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A new report from RBC Capital Markets asks the ever more pressing question about Amazon.com ( AMZN ) and its deliveries ambitions: Does the transportation sector have a problem? The short answer is no — at least not yet, according to RBC analyst John Barnes. The crux of the issue for the e-commerce leader is that its shipping costs soared 32% to $11.5 billion in 2015, while sales rose about 20%. That, says Barnes, suggests that Amazon might have trouble ahead if it continues on course. As a result, Amazon has been taking more of the shipping task into its own hands. RBC emphasizes, though, that Amazon isn’t anywhere near able to separate itself from shipping partners such as UPS ( UPS ) and FedEx ( FDX ). But the company will incrementally begin to do so, the report says, at least in certain areas. In prior years — though not in 2015 — both UPS and FedEx have stumbled during the critical holiday season. Packages not being delivered on time, Barnes says, is like Amazon being closed on random days without warning. Amazon’s massive distribution network is as complex as it is large. It includes a growing trucking operation and the recently disclosed air transport and ocean shipping components. Ocean shipping is where Barnes suspects the company will attack first. “We believe Amazon will take over large swaths of its ocean freight supply chain, as the move can lower its own shipping costs, drive third-party sellers to the platform and eventually turn into a profit center,” Barnes wrote in the report, released late Monday. As IBD has reported, industry experts estimate that the ocean shipping business has the potential to be worth millions in free cash flow for Amazon, mostly from selling capacity to third parties. Analysts says that Amazon CEO Jeff Bezos might not go after the free cash flow but instead drive the value back to consumers in some fashion, such as still-lower prices. But the ocean shipping industry is vast, and Barnes estimates that the Seattle-based company would grab only between $200 million and $400 million in business. It could, though, affect shippers such as Expeditors International of Washington ( EXPD ) as well as UPS and FedEx. The ocean shipping grab isn’t without precedent, either. Wal-Mart ( WMT ) has been taking possession of suppliers’ goods in China and doing its own shipping for years. Amazon’s growing air network is one area where the company will be content to work with third parties, Barnes said. Amazon’s recently announced deal with Air Transport Services Group ( ATSG ) to lease 220 767 jets highlights this point. As part of the deal, Amazon will be able to purchase about 20% of ATSG’s common shares over a five-year period. Meanwhile, Barnes says that UPS and FedEx are both fighting Amazon’s long-term onslaught. UPS now provides 30% of Amazon’s parcel needs, netting $2.2 billion in revenue, and FedEx hauls in $1.5 billion, or about 20%. Those figures translate to about 8% and 10% of ground revenue, respectively, for the shipping companies. Scalper1 News
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