Express meets its match: E-commerce providers grow their logistics footprints

Only a couple of years ago, placing an order with Amazon for delivery to Seattle — the home of Amazon, as well as Air Cargo World ’s editors — would mean the parcel could arrive courtesy of a handful of different carriers and delivery partners. A UPS driver could arrive bearing the box with the signature logo, the parcel might make its way to Washington from another distribution center via a FedEx freighter, or the U.S. Postal Service could drop off an e-commerce purchase into a mailbox. Quick delivery for Amazon shoppers relied on a complex network of fulfillment and delivery partners, but with transportation costs rising and an increasing number of e-commerce sellers also relying on traditional transportation providers, an Amazon parcel today is increasingly likely to arrive courtesy of Amazon’s own-controlled transportation network. E-commerce growth accelerated early in the pandemic, with U.S. sales increasing by 21% in 2020 and 14% in 2021, according to estimates from Cargo Facts Consulting. The growth is expected to continue during 2022, though not at the pace of the past two years. In FedEx’s most recent earnings call, Executive Vice President and Chief Marketing and Communications Officer Brie Carere noted that the company is expecting 12% year-over-year growth in the U.S. parcel market by 2022 — double-digit growth that is nonetheless down slightly from earlier projections. The revision in U.S. parcel expectations is a reflection of the fact that e-commerce’s share of the overall retail market has declined since its pandemic peak, with a shift in favor of in-store shopping and another facet of e-commerce, the buy online, in-store pickup option. “However, despite this moderate change in e-commerce growth, the secular trend of e-commerce growing as a percentage of retail will continue to drive healthy parcel market growth,” Carere said. “We are forecasting a 10% annual growth rate of U.S. domestic market volume through 2026.” That growth could also present opportunities for Amazon not only to grow sales on its platform, but to potentially compete directly with express providers in the parcel delivery game. Amazon remains reliant on transportation partners for much of its delivery in the U.S. and overseas markets, but its own-controlled, middle-mile and last-mile transportation network is growing rapidly as the company works to reign in its soaring transportation costs and meet ambitious delivery targets. Amazon on the playing field The relative slowdown in e-commerce growth in 2021 and the expected continuation in 2022 is doing little to curb Amazon’s logistics growth trajectory. More than a year ago, in October 2020, Morgan Stanley analyst Ravi Shanker predicted Amazon would equal FedEx in terms of its in-house parcel delivery scope by the end of 2020, launch third-party delivery in the U.S. this year and equal UPS by 2022. Morgan Stanley did not respond to a request for an updated forecast, but in terms of own-controlled air operations, Amazon still falls well short of the express giants. However, it is catching up. FedEx maintains the largest active freighter fleet today, with more than 450 jet freighters as of Sept. 30, and more than 200 of those in the large and medium widebody categories, according to fleet analyses from our sister publication Cargo Facts . UPS comes next in terms of fleet size with more than 300 freighters, about two-thirds of which are widebody aircraft, and the DHL fleet follows UPS with around 270 freighters. Amazon’s air operations currently do not measure up to the express giants, but its transportation needs are still soaring. Amazon’s shipping costs, including costs at sortation and delivery centers as well as transportation costs, rose by $3 billion YoY during the third quarter to $18.1 billion, and were up 33.5% YoY for the first nine months of 2021, according to the company’s Q3 earnings report. Fulfillment cost growth has surpassed North American revenue growth for Amazon in most years since 2017, and despite the sharp increase in revenue growth reported during 2020 — when North American revenues grew by 38% and international revenues grew 40% — fulfillment costs were up by 45% and shipping costs were up by a staggering 61% YoY, according to Cargo Facts Consulting ’s analysis of past Amazon performance. Further cost increases are likely to continue, according to the most recent Amazon earnings report. “We expect our cost of shipping to continue to increase to the extent our customers accept and use our shipping offers at an increasing rate, we use more expensive shipping methods, including faster delivery and we offer additional services,” Amazon said in its 10-Q filing with the U.S. Securities and Exchange Commission. “We seek to mitigate costs of shipping over time in part through achieving higher sales volumes, optimizing our fulfillment network, negotiating better terms with our suppliers, and achieving better operating efficiencies.” Amazon is increasingly seeking to optimize its fulfillment network by taking control of its own fulfillment operations, and that trend — like e-commerce growth — has accelerated during the pandemic. By the end of 2020, the Amazon Air freighter fleet had grown to more than 70 aircraft, with the majority being 767Fs and the remainder a mix of 737 NG and Classic freighters, according to fleet information from Cargo Facts . This year, Amazon Air has added around a dozen more jet freighters , as well as beginning regional freighter operations with its new partner Silver Airways . In April, Amazon Air launched its new hub at San Bernardino Airport (SBD) with one daily 767F flight, which has since ramped up to three daily flights according to flight tracking data. Amazon also opened its 600-acre cargo hub at Cincinnati/Northern Kentucky International Airport (CVG) in August in the first phase of its hub opening, with the full build-out of its south development at CVG not scheduled until 2026. The rapid build-out of air cargo hubs in the U.S. from Amazon is a trend that has emerged “not too often” in the industry, SBD’s Director of Aviation Mark Gibbs told Air Cargo World of the southern California hub development, which is second in size only to CVG for Amazon. “I liken it to a new era in aviation — it’s the next chapter in aviation, really,” said Gibbs. “There are really not a lot of big domestic rollouts nationwide, that doesn’t happen very often in this industry.” Growth of Amazon’s own-controlled network is supporting the e-tailer’s delivery needs for products sold on its platform, but also represents a potential threat to express providers. “Own-controlled logistics are seen as a competitive advantage for most of these e-commerce platforms,” explained Cargo Facts Consulting analyst Guillermo Ochovo at the recent Cargo Facts Symposium. “Today we’re seeing that logistics networks are open to third-party sellers — this is the case for Alibaba or Amazon, and we have also seen that some logistics networks are open to third parties who are not sellers.” Amazon had launched Amazon Shipping, a trial program in which its drivers picked up packages directly from businesses and delivered them to consumers, in a departure from its current distribution center model, but that program was officially paused in June 2020 . Amazon did not respond to inquiries regarding its current plans, but signs are emerging that Amazon may be resuming the external parcel shipments and appears to already be transporting cargo on behalf of the U.S. Postal Service. With no sign that Amazon’s fulfillment network growth is slowing down, the e-tailer could soon be a direct competitor to the integrators. Don’t count out the integrators, yet Major express providers were well aware of the potential threat presented by their e-commerce customers well before own-controlled network growth accelerated during the pandemic, as evidenced by FedEx’s decision to end its Ground and Express delivery contracts with Amazon in 2019. While Amazon and other e-commerce providers have strengthened their in-house delivery capabilities, express providers have expanded their own offerings to capture their share of growing e-commerce volumes and in some cases even made acquisitions in the e-commerce space. In FedEx’s case, alongside its plans for keeping up with the thriving U.S. market, the integrator is focused on capturing cross-border growth to expand overseas, with Carere noting, “e-commerce growth will be critical for both our Asian and European businesses.” To do so, FedEx launched its FedEx International Priority Express Service in Europe and the International Connect Plus (FICP) service between Europe, the U.S. and Asia during the year, and is expanding those products to become more competitive in its overseas markets. According to Carere, FICP was expanded during the company’s first quarter ended Aug. 31, and on Sept. 1, FedEx launched FICP and AMEA [Asia Pacific, Middle East and Africa] across 80 origins. “For businesses looking for a cost-effective solution with competitive transit, FICP provides a compelling e-commerce value proposition,” Carere said during the Q1 earnings call. “We continue to gain new customers through FICP and have a very robust sales pipeline.” The Asian and European cross-border markets will continue to be growth targets for FedEx, Carere added, noting the company is “underpenetrated” within Europe, from Europe to the U.S. and between Asia and Europe. FedEx also made a more direct overture into the e-commerce space with its 2020 acquisition of ShopRunner, a membership-based platform connecting members to retailers like American Eagle, Under Armour, Brooks Brothers and Neiman Marcus. ShopRunner is operating as a FedEx Services subsidiary under the FedEx Dataworks organization, according to a release on the acquisition. The move could help position FedEx more directly for head-on competition with Amazon and other marketplaces, noted Logistics Trends & Insights founder and Air Cargo World columnist Cathy Roberson in a column on e-commerce acquisitions . UPS, meanwhile, has maintained its business with Amazon, which is the integrator’s largest customer. According to CEO Carol Tome during the company’s most recent earnings call, Amazon’s volumes moving with UPS “surged” during 2020 thanks to the sudden increase in e-commerce demand, but that has scaled back recently. “This year, if I look at the volume with our largest customer as a percent of total volume for the first nine months of this year, it's trending at where it was back in 2019,” Tome said. “And we continue to support that customer as they continue to grow, but we're just part of their supply chain.” Enterprise customer volumes overall declined with UPS during the third quarter as the company’s strategy has focused on improving its revenue quality by targeting volumes for its small and medium business (SMB) customers. According to the company, its SMB average daily volumes in the U.S. were up 10.9% YoY in Q3 and made up 27.4% of UPS’ total U.S. volume. In DHL’s case, the Express division experienced 29% YoY EBIT growth to $1.1 billion during the most recent quarter , while its eCommerce Solutions division EBIT increased by about 20% thanks to strong growth in its B2C business. Along with the other integrators, DHL is planning additional investments to increase its express and e-commerce capabilities. DHL will invest more than $300 million in the next five years in eCommerce Solutions in the U.S., adding 70% more square footage, automating all U.S. distribution centers and upgrading the current IT platform, according to a September announcement. With their vast fleets and high-tech facilities around the world, the express providers have at least one advantage over Amazon: a massive head start in terms of existing network scope. UPS, FedEx and DHL are also refusing to sit on the bench as Amazon continues to grow, instead making substantial operational changes and investments to accommodate growth and improve operational efficiency. It remains to be seen whether Amazon will give the companies a run for their money in head-to-head express competition.

Express meets its match: E-commerce providers grow their logistics footprints

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