Morgan Stanley: Amazon Air Could Save The Company Up To $2B In Shipping Costs

Amazon.com, Inc. AMZN's ambitions to oversee its own fleet of aircraft is just two years old, but much progress has been made — with more to come at the expense of FedEx Corporation FDX and United Parcel Service, Inc. UPS, according to Morgan Stanley.

The Analyst

Morgan Stanley's Ravi Shanker maintains an Equal-weight rating on FedEx with a price target lowered from $240 to $230.

The analyst maintains an Underweight rating on UPS with a price target lowered from $92 to $87.

The Thesis

Amazon started building out its own in-house logistics network in 2015, and it has quickly ramped to include 27 aircraft that combine for an average of 50 flights per day — 4,000 per quarter — to 31 destinations, Shanker said in a Tuesday note. (See his track record here.) 

Amazon's package volumes are split as follows, the analyst said: USPS at 40-45 percent, UPS at 30-35 percent and FedEx at 10-15  percent, with the remaining 10-15 percent handled by independent service providers.

Amazon Air has already trimmed 200-300 basis points of growth off UPS and FedEx's domestic air growth in the past year alone, Shanker said. This is due to the fact that Amazon Air flies routes that compete with around 67 percent of the volumes flown by UPS and FedEx, he said. 

Amazon's impact could expand over time, as the e-commerce company has only accepted 27 of its initial 40-plane order to date, Shanker said, adding that the order should be fulfilled by mid-2019.  

By flying its own products, Amazon saves around $2 to $4 per package, which could lower its global shipping costs by $1 to $2 billion in 2019, according to Morgan Stanley. 

Despite Air being a new concept for Amazon, the initiative is likely already impacting the FedEx and UPS businesses, Shanker said. While the estimated impact to the two legacy delivery companies of 200 to 300 basis points on volume growth is "hardly crippling," it is nevertheless a large enough drag to impact earnings growth, the analyst said, and could worsen as Amazon continues to expand its air operation.

That expansion could ultimately include direct competition to UPS and FedEx, according to Morgan Stanley.

Price Action

UPS shares were down 7.36 percent at $106.79 at the close Tuesday, while FedEx was down 6.31 percent at $215.52. Amazon was down 5.87 percent at $1,668.40. 

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Photo courtesy of Amazon.