The US logistics industry may be on the verge of further disruption from the online-retailing juggernaut Amazon. Amazon has increasingly set its sights on the segment, which is critical for its core business, threatening the prospects of the incumbents UPS and FedEx.
FedEx said on Friday that it was severing its US package-delivery contract with Amazon as the battle for e-commerce shipping heats up. The carrier will continue to deliver packages for Amazon internationally.
The announcement comes as the online-retailing giant has increasingly used its own parcel carrier, Amazon Air, to serve its customers directly. In addition, Amazon is pushing the frontier of delivery services through its highly anticipated rollout of drone-delivered packages.
The ramifications for the parcel industry would be huge if Amazon decided to also serve third-party customers. This strategy has driven the growth of the company’s cloud-computing segment, Amazon Web Services, which is by far the leading player in the red-hot industry.
“We believe FDX’s strategic break-up with AMZN is a watershed moment for the Parcel industry that signals AMZN’s emergence as a significant player in the industry and brings a new level of risk to numbers at both UPS and FDX,” the Morgan Stanley equity analyst Ravi Shankar wrote.
And while the ramifications are huge, FedEx won’t be crushed by its contract with Amazon ending. In a statement released on Friday, FedEx said Amazon accounts for less than 1.3% of its revenue. Still, Amazon paid FedEx $200 million in 2018 alone.
The delivery industry has long been dominated by rivals FedEx and UPS, who have struggled with how to best deal with the Amazon, which is both a large customer and a threat.
“It is possible that UPS may benefit in the near-term from AMZN moving some business from FDX to UPS,” Shankar added. “But we note that FDX gave up the business for a reason and UPS may not want to take it on for the same reason.”
Shankar holds an “equal-weight” rating on FedEx shares, as well as a “cautious” view on the US freight-transportation industry. His FedEx price target is $143 a share — 15% below where it’s trading.
FedEx is up less than 2% this year.