FedEx's Management Doesn't Think Amazon's A Threat

FedEx (NYSE:FDX) released its second-quarter earnings report earlier this week, and during the conference call with analysts, management took a lot of questions about one of its biggest customers. Amazon (NASDAQ:AMZN) accounts for nearly 3% of FedEx's revenue, but it's buying dozens of cargo planes, establishing a regional hub near Dallas, building a new sorting center for its planes in Ohio, and expanding its cargo facility in Chicago. And that's just in the past couple weeks.

This article originally appeared in the Motley Fool.

"We look at Amazon as a wonderful company and service and they're a good customer of ours," FedEx CEO Fred Smith said during the company's second-quarter earnings call. "We don't see them as a peer competitor at this point in time. For many reasons, we think it is doubtful that will be the case."

Indeed, most of Amazon's recent efforts won't have any impact on FedEx. But Amazon is building the infrastructure necessary to replace some of the business it currently provides to couriers like FedEx and UPS (NYSE:UPS).

What Amazon Air is -- and isn't

Amazon Air is a service the company uses to transport inventory from one fulfillment center to another. It's an internal service used exclusively by Amazon to enable it to fulfill orders in a timely manner by balancing inventory across its warehouses.

It's particularly useful to support third-party merchants on its marketplace that use its Fulfilled by Amazon service. Merchants can send their inventory to a single Amazon warehouse, and Amazon can then spread that inventory across the country, reducing costs for its merchants and itself.

Amazon Air isn't a package courier like FedEx or UPS. It's not delivering packages to customers' doors. Nor is it offering services to retailers and other businesses that may need inventory transported across the country.

In that way, Amazon Air is a very different service compared to FedEx or UPS. But that doesn't mean it's not a threat.

Leveraging existing infrastructure

Throughout its history, Amazon has proven capable of maximizing the value of its existing infrastructure. The company built the largest public cloud computing business on the back of its own computing infrastructure. It's the largest third-party merchant marketplace in the United States thanks to leveraging its warehouses and fulfillment capabilities.

The facilities, cargo planes, and the routes they fly are all major pieces of infrastructure Amazon can leverage to expand Amazon Air into a FedEx and UPS competitor. Amazon Air's lanes "overlap with over two-thirds of the volume flow by UPS and FedEx combined," according to Morgan Stanley's Ravi Shanker. That number is likely to move higher as Amazon continues to build out its network of planes, hubs, sorting centers, and cargo facilities over the next few years.

Meanwhile, the company is working on ground transportation for last-mile delivery. It's partnering with entrepreneurs willing to take delivery routes for Amazon's packages and it's even contracting delivery drivers directly during the holiday season. Those contractors may stay on next year if Amazon sees a good return on its investment.

Amazon is putting all the parts in place that could enable it to eventually offload some of its business with FedEx and UPS. Shanker believes Amazon's own delivery network could take out a 10% chunk of revenue from FedEx and UPS combined by 2025. Overall savings for Amazon could total between $1 billion and $2 billion that year.

The long-term opportunity may be even greater for for the e-commerce titan. As it builds out a delivery network for its own operations, it could offer a courier service to smaller merchants or even consumers. It's already building out a physical presence through Amazon Go and Whole Foods that would rival the number of physical storefronts of UPS and FedEx. It wouldn't take much for Amazon to add shipping services to those stores.

Such a move would follow the exact playbook it has run in the past with Amazon Web Services and Fulfilled by Amazon: build an internal solution, scale, and expand the service to work for other customers.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Adam Levy owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon and FedEx. The Motley Fool has a disclosure policy.