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.