Amazon Air predicted to increasingly hit FedEx/UPS revenues

05 / 12 / 2018

A report from investment bank Morgan Stanley has warned that the market is underestimating the risk that Amazon's air network poses to UPS and FedEx.

The report suggests that Amazon's network is already having an impact on the two integrator's air volumes, with more erosion expected as services are expanded further.

It says that Amazon Air's lanes overlap two thirds of the US domestic volumes flown by FedEx and UPS combined and that it could result  in 2% of lost revenue for the express firms in 2018, growing to more than 10% by 2025.

"While this is hardly crippling to UPS/FedEx as US domestic air/express only accounts for ~17% and 19% of total revenues respectively, it is enough to serve as a drag on earnings growth, especially in combination with other areas of secular competitive pressure.

"The drag will likely grow as Amazon Air grows its fleet, expands operations and potentially starts moving third party volumes."

The analysts pointed out that the $1.5bn air hub it is building at Cincinnati/Northern Kentucky Airport has space for 100 aircraft.

The report suggests that even with 27 planes in service for Amazon (the number used for the study) the e-commerce giant has the capacity to ship as much as 25% of its North American packages.

Cost savings seem to be one of the main drivers behind Amazon's decision to develop its own airfreight operation.

"We estimate that Amazon Air’s all-in cost to be ~$6 [per package] vs. ~$8/~$10 for UPS / FedEx Air.

"We estimate in 2019, this savings per package translates to a savings of $1-$2bn or 3-6% of Amazon’s global shipping costs," the report suggested.

"In 2Q18, we tracked 3,980 Amazon Air flights with 27 of its 40 plane fleet in the air.

"This is an average of nearly 50 flights per day or two per operating plane. At launch, Amazon Air was announced as a purely domestic US operation.

"Our AlphaWise flight tracking has backed that up with 99% of tracked Amazon Air flights to-date within the 48 states.

"Out of 19,000 total flights for Amazon Air planes from August 2016 to July 2018, we have seen 22 flights to Hawaii and two to Puerto Rico.

"However, we also see a few international routes flown in the data – to be precise – 21 routes with an international origin and destination.

"It is likely that many (or all) of these routes are technical flights though there have been over 100 flights flown to date with an international origin/destination or both."

Overall Morgan Stanley estimates that the e-commerce firm's carrier split - ground and air - is 10%-15% in house, 10%-15% FedEx, 30%-35% UPS and 40%-45% US Postal.

"If Amazon bought 100 B767F planes to fill up its [new] air hub, it would account for 26% and 41% of FedEx and UPS’s estimated monthly active domestic fleets, respectively."

Looking ahead, Morgan Stanley is expecting Amazon to fly even more of its own parcels. It points out that 19% of Amazon volumes flown by FedEx and 14% by UPS are flown to an airport within 50 miles of an Amazon warehouse.

In response, the two integrators are likely to ramp up their exposure to non-Amazon customers, the report stated.

Analysts have question UPS and FedEx in the past whether they are concerned about Amazon's expansion. In response, FedEx dismissed reports as fantastical.

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