The decision by FedEx (NYSE: FDX) to not renew its Express domestic contract with Amazon.com (NASDAQ: AMZN) seems like a minor inconvenience, one that should have minimal impact on both parties.
Amazon represents only a tiny fraction of FedEx's total annual revenue, and the decision doesn't affect any of the carrier's other contracts with the e-commerce giant related to international services.
However, it indicates that fault lines are appearing in Amazon's relationship with third-party carriers as it increasingly builds out its own air cargo capabilities that may eventually compete with FedEx and UPS (NYSE: UPS).
Image source: FedEx.
Open for business
FedEx has long dismissed Amazon as a competitive threat. During its fiscal 2018 second-quarter earnings report in December, Chairman and CEO Fred Smith said that "we look at Amazon as a wonderful company in service and they're a good customer of ours."
In March, President and COO Raj Subramaniam reiterated, "We have been clear that [Amazon's growing out its logistics operations] is not a threat to our business, because Amazon represents less than 1.3% of our total revenue, which is substantially lower than what our largest competitor carries, nor is Amazon a threat to our future growth."
While arguably true, it's also an opportune time for FedEx to begin divesting its Amazon business. FedEx says it's anticipating e-commerce delivery demand to double to 100 million packages by 2026. Even though Amazon will undoubtedly account for a lot of that growth, the carrier is telling other e-commerce providers it's available to focus on and prioritize their needs. It's a positive message for retailers still concerned about Amazon's ability to suck all the oxygen out of the room.
FedEx has also been expanding its relationship with Walmart (NYSE: WMT), announcing last year it would open 500 offices inside Walmart. And with Walmart launching one-day delivery on online orders last month, FedEx now has cargo space available for the retail giant's packages.
Making the move now also doesn't really hurt FedEx's bottom line, and it could, in fact, improve it. Based on the carrier's estimate of Amazon's influence and $17.3 billion in 2018 revenue, Amazon accounts for approximately $225 million of the total, but it still probably commanded discounts for the steady volume it provided. New business from other carriers won't be able to negotiate lower rates, and so margins ought to improve.
Laying the groundwork
Amazon has been aggressively ramping up its investments in logistics, most recently launching Delivery Service Partners (DSP), which encourages entrepreneurs to run their own local delivery business under the Prime banner. Last month, Amazon told its U.S. employees it would finance up to $10,000 of the start-up costs and give them three months pay if they started their own business as DSPs.
And earlier this year Amazon agreed to acquire a 40% stake in Atlas Air Worldwide Holdings and a 33% position in Air Transport Services Group, the two aircraft leasing companies through which Amazon operates its Prime Air cargo service. The e-tailer has also expanded its cargo hubs and aircraft fleets; operates a fleet of ground vehicles, both trucks and vans, as well as third-party cars; and has entered first-mile, transocean shipping.
The other carriers may see this as an opportunity to reassess their own relationships with Amazon, though they might not be as readily able to drop the e-commerce leader as their rival.
The start of something big
Although Big Brown has said in SEC filings that no customer accounts for more than 10% of the total, it's also acknowledged that if it lost a significant customer it would have a material impact on its business. Echoing the words of FedEx's Smith, UPS CEO David Abney told Fox News: "[Amazon is] a good customer of ours. We work closely together."
UPS is more dependent on Amazon than FedEx, but it too may look for opportunities to wrench control away from a very big customer. As Amazon trials delivery packages for third-party retailers, admittedly small now but that have the potential to blossom into something more, this first crack in the dam may soon become a torrent.
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