Will AMAZON AIR, cause threat to FEDEx AND UPS?

 

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 may now aim to compete with them. Amazon is looking to become a logistics company 

The question is how quickly will they ramp up their operation to take over as the logistics giant. 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 USA 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, the UPS and FedEx revenues would have been about two percent higher than what it is today, further growing up to 10 percent by 2025. 

 

FedEx and UPS shares dropped 20 percent from recent highs, after Morgan Stanley reported these numbers to investors in December 2019. In 2018 annual filing Amazon listed transportation and logistics services among its group of competitors for the first time. According to some reports, Amazon is now handling their 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 to 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. Amazon has about eight flights a day on Prime Air.

 

 Some of its aircraft are repainted with blue Prime branding while others still carry logos of the airlines from where Amazon leased the planes. Once the Amazon packages are offloaded from Amazon planes, they're sorted onsite at the Ontario Airport, loaded onto Amazon semi-trucks and sent out to one of its 185 fulfilment centres.

 

 The huge operation at Ontario International didn't have enough capacity for Amazon Air's growing number of flights, so it expanded to the nearby March Air Reserve Base, Moreno Valley. 

 

Amazon has an enormous impact in The Inland Empire, which is the interior in Southern California.  At Ontario, FedEx and UPS make up the airport's majority that is 750,000 tons of air cargo traffic. But the shipping giants are losing a portion of Amazon's business to Amazon itself and its own growing shipping operation. By gaining more control over their supply chain Amazon must make sure they can provide better service because if a customer does not receive the package on time, they will blame Amazon and not FedEx or UPS. 

 

When an Amazon package arrives, chances are that it went through several third-party hands before it reaches the end user. A seller prepares the package and a shipping service like UPS, FedEx or USPS picks it up from the seller and brings it to the distribution center. From there, one of those big shippers loads it on a plane or truck and ships it across the country to the nearest Amazon fulfilment center and then one of those big shippers takes it again to deliver it to your doorstep. If they could eliminate any process out of this delivery route, their sellers could offer their products at a much cheaper cost which 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, the more it can control costs. It is estimated that Amazon will pay about $6 a box to move it on their own network,  while Amazon is estimated to pay UPS and FedEx about $8 or $9 to move a box, looking at  Amazon's scale, that could be a couple of billion dollars of savings. In - house shipping 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 the reason for dozens of Amazon Air planes in the skies and 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. When selling through Amazon, it's better to deal with one company because even at the same price there's obviously some advantage for these sellers to go with Amazon instead of the carriers. 

 

Are the big incumbent shipping companies worried about Amazon becoming a competitor? FedEx says no. Amazon could never be a competitor to FedEx because there's no sensible way to compare the two. It could be some local delivery in highly dense markets but that in no way is 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 while the number of FedEx flights per week is closer to 13,000. Amazon is not trying to replicate a UPS and FedEx network, rather 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.