Why analysts say FedEx may benefit from free one-day Amazon Prime shipping

Analysts don't seem to think Amazon’s move to one-day Prime shipping will bury FedEx, arguing it’s a hefty investment and couriers may see more business to satisfy the shrinking delivery window.

Amazon CFO Brian Olsavsky disclosed the company’s intent to move from two-day free shipping to one-day free shipping for members of its Prime service in an April earnings call. The company is investing some $800 million to make that happen, he said.

“We're able to do this because we've spent 20-plus years expanding our fulfillment and logistics network, but this is still a big investment and a lot of work to do ahead of us,” Olsavsky said.

Amazon has moved to fulfill more of its deliveries in-house rather than through outside carriers like FedEx and UPS, sparking worry that Amazon will eventually compete directly with them instead of only moving items within its network.

Amazon remains a big customer for both companies, yet FedEx says Amazon isn't a concern because business from the company represented less than 1.3 percent of FedEx's total revenue in 2018.

“We have been clear that this is not a threat to our business ... nor is Amazon a threat to our future growth,” FedEx President and COO Raj Subramaniam said in an earnings call earlier this year.

Responding to a question about if Amazon will lean more on its in-house logistics for one-day Prime shipping, Olsavsky said, “we're going to need definitely the continued support of our external transportation partners.”

'One day is the new two day'

The development may lead to additional volume for FedEx, both from Amazon to deliver on its promise and from e-commerce competitors who will use more express shipping services to keep pace, said David Vernon, an analyst at investment research and management firm Bernstein, in a note.

FedEx is a natural beneficiary of the one-day shipping push because it can handle the time-sensitive volume right away, said Ed Yruma and Todd Fowler, equity research analysts at KeyBanc Capital Markets. But the Memphis company’s margins could tighten if it doesn’t raise prices accordingly, leading to the indirect subsidization of Amazon’s improved service, they said in a note.

FedEx is plenty familiar itself with one-day deliveries, both in the air and on the ground, Vernon noted. Citing company statistics, Vernon said FedEx Ground delivers 28 percent of its ground packages in one day and 66 percent within two days.

Building a faster network will require Amazon to spend more and use more labor, possibly affecting the company “in ways the market has not yet realized,” he said. It falls in line with FedEx’s argument that it would take massive investment for an upstart compete with its global delivery reach.

“While the implications of faster Prime deliveries will be read as a negative for UPS and (FedEx), we think the fundamental impact is less clearly negative,” Vernon said.

Halving the shipping time will put more pressure on cargo airline Amazon Air, according to Kevin Sterling, a FedEx analyst at investment bank Seaport Global. He said Amazon “may need even more aircraft” to fulfill one-day shipments, the new reality of e-commerce deliveries.

“Two-day delivery is so yesterday — one day is the new two day,” Sterling said.

Another FedEx service pursued by Amazon

Amazon also launched a new freight brokerage service available in Connecticut, Maryland, New Jersey, New York and Pennsylvania, connecting customers with available carriers in its network and showing what rates they offer for truckload shipments.

FedEx also offers brokerage services for truckload shipping, via FedEx Supply Chain Transportation Management. FedEx uses its “network of carriers” to find the right capacity at “competitive prices” for customers, per its website.

Vernon said Amazon’s freight brokerage service seems more geared toward small- to mid-sized spot buyers, since it’s not a truly independent service larger enterprises desire. But brokers are more at risk if Amazon is selling all types of capacity, and not just backhaul (trucks returning from stores) capacity that’s common in retail, he said.

“The challenge for the brokerage companies will be to disprove the possibility that Amazon is going to enter the brokerage as a charity business even if it seems more likely that Amazon is looking to broker excess (truckload) capacity it has bought to run its supply chain,” Vernon said.

Although the service could disrupt freight brokers, Vernon said he doesn't expect it to make major waves since “the amount of capacity on offer from Amazon is limited.”

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Max Garland covers FedEx, logistics and health care for The Commercial Appeal. Reach him at max.garland@commercialappeal.com or 901-529-2651 and on Twitter @MaxGarlandTypes.