Amazon’s recent entry into the air cargo business may not significantly impact the bottom lines of UPS and FedEx, according to a report released last week by credit rating agency Moody’s. While both carriers are exposed to Amazon, accounting for 7 percent of UPS’ North American volume and 3 percent for FedEx, analysts from the rating agency concluded that neither company will suffer from a loss of service to Amazon, since the online retailer is a very low-margin customer.
Because of its size, Amazon is able to negotiate shipping discounts that translate into razor-thin margins for both UPS and FedEx. Moody’s estimates that a 10 percent reduction in volume from Amazon would lower annual revenue for UPS by approximately US$219 million and operating profit by about $26 million. For FedEx, a similar move could lower revenue by about $67 million and operating profit by about $10 million. For context, UPS posted a net income of over $4.8 billion in 2015.
“Amazon’s plans to lease freighter aircraft for a supplementary delivery network will reduce revenue and average daily volumes at UPS and FedEx,” said Moody’s vice president and senior credit officer, Jonathan Root. However Root also pointed out that this move would free up capacity for higher-yielding customers and provide the carriers with, “the opportunity to offset reductions from Amazon and improve their margins.” But he also cautioned that if Amazon decided to compete for third-party package delivery, “the U.S., UPS and FedEx would face greater challenges.”
Along those lines, it is unclear what Amazon’s end-game is with this move, but the online retailer is well positioned to enter the air cargo business thanks to its own warehousing and distribution experience and capacity, Moody’s said. Moreover, their freighter partnerships with Air Cargo Transport Services Group (ATSG), and more recently Atlas Air Worldwide Holdings, round out their experience and make them a formidable contender in the air-cargo business. The most recent deal with Atlas hands Amazon an aggregate payload capacity equal to one-fifth that of FedEx and about one-fourth that of UPS, according to Moody’s. An analyst with the ratings agency added that this would enable the company to move up to 30 percent of its volumes with its own fleet.
Another factor worth considering is the overall growth of e-commerce. Both major carriers and Amazon have insisted that their business relationships remain strong, and that Amazon is not dumping the two carriers. Moody’s also raised this as a mitigating factor. And with online retailers outpacing their tertiary counterparts by 3:1 in terms of growth, this scenario is entirely plausible.
According to Yahoo Finance, UPS ships 15.5 million packages while FedEx ships around 6.9 million on a daily basis. With a 28.22 percent year-on-year increase in revenue over the first quarter 2016, Amazon outperformed the 22.97 percent improvement posted by businesses classified as “internet, mail order and online shops,” and the 8.66 percent growth in the retail sector.Like This Post