FedEx Corp. said it would not renew its U.S. air delivery contract with Amazon.com Inc., ending a key customer relationship as the largest online retailer deepens its foray into freight transportation.
FedEx’s new priority will be to “serve the broader e-commerce market,” with U.S. package volume from online purchases expected to double by 2026, the delivery giant said Friday. Amazon’s contract with the Express Air division expires at the end of this month, and it does not cover international operations or other services such as FedEx ground deliveries.
FedEx’s surprise move signals that the No. 2 US courier will be banking on e-commerce customers who don’t have the power of Amazon to negotiate deep volume discounts. Amazon’s emergence as a logistics powerhouse puts pressure on FedEx and United Parcel Service Inc. for cheaper, faster deliveries as the e-commerce leader builds its own aircraft fleet and delivery capabilities .
“FedEx is ripping the band-aid off,” said Seaport Global Holdings analyst Kevin Sterling. “You could see the Express business eventually go away, and FedEx made the decision to go ahead and leave that side of the business with Amazon.”
Shares of the company rose 0.8% to $158.02 per share. Shares of Amazon rose 2.8% to $1,804.03.
“We respect FedEx’s decision and thank them for their role in serving Amazon customers over the years,” the e-commerce titan said.
Decrease in business
FedEx said Amazon was not its biggest customer, accounting for 1.3% of sales last year. Shipping consultant Satish Jindel estimated that FedEx’s domestic air parcel business with Amazon is likely “a few hundred million a year, at best” and is on the verge of declining.
FedEx knows that “their Amazon business is going to continue to shrink,” said Jindel, founder of SJ Consulting Group. “Why is your capacity being used by a customer who will continue to run out? They prefer to use this capability for other customers.
FedEx said it would focus on customers such as Walmart Inc., Target Corp. and Walgreens Boots Alliance Inc.
“There is significant demand and growth opportunities in e-commerce, which is expected to grow from 50 million to 100 million packages per day in the United States by 2026,” said the Memphis, Tennessee-based courier. , in the press release. “FedEx has already built the network and capacity to serve thousands of retailers in the e-commerce space.”
XPO Logistics Inc., another transportation provider, had to cut its 2019 profit forecast after Amazon abruptly ceased operations in December. This left XPO with $600 million in lost sales.
“FedEx didn’t want to be caught off guard and come to Amazon one morning and say we weren’t doing express business with you anymore,” Seaport’s Sterling said.
Amazon has been building its own freight capacity for several years. In 2013, an internal report proposed an aggressive global expansion of the Fulfillment By Amazon service, which provides storage, packaging and shipping to independent merchants selling products on the company’s website.
Three years ago, the online retailer entered into agreements with air cargo companies Atlas Air Worldwide Holdings Inc. and Air Transport Services Group Inc. to bolster the fleet of cargo planes dedicated to transporting Amazon packages.
Atlas Air and Air Transport operated a total of 40 air freighters for Amazon at the end of 2018, with agreements to add more over the next two years. In either case, Amazon holds warrants that allow it to acquire increasing stakes in air cargo carriers as its aircraft commitments increase.
Amazon had already reduced its business with FedEx Express over the past 14 months, said Bloomberg Intelligence analyst Lee Klaskow. Dropping Amazon will allow FedEx to carry “more desirable freight” than Amazon’s business from a profitability standpoint.
“It’s just a fact that Amazon has been using FedEx less over the last year or so, given that they’re building their own airline fleet, combined with the fact that their volume probably didn’t warrant the kind of discounts that they were getting,” Klaskow says. “FedEx would like to grow with a long-term partner rather than someone who takes care of transportation functions in-house.”