Amazon challenges FedEx, UPS with new air freight hub

PHOTO: Amazon

PHOTO: Amazon

As the retail industry moves into full gear for the Holidays, Amazon takes center stage by announcing a new hub for its burgeoning air freight fleet. The new freight hub is currently under construction at Fort Worth Alliance Airport in Texas and is expected to become operational early next year. This marks the first air hub that Amazon will be able to design from the ground up with 50% of space being reserved for future development.

Amazon’s presence at Alliance is notable because FedEx (FDX: NYSE) is currently the sole commercial operator at Alliance Airport. Already legacy freight carriers are facing increased competition by Amazon Air’s expansion. On December 4th Morgan Stanley (MS: NYSE) issued a parcel sector report that rated the stock of UPS (UPS: NYSE) to be underweight with a risk of Amazon capturing its large business to consumer marketplace.

Both FedEx and UPS have struggled on the stock market, falling 28% and 18% respectively against the S&P 500 loss of 6.3% year-to-date. Morgan Stanley estimates that Amazon’s rise in aviation will siphon 2% off of UPS’s revenue in 2018 and Amazon’s increased cost efficiency could erode 10% of FedEx and UPS’s revenues by 2025.

“The market is missing the risk Amazon Air poses,” explained Morgan Stanley equity analyst Ravi Shanker.

Amazon Air began operations in 2015 and has mirrored its parent company’s rapid growth. Amazon itself was founded in 1994 and became the world’s second trillion-dollar company in market capitalization in September of this year.

“For now, investors are focusing on Amazon’s last-mile efforts, but we believe the challenge in Air is just as relevant” said Shanker.

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FedEx did not publicize any concern for Amazon during their quarterly earnings call on Tuesday.

“We don’t have concerns,” said Executive Vice President Rajesh Subramaniam. “So far as you can see, our volumes in the domestic networks are continuing to increase, and we value Amazon as a good customer of ours.”

FedEx management remains content that Amazon continues to outsource most of its shipping services through companies like FedEx and UPS.

Amazon Air now has a fleet of forty aircraft operated by Atlas Air (AAWW: NASDAQ) and Air Transport Services Group (ATSG: NASDAQ). Its main hub has grown at Cincinnati/Northern Kentucky International Airport, and Amazon plans to eventually sponsor a fleet of 100 planes. Amazon stands to save $2 to $4 per package by using its own air delivery service in place of an established carrier, saving $2 billion or 6% of its global shipping costs in 2019.

2018 has been an eventful year for Amazon. After much speculation, the company announced New York City and Arlington, Virginia will jointly serve as its HQ2. The company agreed to pay a $15 minimum wage at its fulfillment centers, only to take away employee incentives and stock options. It also fell into dispute with its home city of Seattle when the City Council attempted to enacted a “head-count” tax on corporations.

Undeniably, Amazon is set to significantly impact the air cargo market. The International Air Transport Association (IATA) reported that e-commerce trade between the Asia Pacific and Europe grew by 66% between 2013 and 2015. E-commerce demands speed, and air freight provides a strong platform for the future of the industry.