FedEx Corp. (NYSE:FDX) was supposed to benefit the most from ongoing e-commerce developments as it could take this opportunity to really build up its relatively low-profile package delivery business and potentially see above-average growth. The argument was made here back in December 2013, when the company finished the year with just a 3% revenue growth. For the next two years, however, the company's revenue growth stuck between 2 and 4%, while e-commerce giant Amazon (NASDAQ:AMZN) was advancing in sales at 20% in each of the same two years. It doesn't seem that FedEx kept up with the progress of e-commerce and really delivered for online merchants.
It's not a surprise that Amazon has decided to take full control of its package delivery operation by flying a fleet of 20 freighters itself. The Air Express business within FedEx is the largest in the world and supposedly the best. But somehow it never really landed at Amazon. With Amazon operating its own freighters, FedEx is actually not getting a new competitor as some have suggested, but rather is losing a valuable business that it should have retained. In defense, FedEx stated no single customer accounts for more than 3% of the company's revenue, suggesting any lost revenue from Amazon wouldn't be a big deal. But FedEx should have expected itself to generate far more revenue from Amazon in the first place.
Amazon had sales of over $100 billion in 2015, growing from less than $50 billion five years ago. FedEx was actually not too far behind with its sales just under $50 billion, which could give it the needed capacity to run a total delivery operation for Amazon. A 10% cut in delivery charge from Amazon's sales would have given FedEx about $10 billion in revenue from one single customer, considering that Amazon used almost 98% of its sales in 2015 to cover various operating expenses. The $10 billion would be close to 20% of FedEx's total revenue in 2015, compared to the per-customer revenue rate of a meager 3% currently. The loss of potential sales of that magnitude is indicative of how FedEx has not really revved up its business.
It's evident that FedEx has also had a cost control issue. Both operating income and net earnings declined in the last two years even as revenue inched higher. The company has been working on a $1.7 billion, multi-year cost reduction plan in an attempt to boost earnings. However, a lasting solution to bottom line improvement eventually has to come down from top line growth. Because of the lost opportunity to generate sizable sales from Amazon, it's difficult to speculate where else FedEx can get meaningful revenue growth from customers the size of Amazon. It's certain, however, that the reported constant dialogue between FedEx and Amazon didn't produce a delivery partnership to the benefit of FedEx.
The news about Amazon building its own air delivery network is not necessarily a telling of any direct threat to the delivery industry, as Amazon has no intention to become a dedicated logistics company, except that it will certainly serve third parties that sell merchandises on the Amazon Website. But the pronouncement is rather a revelation of how unimpressive companies like FedEx may have been in serving up the logistics needs of online merchants. The results are an unsatisfied Amazon about the status of its delivery and potentially disappointing shareholders of FedEx, which never pursued a business route of custom-designing delivery networks for large customer accounts like Amazon.
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