FedEx Corp. can finally wake up to the threat Amazon.com Inc. makes up its business model.
The logistics company offers big discounts that help fill out aircraft in the express delivery network with multiple e-commerce shipments, according to the Wall Street Journal, who quoted people who were familiar with the case. The offerings are used to woo customers away from rival United Parcel Service Inc., or to convince them to switch from FedEx cheaper deals, the newspaper said and quoted people who were familiar with the case. For some customers, shipping costs via FedEx two-day air service can now cost about the same as sending them through the land department. (1
A FedEx spokeswoman told the Wall Street Journal that the company has not changed the pricing strategy and adds that the two-day Express service "has been very successful and continues to deliver tremendous value to small and medium-sized businesses like compete in the e-commerce market. " Reports on discounts come just a few weeks after FedEx said it is the domestic Express air-delivery unit dropped Amazon as a customer to focus on "serving the broader e-commerce market." FedEx dropped Amazon as a customer for its Express air-delivery unit to focus on "serving the broader e-commerce market." The charity interpretation of this move is that FedEx had found some backbone and held a firmer line on Amazon's pricing in an effort to strengthen its profit margins. The second possibility is that FedEx acknowledged that the Amazon's efforts to bring more of its logistics business into the house were genuine and that it might start the process of breaking with Amazon before Amazon decides to break it down. While FedEx CEO Fred Smith has repeatedly painted some notion of Amazon that interferes with the logistics industry as "amazing," his actions are increasingly suggesting something else.
The percentage of capacity devoted to time-sensitive legal documents and medical supplies that the FedEx Express network was originally built for is likely to continue to shrink. But it is uneconomical for the division's fleet – which numbered 670 leased and owned aircraft at the end of 2018 – to fly partially full or not at all. Meanwhile, FedEx expects US e-commerce to grow to 100 million packs a day by 2026. It's been difficult for Amazon to expect only a small percentage of its total sales. But Amazon has changed the world's expectations of shopping and delivery. So if your own sales are in the mix, FedEx will be forced to drink deeper from the fire extinguishing of e-commerce shipments to keep its network transient. And it will come at a price for margins.
FedEx's decision to prioritize transfers from such as Walmart Inc., Target Corp and Walgreens Boots Alliance Inc. gave some analysts hope that it would deliver a larger share of packages to higher-paying business customers and add more density to their delivery routes . But there is some debate as to whether the Express Air-Delivery unit is still meaningful today. Amazon builds on a network of fulfillment and sorting centers near metropolitan areas to quickly complete and send orders, a model that many competing dealers imitate in some form or form as they attempt to be competitive. If you are only going to deliver a package of 25 or 50 miles, do not use a plane to do so. FedEx's decision to release Amazon as a US express customer was first announced, and analyst Kevin Sterling, Seaport Global Holdings, wondered about Bloomberg News if it was a precursor to the Express unit eventually fading out.
Plans still have a role to play: Amazon last week announced an agreement to lease 15 additional Boeing Co. 737-800 converted carriers from the General Electric Co.'s jet-lessor arm, adding an existing five-plane deal. However, FedEx reported the need to offer discounts to keep the aircraft full to the company's decision to spend a significant portion of the investment budget to refresh their aircraft fleet. The management has clearly not expanded the capacity of the Express device, but rather replaces its aircraft with more efficient options to improve productivity and costs. Scaling down the fleet and redistributing these resources can be a smarter move.
The reported price reductions – coupled with FedEx's recently announced plan to offer delivery seven days a week by 2020 and adding a fleet of flexible part-time drivers – boost a point both I and my colleague Shira Ovide have long claimed: Amazon doesn't have to Steal customers away from FedEx and UPS to be a threat. It forces both companies to think about how they operate. The revenue lost from removing Amazon as an Express customer is relatively small, but the world e-commerce giant has created is not a hospitable one for the package supplier's profit margins and capital expenditures.
(1) The news of the rebates weighed on stocks Monday, which made a separate freight issue: FedExhad issued another excuse to Huawei Technologies for packet offsetting, and some reports indicate that China is considering having a black listing. 19659012] To contact the author of this story: Brooke Sutherland at email@example.com
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Brooke Sutherland is a Bloomberg Opinion Socialist who covers deals and industrial companies. She previously wrote an M&A column for Bloomberg News.
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