Why Amazon Needs to Dump UPS and FedEx (AMZN, FDX, UPS)

Seldom is there a company that’s as dependent on others as Amazon.com Inc (AMZN) is dependent on FedEx Corp (FDX) or United Parcel Service Inc (UPS). The e-commerce giant sends out over 300 million packages a year and spent $13 billion on fulfillment costs in fiscal 2015. With fast shipping such a key component of Amazon’s business, shareholders should demand a fail-proof shipping service that is scalable and can handle Amazon’s future growth. Neither FedEx nor UPS can provide that service.

Amazon has used a variety of shipping methods to get its products where they need to be. But before the products even get onto a delivery truck, Amazon has already worked its magic to speed up the packaging process.

After having purchased Kiva Systems, Amazon leveraged the former’s robotic and distribution systems to improve efficiency within their warehouses. Products at Amazon are not shelved in any particular order, nor are they continually displaced and reorganized like books in a library. Instead, products are stored where they fit and robots and human pickers fetch the products for packaging. (For more, see: Five Amazing Technologies Developed By Amazon.)

Once packaged, products are not always left to await a FedEx or UPS pick-up truck. In a handful of cities, Amazon contracted couriers who deliver parcels to customers within an hour or on the same day (depending on the shipping method chosen by the customer). Amazon is also testing drones for a cheap and quick 30-minute delivery solution. In other cities, Amazon has built “sortation centers” where millions of parcels are sorted via zip codes and then delivered to local post offices for inexpensive local distribution. It costs Amazon more money to sort and deliver the products halfway to their destination, but the trade-off is that Amazon can better control its package delivery.

And therein lies Amazon’s biggest problem with deliveries – it can’t rely on FedEx, UPS or USPS to have its best interests at heart. Third-party companies will never have as much interest in ensuring quick delivery as much as the company which guaranteed it.

In order to avoid late deliveries that can cost the retailer money and customers, Amazon has implemented a few techniques that aim to bypass the slower parts of the delivery process. In Europe, for example, Amazon has had five flights a week since November which shuffle packages internationally between warehouses. There are also rumors of Amazon testing private flights within the United States.

Being able to move packages from warehouse to warehouse quickly and easily has two benefits for Amazon. First, the retailer could have smaller warehouses. There’s no need to build a super warehouse in Alaska if there’s a delivery plane coming in each day from Seattle. Secondly, warehouses don’t need to stock as much quantity as they have previously. Take a man in Phoenix who orders a product that’s sold out in Amazon’s regional warehouse but available to be shipped from another distribution center in the Northeast. Amazon workers would package the item, but instead of shipping it with FedEx or UPS, the package is flown by Amazon to a warehouse in the Southwest and then mailed with USPS from there. (For related reading, see: UPS Vs. FedEx: Comparing Business Models and Strategies.)

Initially the cost of sending out multiple airplanes a day would be exorbitant. The idea of inter-warehouse transfers is something that Amazon is already testing and is probably the only retailer with enough cash flow and willing shareholders to revolutionize e-commerce in this way.

Eventually, though, Amazon delivery planes will number in the hundreds and the viability of the whole thing will rest on Amazon’s ability to secure third-party business. Amazon will not be able to fill the cargo space of hundreds of planes a day, but if the cargo space could be sold, Amazon would be able to profitably operate daily flights between each city in which it has a distribution center. Suddenly, there’s an airplane going wherever Amazon needs the package to be and the idea of flying something across the country to be dropped in the mail doesn’t sound so crazy. (For more, see also: Analyzing the Current Bulk Shipping Markets.)

Amazon has already purchased parts of a French and an English delivery company and insists that it is not looking to compete with UPS and FedEx. Amazon doesn’t need to compete with the big deliverers – its reputation is founded on getting products where they need to be really, really fast. The company has no vested interest in operating a daily Miami to Detroit flight route if it doesn’t serve their best interests. The retailer is happy to let UPS and FedEx keep the bulk of their routes aside from the ones to and from cities in which Amazon has distribution centers.

In 2017, Amazon’s 32 Boeing 767 cargo delivery jets (Amazon Air) carried over 360 million pounds in packages. The total 40 planes Amazon has planned to deliver packages, will all be in service this year, and delivery by plane is only expected to grow. Amazon’s hub at Cincinnati/Northern Kentucky International Airport worth $1.5 billion, can accommodate up to 100 aircraft. Even better, Amazon has plans to start using Textron Aviation’s Cessna SkyCourier 408 turboprop, by 2020.

Amazon is astoundingly dependent on its delivery companies. Coupled with the increase in the number of packages sent out each year, Amazon is guaranteeing shorter delivery times and has hopes for increased flexibility. Going further than inter-warehouse transfers, if Amazon creates its own private delivery service (not one that rivals FedEx or UPS), the company could retain control over its most important selling feature, can expand delivery to 24 hours a day, seven days a week and can solve the bottleneck in its operations. Contract labor, similar to what Amazon uses for its one-hour delivery service, could be used in its delivery services to allow for flexibility when the volume of packages fluctuates throughout the year.

Amazon needs to streamline its fulfillment process, not just internally but by eliminating FedEx and UPS as well. By personally moving its products from region to region and then having them delivered by USPS, Amazon can have better control over its deliveries and save money by using a cheaper delivery service locally.