Amazon a Good Thing or Bad Thing?

Lots of Questions about AMZN Buying Planes. Last week, several news agencies reported that AMZN is looking to lease up to 25 aircraft to build out its own airfreight operations. For some reference, FDX has ~400 jets and UPS owns nearly 250 jets and leases or charters another 400. Our note today discusses what this means for UPS, FDX and AAWW.

Some Numbers on AMZN. We estimate AMZN accounts for about 10% of total volume and 5% of total rev. for UPS, and 9% of volume and 3% of rev. for FDX. Overall, we estimate about 30% of AMZN’s business is shipped with UPS, 35% with the Post Office, 17% with FDX, and 18% with regional providers like LaserShip in New York.

What Can AMZN Do with 25 Planes? Below, we try and estimate how many packages AMZN can ship on its own relative to the roughly 1.4B packages it ships currently in the U.S. Our math suggests that with 25 aircraft, AMZN could ship around 225M packages a year, or about 16% of its total U.S. shipments a year.

What’s the Risk for UPS and FDX? We believe AMZN is already leasing 4 freighters to move inventory between its fulfillment centers. And with 25 more aircraft, we suspect AMZN might start shipping its own packages around to diversify away from FDX and UPS. But 25 aircraft are not enough to fully displace UPS and FDX as providers, and they’re nowhere close to enough to start competing against UPS and FDX for other shippers.

We’re Not Sure AMZN is a Good Thing for UPS and FDX. We’ve never recommended UPS or FDX as winners from e-commerce growth, as we believe it’s low-yielding, low-density, and low-margin business. UPS is seeing its best volume growth ever in recent years, but little EPS growth. And FDX Ground margins have contracted the past 3 years as e-commerce has grown rapidly. So as we’ve cautioned about the negative mix of e-commerce growth in recent years, it would seem hypocritical to worry about losing some of the business. Reiterate Peer Perform on both FDX and UPS.

A Few More Thoughts. We love the long-term story at FDX Ground, and would like to see FDX Express shrink its way to better profitability. So if AMZN plans to take on the burden of more aircraft, that’s not a shift that troubles us too much. Meanwhile, if it seems likely that AMZN will do more shipping on its own, we’d like to see FDX and UPS push pricing increases even more aggressively while they can. See more below, including what AMZN’s plans could mean for AAWW