Amazon’s impact on UPS, FedEx underestimated: Morgan Stanley

Amazon prime air

Amazon’s move to create its own air network has been underestimated and could cause significant turbulence for both UPS and FedEx, Wall Street investment firm Morgan Stanley warned this week.

“For now, investors are focusing on Amazon’s last-mile efforts but we believe the challenge in Air is just as relevant,” says Ravi Shanker an analyst with the bank, who added that many are “missing the risk Amazon Air poses” to their businesses.

This is particularly the case as Amazon continues to ramp up its growing USD 1.5 billion hub at Cincinnati/Northern Kentucky Airport (CVG), which could potentially offer enough ramp space for 100 freighters.

“Given Amazon’s plans to take delivery of 40 planes and build an air hub that could potentially handle 100 planes, we’ve taken a closer look at the impact of Amazon Air (its in-house Express Air network) on UPS/FedEx Air volumes, Shanker says.

Just last month the e-commerce giant announced it will open a new “air gateway” and package-sorting centre at Wilmington Air Park, less than 100 km from its main CVG hub. That facility is set to begin operating eight flights daily in the second quarter 2019.

And persistent rumours abound, suggesting Amazon is on the hunt for at least six more B767Fs on ACMI basis, beyond the forty already flying for Amazon Air by Atlas Air Worldwide Holdings and the Air Transport Services Group (ATSG).

The investment bank estimates that Amazon Air’s all-in cost is around USD 6.00 per package compared to somewhere between USD 8-10 for UPS / FedEx.

“We estimate in 2019, this savings per package translates to a savings of USD 1.0-2.0 billion or 3-6 per cent of Amazon’s global shipping costs,” the report says.

“Though Amazon Air’s rollout is in the early innings, we estimate a 200-300 bps [2-3 percentage points] impact on UPS and FedEx Domestic Air Volume growth already, with more erosion expected as Amazon Air is built out,” says Shanker.

And this current 2-3 per cent is estimated by Morgan Stanley to grow to as much as a 10 per cent bite out of their revenues by 2025.

The bank also estimates that Amazon Air’s lanes overlap with over two thirds of the volume flown by UPS+FedEx combined.

“While this is hardly crippling to UPS/FedEx as US domestic air/express only accounts for ~17 and 19 per cent of total revenues respectively, it is enough to serve as a drag on earnings growth, especially in combination with other areas of secular competitive pressure.

“The drag will likely grow as Amazon Air grows its fleet, expands operations and potentially starts moving third party volumes,” Shankar says.

UPS stock closed down 7.4 per cent in trading at USD 106.77 a share, while FedEx dropped 6.3 per cent to USD 215.52 a share following the Morgan Stanley report.

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Amazon's impact on UPS, FedEx underestimated: Morgan Stanley
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Amazon's impact on UPS, FedEx underestimated: Morgan Stanley
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Amazon’s move to create its own air network has been underestimated and could cause significant turbulence for both UPS and FedEx, Wall Street investment firm Morgan Stanley warned this week.
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AsiaCargoBuzz.com
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