FedEx ending Amazon contract still good business move: analyst

FedEx announced on Friday it had decided not to renew a contract with Amazon for sending packages through its Express air shipping network.

The decision will likely result in the loss of millions in potential revenue for FedEx, but analysts say the decision will pan out for the shipping carrier in the long run.

FedEx's long-term play is for carrying more profitable packages without growing volume to keep up with Amazon's rapid growth.

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FedEx may have just rejected millions in potential revenue from Amazon, but it has nothing to worry about.

That's according to Moody's Jonathan Root, the company's senior vice president and lead analyst for FedEx.

“FedEx will achieve higher margins and better returns on its investments in its Express network by redeploying capacity to customers other than Amazon,” Root wrote in a note to investors. “While it will take time to fully replace the Amazon volumes with that from other customers, we nonetheless consider the news a credit positive event taking a longer-term perspective.”

He postulates FedEx will easily recover the lost business after deciding not to renew its contract with Amazon for FedEx Express shipping.

Read more: FedEx says it will no longer deliver Amazon packages with its fast shipping service

“We believe Amazon, representing less than 1.3% of FedEx's nearly $70 billion of consolidated annual revenue, is one of FedEx's least profitable customers on a margin basis and that the decision implies that Amazon would not agree to financial terms that would meet FedEx's needs,” Root wrote in a note to investors on Monday. “We assumed an average revenue per package for Amazon of about $15.00 versus the disclosed composite average of $18.50.”

In total, all of FedEx' business with Amazon is worth about $850 million across its different package delivery networks, Root estimates. Amazon's other contracts with FedEx were not affected by the new development.

While FedEx likely just turned down millions in potential revenue from Amazon by deciding not to renew the Express contract, it appears to believe it can make that up by focusing on the other large part of e-commerce that Amazon does not own.

The volume of Amazon packages being affected by the policy change — which Moody's estimates is less than 200,000 packages a day out of a total of 2.9 million packages for FedEx Express US domestic — can be replaced with packages sent by e-commerce shippers who will pay more per package, resulting in increased revenue for the same volume sent through FedEx's logistics network, Root argues.

In its statement about the Amazon contract, FedEx made clear it is looking to service other e-commerce customers apart from Amazon.

FedEx has already made moves to chase this business, including making more of its last-mile FedEx ground deliveries directly instead of handing them over to the US Postal Service. It also announced a new seven-days-a-week delivery schedule that will start in 2020.

“Despite Amazon's large share in driving e-commerce's growth, most of its FedEx US package volume flows through the FedEx Express Network,” Root wrote. “This suggests that the impetus for adding year-round Sunday delivery in the FedEx Ground business is driven by a desire to maintain a competitive offering and smooth daily flow through its sorting facilities to improve operating efficiency rather than to serve volume growth from Amazon.”

“We respect FedEx's decision and thank them for their role serving Amazon customers over the years,” Amazon said in a statement after FedEx announced its decision on Friday.