After mastering two-day delivery, Amazon.com (NASDAQ:AMZN) has set its sights on expanding free one-day shipping. The company said last month that it was investing an additional $800 million in the necessary fulfillment infrastructure, and one-day delivery is already available on over 10 million items. However, the e-commerce giant is about to face a setback with its one-day delivery aspirations, as one of its biggest carrier partners just took a step back.
FedEx (NYSE:FDX) is more interested in other e-commerce opportunities.
Other e-commerce fish in the sea
In a statement released today, FedEx said it was not renewing its contract with Amazon for FedEx Express, the carrier's expedited shipping service that leverages FedEx cargo aircraft. FedEx noted that the decision doesn't affect its other contracts with Amazon -- such as ground delivery services -- and it's not clear when the current FedEx Express contract expires. FedEx says it will "focus on serving the broader e-commerce market," which the company estimates will see daily packages soar from 50 million to 100 million by 2026.
The news comes amid Amazon's ongoing expansion of its own fleet of Amazon Air cargo aircraft, which consists of leased aircraft operated by partners Air Transport Services Group (NASDAQ:ATSG) and Atlas Air Worldwide (NASDAQ:AAWW). Amazon deepened its partnership with ATSG last year, bringing its total fleet to 50 planes. Of that total, 40 aircraft are already in operation, and the remaining 10 are expected to be delivered by December 2020.
Amazon's continued push to take greater control of delivery was always destined to create tensions with carrier partners like FedEx and UPS, although the shipping companies have continued to downplay concerns. To that end, FedEx even went as far as to note that Amazon represented just 1.3% of revenue in 2018. However, it's challenging to reconcile that rare disclosure with others that FedEx has made previously.
"In addition, some high volume package shippers, such as Amazon.com, are developing and implementing in-house delivery capabilities and utilizing independent contractors for deliveries, which could in turn reduce our revenues and market share," FedEx wrote in its most recent annual report. The company also added, "Moreover, if our current customers, such as Amazon.com, become competitors and bundle transportation with other services, it will reduce our revenue and could negatively impact our financial condition and results of operations."
Even though it's unclear what precise operational impact the decision might have on Amazon's one-day delivery capabilities, losing a major shipping partner will undoubtedly be an incremental blow to the progress that the company is making.
Amazon is playing the long game
It's also worth noting that the e-commerce giant is keeping plenty of options -- or rather, warrants -- on the table. In both of its partnerships with ATSG and AAWW, Amazon has secured warrants that could let it acquire significant stakes in either operator. As part of those deals, the more aircraft Amazon leases, the more warrants it gets.
Amazon and AAWW amended their agreement in March, granting Amazon enough warrants to acquire 39.9% of the company, up from a previous 30% potential stake. Amazon currently has enough warrants to acquire 33.2% of ATSG, but if it leases up to 17 more aircraft before January 2026, it will get enough warrants to acquire a comparable 39.9% of ATSG.
If Amazon has to go it alone, perhaps after acquiring one or both of its aircraft operator partners, there should be little doubt that it can and will.