As Amazon.com (NASDAQ:AMZN) brings more and more of its logistics in-house, the companies that provide it with logistic services get squeezed. Apparently, FedEx (NYSE:FDX) has had enough.

In this week's Industry Focus: Energy, host Nick Sciple and Motley Fool contributor Dan Kline explore why these two companies are splitting up, what it means for their futures, and what it says about FedEx's main competitor, UPS (NYSE:UPS). Find out what other avenues FedEx is expanding into, why UPS has such a bleak outlook, what Amazon's logistics picture looks like today, why the logistics industry can't get as many pilots as it needs, where the U.S. Postal Service fits into all this, and more.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

This video was recorded on June 20, 2019.

Nick Sciple: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. Today is Thursday, June 20, and we're discussing FedEx and Amazon. I'm your host Nick Sciple, and today I'm joined by Motley Fool contributor Dan Kline via Skype. How are you doing, Dan?

Dan Kline: Oh, I'm good! How are you, Nick?

Sciple: I'm doing great! Dan, you're all over the place this week. You're on the Tuesday show with Shannon Jones.

Kline: I was.

Sciple: How are you such a diverse and just well-rounded guest on all these podcasts? What do I have to do to be like Dan Kline?

Kline: Well, you have to be here for six years. I've covered a lot of things. And honestly, I am one of the few people that bounces between the different shows, but it's really because things like what we're going to talk about today, Amazon and FedEx, that could easily be a different angle and be a Consumer Goods show. It isn't that I cover so many diverse things. It's that some of the companies I cover -- Amazon could probably be a Healthcare show, though they've never had me on the Healthcare show.

Sciple: I sense a little a little bit of pangs there, Dan. There's that one last one. You haven't completed the Infinity Gauntlet of the Industry Focus shows.

Kline: Yeah, I've only got four of the rings. I need the fifth one. I think next week I'll be doing MarketFoolery when I'm in the office. I'm all over the place!

Sciple: Yeah, there you go. Well, as you teased there, we're talking about FedEx and Amazon. On June 7, FedEx announced a strategic decision to not renew its FedEx Express U.S. domestic contract with Amazon. FedEx says that they intend to focus on the broader e-commerce market. They believe there's significant demand and opportunity for growth in e-commerce. They intend to serve those retailers outside of Amazon. When you saw this news, Dan, what was your first reaction to hearing that FedEx is breaking up with Amazon?

Kline: Do you have any couple of friends that, when you go out to dinner with them, you can tell they're going to get divorced at some point or break up, and maybe they don't know it? This is one of those relationships. Amazon was never that big of a FedEx customer. It's about 1.3% of FedEx's revenue. It was always like, "Yeah, we'll work together, but we'll use the Post Office or UPS first." And for FedEx, this is one of those, if you're not going to have a major chunk of your business come from Amazon, you're better off going to Walmart and Target and all the other big retailers out there and saying: "Look, we don't deal with Amazon. They don't know any of our secret sauce. They don't have any special pricing. We want to work with you." So, this makes them more palatable.

Sciple: Yeah. I was talking about before the show, for our listeners who listen every week to Industry Focus, a couple of weeks ago, I talked with Tim Beyers, we talked about Redfin, which is an online real estate brokerage service. This is a company that announced a new offering that led to RE/MAX, which is another big nationwide brokerage firm, to end its partnership with Redfin. And we said then that this is one of those things, the path that Redfin was taking, sooner or later, it was going to be antagonistic to these other brokers that we were going to have this breakup take place. That's what took place for Redfin.

I think that's what it took place for Amazon as they pushed into e-commerce and became more vertically integrated in logistics and showed that was a clear intent of the path of business going forward. Sooner or later, they were going to become antagonistic to FedEx or maybe UPS eventually that this breakup had to happen.

We've seen some analysts say the same thing. Ravi Shanker from Morgan Stanley said, "We believe FedEx's strategic break up with Amazon is a watershed moment for the parcel industry that signals Amazon's emergence as a significant player in the industry and brings a new level of risk to numbers at both UPS and FedEx." Dan, when you see this shift in the industry, are you concerned for UPS and FedEx going forward?

Kline: I'm not worried about FedEx. This is FedEx saying, "You weren't that important to us anyway. We'll give up this 1.3% of our business in order to be able to work with many other people." They expect the size of this business to double from 50 million to 100 million packages a day by 2026. If you're FedEx, you're basically saying, "We're not going to let any one company become too important to us."

Now, UPS, I'm absolutely worried for UPS. Roughly 26% of their business is from Amazon. If Amazon keeps ramping up its shipping business, which is something they've been doing and are going to continue to do, and they say to UPS, "Hey, we don't need you quite as much. We can do a lot of this on our own," that is a material irreplaceable part of their business. UPS is in so far, I don't know that they can even get out of it. And yeah, eventually, Amazon is either going to crush them or buy them.

Sciple: Yeah, you can look at a chart -- you sent this over to me, Dan. Wolfe Research had this chart out. In 2013, UPS was 49% of Amazon's shipping business. Today, in 2018, their numbers have UPS being 22%, with much of that market share being taken away by Amazon, which now represents 26% of the logistics that are run through that website. Obviously, in the near term, this is going to be a benefit to UPS. Only UPS and FedEx have these express networks, which is the business that FedEx pulled. But as you say, Amazon is pushing more into logistics. They want to put more logistics in-house because it's less expensive to them than fulfilling orders through UPS and FedEx. And they have called out specifically in their filings that the transportation and logistics services are an area in which they compete. Amazon has been making some recent investments in these areas to build out their presence. Can you talk about that a little bit, Dan, and what that means for the company?

Kline: Amazon has been investing everywhere from last mile -- we've talked about their van network, where they're literally getting entrepreneurs to lease vans, helping them do that, and doing last mile delivery. Then, they're massively building out their plane fleet. That's where they're encroaching on what these other companies are doing. In addition to that, of course, they have their trucking fleet. They're actually selling space against UPS and FedEx. Amazon isn't just delivering its own stuff, it's become a full-fledged shipping company. It wants to control as much of its own process as it can. That includes testing things like building new, smaller warehouses, shipping out of Whole Foods stores, maybe shipping out of some Kohl's locations where it has a partnership. This is something that you're outsourcing it, you see that you're spending more money, and they are building as fast as they can possibly build, but they are hitting some brick walls in that. We've done shows about the trucking shortage. It's hard to hire truck drivers. It's also incredibly difficult to hire pilots.

Sciple: Right. That's been one issue with Amazon scaling up. You have to have enough pilots to fly all these planes. Particularly when you're shoving in, becoming a third player in this logistics market, you need to hire some pilots away. Amazon has struggled to build up its cargo airline. You sent me some stats, Amazon can only run 6.6 revenue air hours per day compared to around 18 for UPS and 14.5 for FedEx. That's due to crew efficiencies. Can you talk a little bit about what about bringing new pilots into this market is really causing a bottleneck in the amount of human capital you have to scale up?

Kline: There's a disconnect in how you become a pilot. In order to become a pilot, you have to go to pilot training school. Then you have to put in a certain amount of flight hours working for smaller airlines before you can fly the bigger routes, the bigger planes. While you're going through that period, not only are you spending $100,000 or more on pilot school, your first few years of working, you're making a very low salary. Even though being an airline pilot for Southwest or Delta is a very good job, you make a lot of money, it takes a lot of investment to get there.

The other problem we have is that in most cases, companies want pilots -- I don't know if Amazon requires this or not -- to also have four-year degrees. So, in addition to having to go to pilot school, they also have to go to college. This is causing a huge shortage of pilots, which is going to be exacerbated by the fact that there's a mandatory retirement age for pilots at 65.

Now, honestly, the best way to solve this in the short term is make the mandatory retirement age 70 and have increased testing and licensing procedures in the five years in between there. But if you're Amazon, you're competing against maybe cushier jobs, maybe higher paying jobs, and hitting the wall of, no matter what you pay, there's simply not enough people who know how to do this.

Sciple: Yeah. Something to follow. As we see clear demand for more fulfillment services from companies like Amazon and others, to make that happen, we're going to need humans to fly these planes, at least in the near term. Maybe at some point in time, we'll have a robot that can take off and land. But at least in the near term, we're going to need to have people.

Kline: I think we could automate plane flight. I think there's such public sentiment against it. It's like the automated driving. Let's say, for every hundred accidents that would happen with human drivers, there's only one with automated drivers. It doesn't work, it has to be zero. Even if using automated planes dramatically cuts down on crashes, until they can guarantee zero, the publicity simply isn't going to work.

Amazon, the first thing they have to do, is get more efficient. You talked about how many fewer working hours they get. That's a practice of time. The more time they do it, the more they're going to refine their process. The bigger they are, the easier it's going to be for them hire experienced people who can smooth those things out. If you look at where they are now, and where the top of the industry is, they can basically get three times more efficient. Amazon has shown with shipping that it will eventually get there.

Sciple: Yeah. Clearly, this is something that Amazon's interested in getting more and more involved with. We're going to continue to follow the story. This is the third or fourth time we've had you on the show to talk about this, Dan. We'll continue to bring this to ground.

OK, Dan, now let's talk a little bit about what opportunities there might be for FedEx as they expand to offering services to other e-commerce sellers and retailers. They've expanded some of their offerings this year. They introduced their extra hours program to help retailers fulfill online late night orders. And as you mentioned, there are some bigger growth opportunities arguably outside of Amazon in e-commerce than there are within Amazon. Can you talk about what those opportunities are and how FedEx is moving to serve those businesses?

Kline: Basically, FedEx has positioned itself as the un-Amazon. That's a smart place to be. As big as Amazon is, it isn't all of retail. Let's look at the major competitors, which in terms of most stuff would be Walmart and Target. If you're Walmart and Target, you don't want to use Amazon, certainly, even though you technically could. You also don't want to use any company that's cozied up to Amazon, partly because you'd be less of a priority in most cases, and you just don't know how that data is being shared, what's being used, what's being implicitly shared, and what's being accidentally shared. This is a way for FedEx to say, "Hey, we're not working with your competition. We're on your side. We're going to come in and help you do this the best way you can." For example, they're adding Sunday delivery. One of Amazon's Prime advantages is that they do two-day, and now one-day delivery, and Sundays are included. Well, Walmart doesn't have that. Target doesn't have that. They have it on a same-day basis, in some cases, in some markets. But now, through FedEx, they can roll out that service. They can add.

If you look at the sizes, Amazon is growing I think 13.5%, and it's like 30%, so about triple that, for Walmart and Target. There's more growth potential outside of Amazon than there is inside of Amazon because every retailer that isn't Amazon is probably going to look at FedEx as a first solution now.

Sciple: Yeah, that's a huge opportunity when you realize that outside of Amazon, there's faster growth for a company like FedEx to add services to them. As you mentioned, Walmart has been competing really back and forth with Amazon when it comes to this one-day shipping offering. Before that, they were competing for who could get to two-day shipping without a fee. FedEx has really expanded their relationship with Walmart. Last year, they announced they opened 500 offices inside of Walmart stores. They're also moving with other retailers as well. They announced a deal this week with Dollar General where they're going to install facilities in Dollar General stores to offer drop-off and pick-up services for FedEx packages. They plan to roll that out to 1,500 Dollar General stores in the late summer 2019. By the end of 2020, they plan to have that in 8,000 stores. Obviously, a huge opportunity there. When you look at the areas where Dollar General is located, these are markets that tend to be underserved. When you look at that opportunity, how significant do you think that could be for FedEx?

Kline: I think it's huge. You're an individual, do you have a favorite package delivery company?

Sciple: Whoever's the easiest and cheapest for me to get to.

Kline: Exactly. I feel the same way. I had to mail my brother his mail. I was his forwarding address for a few months while he was in between jobs. I went to a UPS Store. Is it because I have any loyalty to UPS? No, it's because the parking at the UPS store is easier than the parking at the FedEx location near me. If I could go to Dollar General, we have a Dollar General near our other home in the Orlando area, which is about a mile walking, if I could go there and drop off for FedEx, am I going to haunt down a UPS location because they might be a little cheaper or find a Post Office? No, I'm going to go to whatever the easiest place is. So, putting yourself at up to 8,000 Dollar Generals -- and I think that number's low because Dollar General opens 1,000 stores every year, so it seems very logical that any new store they open will have this -- it's a huge opportunity to collect business. And what are you adding? All you're adding is pickups on existing routes. This is almost no cost for FedEx, and it's probably a significant amount of incremental business, especially during the holiday season.

Sciple: Yeah. FedEx did not break up with Amazon without any other plans for what they might be able to move into. Clear opportunity there with the Dollar General stores. And, as well this week, and we don't know if there's a clear relationship here with FedEx, but we've seen Shopify -- you talk about Dollar General, Walmart, Target, they seem like these lazy, older businesses. Well, Shopify is moving into physical distribution and fulfillment, announcing yesterday at their investor day that they're going to offer customers access to a network of dedicated U.S. fulfillment centers to store and ship consumer goods for online orders. They're going to use machine learning to forecast demand and allocate inventory to route orders to the closest fulfillment centers. And they're going to be working with logistics providers to make that happen. Obviously, as you see Shopify, which is a company that aggregates a lot of small sellers together to offer logistic services, that's another opportunity for FedEx. Do you think that's going to be a bigger trend over time? Do you see all these small sellers uniting together through Shopify and other offerings to maybe bring down the cost of their logistics operations?

Kline: I do see this as an opportunity for FedEx. But if you're on the Shopify platform, you have the ability to make shipping a service. And what Shopify does is, it matches what you're shipping with the best provider. Now, could FedEx go in and make a deal so it's the best provider more often? Could it have staffing at these warehouse distribution center locations? There's a huge opportunity here. Basically, any platform -- we saw this with Stamps.com at Shop Talk earlier this year -- any platform that businesses are using has to integrate shipping and logistics because you're competing with what was a two-day standard, that's becoming a one-day standard. If you and I have a regional company, let's say we sell, I don't know, model trains that we make ourselves. The standard for the consumer is going to be, "I get it in two days." They're not going to wait for two weeks because I could save $1.50 by shipping it in two weeks. Everything is going to have to get Amazon-level efficient, down to some pretty small companies, and a Shopify can do that. FedEx can certainly come in and help make that happen.

Sciple: Taking all this together more broadly, in the near term, this is probably going to hurt FedEx somewhat, because you've had this existing business from Amazon that's going to fall off. Some analysts have estimated that it could lower FedEx's earnings by as many as $0.40 a share. However, when you look at the opportunity moving forward, growth rates in e-commerce away from Amazon are actually growing faster. There are some opportunities to forge some relationships today that can be really significant going forward. Any last thoughts on FedEx?

Kline: To tie this up with a dating analogy, this is FedEx breaking up with his girlfriend, but it spent the last few years flirting all around. It knows that a lot of people are interested. Instead of having this monogamous relationship, FedEx is going to be dating a different supermodel every daypart. So, yeah, it'll hurt in the short term, simply because you can't build these massive relationships quickly. It takes time. But I see this as a quarter or two, and then FedEx is going to be in a much better position. And chances are, you're going to see Walmart, Target, Lowe's, Home Depot, all those other non-Amazon's, you're going to see that business ramp up very quickly.

Sciple: Yeah, Dan. For me, when I look, I think e-commerce is going to be a really significant trend going forward. Everybody believes that. But you see so many players getting into the selling part of that market. When you look at the logistics part of the industry, it appears it's consolidating into an oligopoly -- FedEx, UPS, maybe Amazon is pushing in there. With the growth in all those other parts of e-commerce outside of Amazon, this looks like it could be an interesting place to sniff around for an opportunity to play a trend in a market that may be less competitive going forward. We'll see. Obviously, it's hard to say things are less competitive when Amazon is lurking around. Interesting way to play the e-commerce trend.

Kline: Don't forget the U.S. Postal Service. The reality is, they're a big piece of the Amazon business. In fact, they're Amazon's biggest partner. You have Amazon-UPS-USPS on one side, FedEx on the other. It wouldn't shock me if you saw FedEx build out other services, like what Amazon is doing with last mile delivery. You're obviously going to see FedEx move into automation. We saw some tests with robots and other things. You might see drones. This is basically FedEx vs. the world, and I sort of like where that's going.

Sciple: We'll be here to continue watching it as it develops, Dan. Always love having you on! We'll have you on again soon!

Kline: I'll see you in the office next week!

Sciple: Yes, sir! As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against the stocks discussed, so don't buy or sell anything based solely on what you hear. Thanks to Dan Boyd for his work behind the glass! For Dan Kline, I'm Nick Sciple. Thanks for listening and Fool on!