- That leaves some 200,000 Amazon packages a day previously moved by FedEx unaccounted for.
- With the exit of that key strategic partner, Amazon's quickly-growing logistics network is about to get seriously tested.
- There are two big problems with the air cargo network right now, analysts say.
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FedEx delivered 3% of Amazon packages last year, according to Wolfe Research. That's about 200,000 Amazon boxes a day of FedEx's daily volume of about 2.9 million packages, Moody's Investors Service estimated.
But on Friday, the Memphis freight giant announced that it won't renew its contract to fly packages for the indomitable e-commerce site.
"FedEx has made the strategic decision to not renew the FedEx Express U.S. domestic contract with Amazon.com, Inc. as we focus on serving the broader e-commerce market," FedEx said in a statement on Friday .The relationship will end June 30.
A FedEx spokesperson declined to comment further on the matter.
"We respect FedEx's decision and thank them for their role serving Amazon customers over the years," Amazon wrote in a statement to Business Insider.
FedEx Express, the company's air freight sector, will benefit in the long-run, analysts said. Moody's wrote to investors that Amazon a customer requiring massive amounts of residential, small-package deliveries instead of more fruitful business-to-business contracts is among FedEx's least-profitable businesses.
"FedEx will achieve higher margins and betterreturns on its investments in its Express network by redeploying capacity to customers otherthan Amazon," the Moody's note said.
As FedEx balances its wins and losses from the change in relationship, the pressure is on Amazon's burgeoning in-house logistics network of ocean freight containers, trailers, fulfillment centers, cargo planes, and more to be able to carry out its two-day delivery promise and soon, its one-day pledge.
"In a sense, the trainer wheels are off the Amazon Logistics operation," readan investors' note from Morgan Stanley's freight analyst team.
"(T)his announcement is likely to put extra strain on AMZN's in-house shipping offerings," it continued.
Amazon has been shifting more and more packages to its in-house delivery network, sometimes disrupting relationships with important logistics providers. Amazon suddenly pulled two-thirds of its business from XPO Logistics in Feb., snipping some $600 million from the company.
Amazon says one motivation to develop its logistics network was to manage its quickly rising shipping costs.Amazon's worldwide shipping costs have grown fifteenfold from 2009 to 2018. Net sales increased by sevenfold in the same time.
However, many observers say Amazon is actually building a third-party logistics company that will someday compete against FedEx and UPS.
Amazon has started to describe itself as a transportation company . And Morgan Stanley analyst Ravi Shanker said in a previous Business Insider interview it's clear that Amazon is looking to break into third-party logistics by looking at its quickly expanding network.
Amazon has acquired or leased planes, trucks, vans, and so on. And the air freight network is the priciest and perhaps most complex piece of Amazon's logistics network.
Amazon's fleet of 39 planes are staffed, maintained, and insured and owned by Atlas Air Worldwide Holdings and Air Transport Services Group (ATSG). Pilots from Atlas and ATSG fly the Amazon Air planes, and the company is the largest customer of both cargo airlines.
Amazon hasn't been able to perfect air parcel delivery. Andwith the elimination of FedEx, which boasts some 700 planes and 47 years of air cargo experience, from Amazon's air network, the pressure is dialed up for the e-commerce company's transportation venture.
Analysts highlight two problems with Amazon Air:labor issues and poor cost efficiency.
"We are confident in our ability to serve customers," an Amazon spokesperson told Business Insider. "We regularly balance capacity across our extensive network of great carrier partners to ensure we are able to meet our delivery promises even during the busiest of shopping events."
Pilots who fly for Amazon Air have threatened strikes over below-industry pay and safety standards
In March, Business Insider interviewed 13 pilots who work for Amazon Air and several logistics insiders on the e-commerce company's push to launch a cargo airline. Pilots and experts shared that the transportation effort grew too quickly, and that left safety and training matters on the sidelines.
But even without a strike, pilots have previously told Business Insider that the lack of new talent coming to the contract airlines that Amazon works with mean that service disruptions are likely on the way. Pilots at those airlines earn a third less than their peers who fly the same planes with the same years of experience at FedEx and UPS, and a pilot shortage means that most would-be Amazon Air pilots are more likely to apply for a better-paid job anywhere else.
Atlas said at the beginning of 2018 that it needed to add 200 pilots to its pilot pool as business expanded but, according to its pilots' union, Atlas hired a net total of only 143 pilots last year. It hired 288 pilots, but 145 quit. ABX Air lost more pilots than it hired 37 joined, but 42 quit.
"Right now, they're barely keeping it together," one Atlas pilot, who flies Amazon Air planes and spoke on condition of anonymity, told Business Insider in February . "And when I say 'barely,' it's right there. They're going to run out of people."
That concerns analysts like Kevin Sterling, managing director of Seaport Global. He wrote in a note to investors this week that ATSG and Atlas may not have "the ability to maintain on-time service levels and control costs."
Even Amazon has threatened to cut its ties with ATSG and Atlas , which would nix much of Amazon's ability to deliver on its consumer promise of two-day delivery, due to the caustic relationship between the pilots and their corporate leaders. The two airlines have been in a years-long labor contract battle with their pilot employees.
Amazon Air isn't as cost-efficient as FedEx or UPS
Amazon's logistics network is slated to save the company significantly in its skyrocketing transportation costs, experts say.
"Amazon is doing everything possible to keep their shipping expense low because it's ballooning," Marc Wulfraat, the president and founder of supply-chain consultancy MWPVL International , previously told Business Insider.
But in the short term, Amazon hasn't been able to run a cargo airline that is as cost-efficient as UPS or FedEx,David Vernon, a Bernstein senior analyst and vice president, wrote in a December note.
Amazon can only run 6.6 hours of revenue air hours per day, compared to 17.9 hours per day for UPS and 14.4 for FedEx.Because of "crew inefficiencies," Vernon wrote that Amazon Air is still costlier than UPS and FedEx in regard to moving goods door-to-door.
"While we are certain Amazon is getting a better deal chartering flights with ATSG and Atlas than it would at UPS or FedEx (which explains why they chose them), this does not mean they can undercut UPS and FedEx on price for deferred deliveries," Vernon wrote.
Despite these hurdles, the exit of FedEx means the pressure will grow on Amazon to demand more from its internal logistics network, and its airline contractors ATSG and Atlas, to deliver more.
Still, Morgan Stanley's freight team wrote they "believe Amazon has enough linehaul capacity to insource all of its own Prime needs and potentially open up to third-party packages as well." The move "signals Amazon's emergence as a significant player in the industry."
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