As Amazon Air Expands, FedEx And UPS May Suffer

E-commerce giant Amazon has taken to the skies. Amazon's growing air fleet now has 50 planes that help Prime packages arrive on time. That means Amazon is less dependent on UPS, FedEx and the US Postal Service and could now try to compete with them. Amazon is looking to become a logistics company in its own right. We believe Amazon will be a major logistics provider, whether by ground or air transportation, in the coming years. I think the question is how quickly they will escalate that operation. It is certainly within Amazon's realm of possibility to become a legitimate logistics company in all aspects.

So far, Amazon planes are at 21 airports across the country, with new regional hubs opening soon in Fort Worth, Texas, and Wilmington, Ohio. In 2021, it will open a major $1.5 billion air hub in northern Kentucky that can accommodate 100 aircraft. That's double the number of their fleet now. By 2025, Morgan Stanley says Amazon will have 67 planes in the air. If Amazon Air didn't exist at all, we estimate UPS and FedEx revenue would be about two percent higher than they are today, growing up to 10 percent by 2025. After Morgan Stanley reported these figures to investors In December, shares of FedEx and UPS fell 20 percent from recent highs.

Then, in Amazon's 2018 annual presentation, it included transportation and logistics services among its group of competitors for the first time. If they are already making 2 percent of their gross revenue right now, in a sense they are competing. According to some reports, Amazon now handles its own shipping for 26 percent of online orders. Amazon says it can transport hundreds of thousands of packages a day with its new dedicated air network and that its fleet of planes makes two-day shipping possible to almost anywhere in the U.S. One of Amazon's busiest air operations is located at the number one airport for outbound cargo in the country: Ontario International in Southern California.

We have around eight flights daily on Prime Air. If you bought something online, many times if you received your shipment you will see that its origin was in ONT. Some of its planes are repainted in Prime blue branding, while others still carry logos of the airlines to which Amazon leases the planes. Once Amazon packages are unloaded from Amazon planes like this one, they are sorted at the Ontario airport, loaded onto Amazon semi-trailers, and shipped to one of its 185 fulfillment centers. The huge operation at Ontario International did not have enough capacity for the growing number of Amazon Air flights, so it expanded to March Air Reserve Base in nearby Moreno Valley.

In the Inland Empire, which is the two inland counties of Southern California, the impact that Amazon is having here is enormous. There is five billion dollars in land and facilities. There are more than 20,000 workers. They have raised the minimum to $15 an hour, making them the number one employer in the private sector. But analysts warn that not everyone is benefiting from Amazon Air's expansion. In Ontario, FedEx and UPS account for most of the airport's 750,000 tonnes of air cargo traffic. But those shipping giants are losing a chunk of Amazon's business to Amazon itself, its own growing shipping operation.

By gaining more control over their supply chain, they can ensure they provide better service because if a customer doesn't receive their package on time, they won't blame UPS or FedEx. They are going to blame Amazon. Right now, when an Amazon package arrives at your door, it's likely passed through several third-party hands to get there. A seller prepares the package, and a shipping service such as UPS, FedEx, or USPS picks it up from the seller and takes it to a distribution center. From there, one of those big carriers will most likely load it on a plane or truck and ship it across the country to the Amazon fulfillment center closest to your home.

Then one of those big carriers picks it up again to deliver it the last mile to your door. If they could save a penny on this delivery route, their sellers could offer their products at a cheaper cost. And that gives them a huge advantage in this online e-commerce space. Amazon's shipping costs rose 23 percent last quarter, hitting a record $9 billion. It spent $27 billion on shipping in 2018. The more Amazon can control these steps, the more it can control the cost. We estimate Amazon will pay about $6 per box to move this themselves on their own network, compared to what we estimate Amazon will pay UPS and FedEx about $8 or $9 per box.

And given Amazon's scale, that could represent at least a couple billion dollars in savings. Shipping in-house also means more control over the speed of deliveries. The next big thing in e-commerce is who figures out how to make this two-hour or same-day delivery. This is very expensive, but whoever discovers it first will have a huge advantage in this market. That's why there are dozens of Amazon Air planes in the skies and 300 Amazon Prime semi-trucks on the highways. Amazon has even applied for a license to offer shipping services between the United States and China. In Los Angeles and London, it is testing a program called Shipping with Amazon.

Sellers who have used the service say Amazon offers shipping rates half the price of UPS. If I sell through Amazon, it is better for me to deal with only one company. So even at the same price, there is obviously some advantage for these sellers in opting for Amazon instead of carriers. So are large traditional shipping companies worried about Amazon becoming a competitor? FedEx says no. We honestly don't see a world where Amazon is a competitor to FedEx because there is no sensible way to compare them. You can do some local deliveries in very dense markets. This is in no way a competitive threat to the broad portfolio of business that FedEx does.

Fedex notes that it has 700 planes, while Amazon only has 40. In a given week, Amazon flies 671 flights. The number of FedEx flights per week is approaching 13,000. I don't think Amazon is trying to replicate a UPS and FedEx network. Amazon is trying to build a hybrid network where they can connect their own warehouses with their own plans that connect to dense urban areas. I asked him if FedEx is worried about losing Amazon's business if it primarily handles its own shipping. Amazon is a long-time customer of ours. We are proud of the partnership, but they are not our biggest customer.

They represent less than 1.3 percent of our total revenue for 2018. Clearly, for our competitors Amazon's share of revenue is significantly higher. Morgan Stanley estimates that FedEx ships 10 percent of Amazon's packages, while UPS, which has 550 planes, ships 25 to 30 percent and the United States Postal Service ships 40 to 45 percent. . We've reached out to UPS and the Postal Service for comment. Both declined an interview. And when Amazon learned that we contacted UPS, FedEx and the Postal Service, they pulled out of a scheduled interview for this story. It just makes sense that they are not optimistic about these attempts. Without logistics, Amazon would not exist, so it is very important for them to maintain close relationships with their third-party logistics partners.

Someone who is publicly concerned about Amazon's effect on the mail system: President Trump. The post office is losing billions of dollars and taxpayers pay that money because it delivers packages for Amazon at a much lower cost. Although the post office is not funded by American tax dollars, it is losing billions. In fiscal year 2018, the post office

suffer

ed a net loss of $3.9 billion and its volume decreased by 3.2 billion pieces. Basically, Amazon gets a volume discount, but the losses at post offices are due to a decrease in traditional mail in envelopes, not packages. What Amazon does use the post office for is that difficult and expensive last mile delivery.

FedEx and UPS also rely on the post office for that. And if Amazon is able to take over last-mile delivery, the post office will be affected. And last-mile delivery is exactly why Amazon ordered 20,000 vans last year and is now testing those Scout sidewalk robots. In an effort to stem losses. The post office has proposed a 9 to 12 percent increase in rates for its last-mile shipping service. At some point they will tell USPS that we no longer need their service. We've built our own infrastructure and we don't have to go through this kind of humiliating, quote-unquote public debate that could affect Amazon as a company.

As Amazon invests in more planes to fly packages across the country and robots to take the final steps to them, analysts I spoke to agree that one thing is clear. In the short term, this additional capacity will simply complement whatever infrastructure UPS and FedEx have. But in the long term there are signs that both companies are worried. If they decide to grow this network, they will be a major player in this mail service industry.