FedEx: Amazon isn't a disruptive threat to us

William B. Cassidy, Senior Editor | Mar 17, 2016 1:44PM EDT

Suggestions that Amazon.com’s forays into air freight and logistics might disrupt the business of traditional package carriers or compete with them are “fantastical,” FedEx founder and CEO Fred Smith said Wednesday. “Let me emphasize I choose this word carefully,” Smith said.

Reports claiming Amazon might be angling to compete directly with FedEx, UPS or the U.S. Postal Service reveals are “devoid of in-depth knowledge of logistic systems and the markets which FedEx serves,” said Smith, also chairman and president of the second-largest U.S. transport operator.

“Network design, technology, facilities, capabilities and route/stop densities are the key elements in the FedEx, UPS and Postal Service systems that make it highly likely these entities will remain the primary carriers for e-commerce shipments in the U.S. for the foreseeable future,” he said.

Smith’s forceful comments followed reports on Amazon’s decision to lease as many as 20 cargo planes from Air Transport Services Group and buy a stake in ATSG, which also deals with airlines including DHL. Amazon plans to use capacity provided by ATSG for U.S. domestic packages.

“While recent stories and reports of a new entity competing with the three major carriers in the United States grabs headlines, the reality is it would be a daunting task requiring tens of billions of dollars in capital and years to build sufficient scale and density to replicate existing networks like FedEx,” Mike Glenn, president of FedEx Services, said during the same earnings call.

Amazon doesn’t need to replicate the networks of FedEx, UPS or DHL, but it does need to ensure it has adequate capacity during peak season. Three of the ATSG planes will be leased to Amazon during the fourth quarter this year, ATSG said in its March 9 earnings conference call.

Amazon is expected to get the rest of the Boeing 767 freighter aircraft by mid-2017.

“In order to properly serve our customers at peak, we've needed to add more of our own logistics (capacity) to supplement our existing partners,” Brian Olsavsky, Amazon CFO, said during a Jan. 28 earnings conference calltranscribed by Seeking Alpha. “Those carriers are just no longer able to handle all of our capacity that we need at peak. They have been and continue to be great partners,” Olsavsky said in the call. “It's just we've had to add some resources on our own.”

“Large retailers have long had their own transportation capabilities, primarily to enable movement and positioning of inventory across their store and fulfillment locations,” FedEx’s Glenn said. “We’ve been in constant dialogue with them to understand their transportation needs as they've experienced significant growth. We’ve been aware of Amazon’s need for supplemental capacity related to inventory management, which is driving some of the investments they are making.”

E-commerce boosted FedEx volumes and revenue in the company's December-to-February fiscal quarter, especially at FedEx Ground. 

In addition to supplemental capacity, however, Amazon also wants to increase the speed of its fulfillment cycle to match increasingly exact delivery promises made to Amazon Prime, Prime Now and Amazon Fresh customers. In particular, Prime Now is pushing the limits of same-day shipping, offering two-hour shipping in some markets in the U.S. and overseas.

A portion of that business will be handled by local cartage companies and even individuals who hire out their cars to deliver packages for Amazon through Amazon Flex, but Smith said economics will ensure FedEx, UPS and the USPS keep the lion's share of the last mile.

“It’s network density and revenue per delivery stop that are the determinant of who is going to deliver these packages in the years to come,” Smith said during the call, transcribed by Seeking Alpha.