World Class Faculty & Research / March 29, 2016

Amazon: Horning in on FedEx's Turf?

SMITH BRAIN TRUST — Amazon has announced it is leasing 20 Boeing 767 planes in order to move its own goods, a move that could significantly impact FedEx and UPS, which it now leans on to deliver many of its packages. Some analysts are even wondering if Jeff Bezos's company might be positioning itself to become a competitor to FedEx and UPS.

Amazon already has a substantial fleet of trucks and vans. With the planes, it will now be moving about 15 percent of its own deliveries. 

The move to bring transportation in-house goes counter to recent corporate trends, points out Philip T. Evers, associate professor in the logistics, business and public policy department at the Robert H. Smith School of Business. Conventional wisdom holds that, for example, for-hire trucking companies have more expertise in that field than private trucking units within larger companies. What's more, for-hire contracts can be scaled up and scaled down as demand fluctuates. On the other hand, Evers adds, "If you have your own internal fleet you can make sure that the driver and other employees always put your company first. I don't know if one option dominates the other. Each has pros and cons."

But going in-house with planes is fairly unique in part because there are few companies moving as many goods around the country as Amazon. Amazon is leasing the planes from Air Transport Services, whose stock subsequently leapt up; Amazon is taking 20 percent equity in the company, and a board seat.

Amazon is likely to use its fleet for its most predictable transportation needs. "They're going to want to make sure those planes are moving all the time, because planes are expensive," Evers says. That may have ripple effects on Amazon's contracts with FedEx and UPS, who may end up with the more variable, seasonable, and unpredictable work — and therefore may attempt to charge Amazon a premium for those jobs.  

It's hard to predict whether, on balance, the planes will save Amazon money, but Amazon has a long track record of doing lots of experimentation, and dropping without fuss whatever doesn't work. "Airplanes are easily traded, and it may be that the leases can be easily terminated, so if this experiment doesn't work out, it's possible there's no harm and no foul," Evers says. Another possibility, to view the issue a tad more cynically, is that Amazon's air fleet is part of a long-run negotiating tactic with FedEx and UPS. Amazon may be signalling that if those companies don't accede to Amazon's terms, Amazon is willing to go its own way.

Evers says that if Amazon's goal is to become the next FedEx — to begin moving other companies' goods in addition to its own — there are substantial challenges. To grow while also meeting the goal of keeping its planes flying constantly, it would want to find customers whose needs are countercyclical to its own. Since Amazon follows the classic retailers' boom-and-bust pattern, spiking at Christmas, it would want to partner with non-retailers, which could be a challenge.

One potentially overlooked side effect of the move, Evers notes, may be its effect on unionization at the company. Amazon has avoided union representation within its warehouses. The airline industry, however is heavily unionized, so Amazon may find organized labor inescapable now.

FedEx moved from a heavily unionized sector, airlines, to another one, trucking. UPS moved from trucking into airlines. "Amazon is an online retailer moving into both of trucking and airlines," Evers says. "The labor-relations issues that might arise over time could be very interesting,"



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The Robert H. Smith School of Business is an internationally recognized leader in management education and research. One of 12 colleges and schools at the University of Maryland, College Park, the Smith School offers undergraduate, full-time and flex MBA, executive MBA, online MBA, business master’s, PhD and executive education programs, as well as outreach services to the corporate community. The school offers its degree, custom and certification programs in learning locations in North America and Asia.

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