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Will Amazon’s Transportation Fleet Bring Down Hammer On FedEx, UPS?

It’s an ambitious plan by Amazon ( AMZN ), to procure a fleet of 40 airline freighters and lessen its dependence on FedEx ( FDX ) and United Parcel Service ( UPS ). The 40 aircraft that Amazon plans to have fully operational by 2018 will enable it to bring as much as 30% of its current delivery volume in-house, according to a research report Monday by Moody’s Investors Service analyst Jonathan Root. In terms of short- and medium-haul aircraft, Amazon’s fleet would be 21% the size of UPS’ and 14% the size of FedEx’s, says Root. In terms of payload capacity, Amazon’s fleet would be 26% the size of UPS’ and 17% of FedEx’s, excluding their largest freighters that fly mostly long-haul routes for those companies, Root wrote. “As significant as that sounds, the business that UPS and FedEx will lose may not be as bad as it sounds,” Root wrote. “Revenue and average daily volumes at UPS and FedEx will be hurt, but there’s plenty of opportunity for them to replace that lost business with growing volumes from higher-yielding customers” and growth in e-commerce. Root also says that Amazon is one of the least profitable customers for UPS and FedEx, because Amazon’s size enables it to negotiate considerable discounts. “The extent to which UPS and FedEx can offset volume declines from Amazon with new business from other customers will determine how beneficial or detrimental Amazon’s plan will be to the companies’ segment operating margins,” Root wrote. Amazon stock was down a fraction, near 700, in afternoon trading in the stock market today , after touching a record high above 722 on May 12. It’s an IBD Leaderboard stock. UPS stock was down a fraction, while FedEx was up a fraction. The threat would grow if other large retailers follow Amazon’s lead, which he says is possible. “We understand that Wal-Mart Stores ( WMT ) is investing to improve its e-commerce positioning by building eight e-commerce warehouses,” Root wrote. Wal-Mart already offers free shipping on orders of more than $50, and it might broadly offer an e-commerce membership that includes free shipping, as Amazon does with its Amazon Prime membership service. Still, it’s not clear how deeply Amazon will dive into transportation services. “We estimate that Amazon could build a competing U.S. ground network for between $8 billion and $15 billion,” Root wrote. “We believe the company has the financial capacity to continue adding fulfillment centers, pickup locations and local and regional delivery operations, it if chooses to do so.” More than that, Amazon could offer its delivery services to the many third-party sellers on its site. “Such an offering would be more problematic for UPS’ and FedEx’s longer-term financial performance,” Root wrote.

Amazon Will Continue To Spend Big To Improve Deliveries: Analyst

In 2010,  Amazon.com ( AMZN ) had 26 fulfillment centers in North America. By 2017, it will have 88, according to Cowen analyst John Blackledge. In a research report Monday, Blackledge said Amazon’s rapid and massive delivery-system expansion — costing the company more than $10 billion in capital expenditures — is likely to continue for the foreseeable future and will not be matched by rivals such as Wal-Mart ( WMT ). Doubling down on the fulfillment business has meant continuing to innovate, especially in Amazon’s “sortation” centers, he says. These centers facilitate last-mile delivery — a notorious problem for any logistics company — and, in conjunction with increased United States Postal Service shipments, improvements here could drive down the cost of shipping to $1.85 per order from $4 to $5, the analyst says. Though spending big bucks has depressed earnings, generating  ire among investors , the strategy is sticking close to the philosophy Jeff Bezos laid out in his 1997 letter to shareholders, that the company will put customers before profits. Amazon stock was up a fraction in afternoon trading on the stock market today , near 624. The company has an IBD Composite Rating of 77, where 99 is the highest. After a low-volume breakout, Amazon is still in buy range from a 603.34 cup-with-handle buy point. Amazon is an IBD Leaderboard stock. The company, meanwhile, also is expanding its FedEx ( FDX ) and UPS ( UPS )-like services. The company has acknowledged a widely circulated rumor that it was launching a fleet of jets — which it is leasing and operating out of Wilmington, Ohio. Blackledge says this program has the potential to make every Amazon item deliverable within a day. The e-commerce leader is set to report Q1 earnings after the close Thursday. Wedbush analyst Michael Pachter wrote in a research note last week that the company will miss EPS expectations but beat sales estimates.

Amazon.com Vs. FedEx And UPS Not Any Budding Rivalry — Yet

A new report from RBC Capital Markets asks the ever more pressing question about Amazon.com ( AMZN ) and its deliveries ambitions: Does the transportation sector have a problem? The short answer is no — at least not yet, according to RBC analyst John Barnes. The crux of the issue for the e-commerce leader is that its shipping costs soared 32% to $11.5 billion in 2015, while sales rose about 20%. That, says Barnes, suggests that Amazon might have trouble ahead if it continues on course. As a result, Amazon has been taking more of the shipping task into its own hands. RBC emphasizes, though, that Amazon isn’t anywhere near able to separate itself from shipping partners such as UPS ( UPS ) and FedEx ( FDX ). But the company will incrementally begin to do so, the report says, at least in certain areas. In prior years — though not in 2015 — both UPS and FedEx have stumbled during the critical holiday season. Packages not being delivered on time, Barnes says, is like Amazon being closed on random days without warning. Amazon’s massive distribution network is as complex as it is large. It includes a growing trucking operation and the recently disclosed air transport and ocean shipping components. Ocean shipping is where Barnes suspects the company will attack first. “We believe Amazon will take over large swaths of its ocean freight supply chain, as the move can lower its own shipping costs, drive third-party sellers to the platform and eventually turn into a profit center,” Barnes wrote in the report, released late Monday. As IBD has reported, industry experts estimate that the ocean shipping business has the potential to be worth millions in free cash flow for Amazon, mostly from selling capacity to third parties. Analysts says that Amazon CEO Jeff Bezos might not go after the free cash flow but instead drive the value back to consumers in some fashion, such as still-lower prices. But the ocean shipping industry is vast, and Barnes estimates that the Seattle-based company would grab only between $200 million and $400 million in business. It could, though, affect shippers such as Expeditors International of Washington ( EXPD ) as well as UPS and FedEx. The ocean shipping grab isn’t without precedent, either. Wal-Mart ( WMT ) has been taking possession of suppliers’ goods in China and doing its own shipping for years. Amazon’s growing air network is one area where the company will be content to work with third parties, Barnes said. Amazon’s  recently announced deal with Air Transport Services Group ( ATSG ) to lease 220 767 jets highlights this point. As part of the deal, Amazon will be able to purchase about 20% of ATSG’s common shares over a five-year period. Meanwhile, Barnes says that UPS and FedEx are both fighting Amazon’s long-term onslaught. UPS now provides 30% of Amazon’s parcel needs, netting $2.2 billion in revenue, and FedEx hauls in $1.5 billion, or about 20%. Those figures translate to about 8% and 10% of ground revenue, respectively, for the shipping companies.