So, FedEx Express Fired Amazon…Really?

The announcement by FedEx that they are walking away from providing Express services to Amazon was not a big surprise and most likely, Amazon was already in the process of walking away from FedEx. Here are my thoughts on what really transpired:

Bad Blood: The relationship between the two companies soured about 3 years ago when Amazon demanded improved discounts from both UPS and FedEx. UPS responded to Amazon with increased discounts, FedEx balked, and more than half of FedEx’s Amazon business was awarded to UPS.

Amazon Not a Competitor? In recent years, FedEx publicly claimed that Amazon was not morphing into a competitor even though Amazon was spending billions on parcel logistics initiatives. As a publicly traded company with a responsibility to protect and drive higher stock prices, FedEx had no choice but to claim Amazon was not a competitor. Acknowledging that Amazon, one of their largest customers, was turning into a direct threat, would have crushed their share price, even more-so, than the companies self-inflicted wounds that were already driving down share price. It was obvious that Amazon was evolving into a competitor but FedEx could not say so.

FedEx Express Capacity Concerns: FedEx is burdened with two costly, legacy Express primary hubs that are geography restricted and saddled with old technology. FedEx is also in the middle of an incredibly costly aircraft renewal, purchase program to replace old DC-10, MD-10 and MD-11 wide body freighters, that break a lot. Given these conditions, it’s quite possible that FedEx is suffering through an Express capacity crunch and it makes sense to replace highly discounted Amazon shipments with higher yielding shipments from smaller customers. The company pretty-much admitted to this condition by saying that terminating the Amazon Express relationship will allow them to focus on growing relationships with other, e-commerce companies.

UPS Was Cheaper: In the transportation business, volume drives the best rate and UPS moves significantly more packages than FedEx for Amazon. Given this condition, Amazon had no choice but to move most of their higher cost FedEx business, both Ground and Express, to the lower cost, UPS solution. FedEx knew Amazon was already in the process of planning to walk away, so FedEx fired them first to control the message, which made sense.

Amazon Delivery Service Partners (DSP): Amazon needs to move more packages through their new, in-house delivery company, DSP, to drive volume and profitability for their contractors that provide this service. Amazon was already switching shipments from the USPS’ Parcel Select service, their largest last-mile delivery service provider, to DSP. It made no sense to move large amounts of UPS volume to DSP as such an action would have decreased UPS volume and driven less desirable, volume-based discounts with UPS. It was a no-brainer for Amazon to start moving its Express business away from the higher cost FedEx Express solution to support its own, DSP initiative or the lower cost UPS Express solution.

One-Day-Prime: This is what the Amazon CFO said during their Q1 earnings call in April:

“The company would use “all of the available levers” for free one-day shipping, including existing partners like the U.S. Postal Service and UPS, as well as Amazon’s own third-party delivery networks”

FedEx was not mentioned, it was clear that UPS was in and that FedEx was out, so who fired who first? FedEx got the message and did the prudent thing by walking away and UPS should be handling many more Express packages at the Louisville World-Port hub to support One-Day-Prime, until Amazon opens their new national air hub in about 18 months.

FedEx is promoting the firing of Amazon as an opportunity to grow Express, on-line business opportunities with other retailers. While that may be partially true, its not a good thing to walk away from any large Express customer. The fact is, it will not be cost-effective for most retailers to use expensive FedEx Express services to support overnight delivery. Finally, the other shoe will also drop soon, and Amazon will most likely pull most of the remaining FedEx Ground business to support their own, Delivery Service Partners initiative. Amazon had to stop using FedEx and FedEx had to fire Amazon. Amazon will probably be ok although FedEx will still have many challenges to overcome.