As Amazon Air Expands, FedEx And UPS May Suffer - YouTube

E-commerce giant Amazon has taken to the skies. The growing Amazon air

fleet now has 50 planes helping Prime packages arrive on time. That means

Amazon is relying less on UPS, FedEx and the U.S. Postal Service and may

now aim to compete with them.

Amazon is looking to become a logistics company in their own right. We

think that Amazon will be a top logistics provider whether it's in

trucking or in air in the coming years. I think the question is just how

quickly they will ramp that operation.

It is certainly within the realm of possibilities for Amazon to build

itself into a legitimate logistics company in all facets.

Amazon planes are at 21 airports all over the country so far, with new

regional hubs opening soon in Fort Worth, Texas, and Wilmington, Ohio. In

2021, it's opening a major $1.5 billion air hub in Northern Kentucky that

has capacity for 100 planes. That's double the number in its fleet now. By

2025, Morgan Stanley says Amazon will have 67 planes in the air.

If Amazon Air did not exist at all, we reckon that UPS and FedEx revenues

would be about two percent higher than they are today, growing up to 10

percent by 2025.

After Morgan Stanley reported these numbers to investors in December, FedEx

and UPS shares dropped 20 percent from recent highs. Then in Amazon's 2018

annual filing it listed transportation and logistics services among its

group of competitors for the first time.

If they're already taking 2 percent off their top line right now, in a

sense they are competing.

According to some reports, Amazon is now handling its own shipping for 26

percent of online orders. Amazon says it can transport hundreds of

thousands of packages per day with its new dedicated air network and that

its fleet of planes make two-day shipping possible almost anywhere in the

U.S.

One bustling Amazon air operation is at the number one airport for outgoing

cargo in the country: Ontario International in Southern California.

We have about eight flights a day on Prime Air. If you were to purchase

anything online, a lot of times if you received your shipment you'll see

that that origination was in ONT.

Some of its aircraft are repainted with blue Prime branding while others

still carry logos of the airlines Amazon leases the planes from. Once

Amazon packages are offloaded from Amazon planes like this one, they're

sorted onsite at the Ontario Airport, loaded onto Amazon semi-trucks and

sent out to one of its 185 fulfillment centers. The huge operation at

Ontario International didn't have enough capacity for Amazon Air's growing

number of flights, so it expanded to the March Air Reserve Base in nearby

Moreno Valley.

The Inland Empire, which is the interior two counties in Southern

California, the impact that Amazon is having here is enormous. There's

five billion dollars in the ground and facilities. There's over 20,000

workers. They've raised the minimum to 15 dollars an hour, which now they

just became the number one private sector employer.

But analysts warn not everyone is benefiting from Amazon Air's

expansion. At Ontario, FedEx and UPS make up the majority of the airport's

750,000 tons of air cargo traffic. But those shipping giants are losing a

portion of Amazon's business to Amazon itself, its own growing shipping

operation.

By gaining more control over their supply chain, they can make sure to

provide a better service because if a customer does not receive his

package on time, they're not going to blame UPS or FedEx. They're going to

blame Amazon.

Right now when an Amazon package arrives at your door, chances are it went

through several third-party hands to get there.

A seller prepares the package and a shipping service like UPS, FedEx or

USPS picks it up from the seller and brings it to a distribution center.

From there, one of those big shippers most likely loads it on a plane or

truck and ships it across the country to the nearest Amazon fulfillment

center to your home. Then one of those big shippers takes it again to

deliver it that last mile to your door.

If they could shave any cent out of 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 jumped 23 percent last quarter, reaching a record

$9 billion. It spent $27 billion on shipping in 2018. The more of these

steps Amazon can control itself, the more it can control the cost.

We estimate that Amazon will pay about $6 a box to move this themselves on

their own network, versus what we estimate Amazon paying UPS and FedEx

about $8 or $9 a box to them. And given Amazon's scale, that could be a

couple of billion dollars at least of savings.

Moving 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 do this two-hour

delivery or same-day delivery. This is very expensive, but whoever figures

it out first will get a huge advantage in this market.

This is why there are dozens of Amazon Air planes in the skies, 300 Amazon

Prime semi-trucks on the freeways. Amazon has even applied for a license

to offer ocean freight services between the U.S. and China. In Los Angeles

and London, it's testing out a program called Shipping with Amazon.

Sellers who've used the service say Amazon offers shipping rates at half

the price of UPS.

If I'm selling through Amazon, it's better for me to deal with one company.

So even at the same price there's obviously some advantage for these

sellers to go with Amazon instead of the carriers.

So are the big incumbent shipping companies worried about Amazon becoming a

competitor? FedEx says no.

We honestly don't see a world where Amazon would be a competitor to FedEx

because there's no sensible way to compare them. You can carve out some

local delivery in highly dense markets. That's in no way a competitive

threat to the broad portfolio of business that FedEx does.

Fedex points out it has 700 planes, while Amazon only has 40.

In a given week, Amazon flies 671 flights. The FedEx number of flights per

week is closer to 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 the dense urban areas.

I asked if FedEx is worried about losing Amazon's business, if it primarily

handles its own shipping.

Amazon is a longtime customer of ours. We're proud of the partnership, but

they're not our largest customer. They represent less than 1.3 percent of

our total revenue for 2018. Clearly for our competitors the percentage of

revenue from Amazon 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 U.S.

Postal Service ships 40 to 45 percent. We reached out to UPS and the

Postal Service for comment.

Both declined an interview. And when Amazon heard we contacted UPS, FedEx

and the Postal Service, they pulled out of a scheduled interview for this

story.

It just makes sense that they're not going to be bullish about these

attempts. Without logistics, Amazon would not exist so it's very important

for them to maintain close relationships with their third party logistics.

Someone who is publicly concerned about Amazon's effect on the mail

system: President Trump.

The post office is losing billions of dollars and the taxpayers are paying

for that money because it delivers packages for Amazon at a very below

cost.

Although the post office is not funded by U.S. tax dollars, it is losing

billions. In fiscal year 2018, the post office saw a net loss of $3.9

billion and their volume was down by 3.2 billion pieces. Amazon does

essentially get a bulk discount, but the post offices losses are from a

decrease in traditional mail in envelopes, not packages. What Amazon does

use the post office for is that difficult, expensive last-mile delivery.

FedEx and UPS rely on the post office for that too. And if Amazon is able

to take on last-mile delivery itself, the post office will take a hit. 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 curb the

losses. The post office has proposed a 9 to 12 percent increase in fees

for their last-mile shipping service.

At some point they're going to tell USPS you know what we don't need your

service anymore. We've built our own infrastructure and we don't have to

go through this kind of, like quote unquote, humiliating public debate

that could affect Amazon as a company.

As Amazon invests in more planes to get packages across the country and

robots to get them the last few steps, the analysts I talked to agree one

thing is clear.

In the short term, this added capacity is just going to supplement whatever

infrastructure that UPS and FedEx has. But in the long term there are

signs for both carriers to be worried. If they choose to grow this network

they're going to be a serious player in this mail service industry.