.

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