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FedEx declines to renew Amazon’s U.S. air-delivery contract

The shipping giant’s decision could affect the retailer during the holiday shipping season and reflects long-simmering tension between the two companies.

FedEx has decided to not renew a domestic contract with Amazon. (Bill O'Leary/The Washington Post)

FedEx said Friday it has decided not to renew a key domestic contract with Amazon, a move that could pinch the online retail giant during its all-important holiday shipping season when it has sometimes struggled to get packages to customers on time.

The decision highlights tension between the longtime partners after Amazon has built its own logistics network over the past few years and is delivering more customers’ packages, lessening its dependence on FedEx and other shipping partners. FedEx executives have repeatedly said Amazon won’t become a competitor and remains highly dependent on its shipping partners, despite its growing logistics might.

FedEx made the decision “as we focus on serving the broader e-commerce market,” the company said in a statement Friday. The decision applies to FedEx’s domestic Express contract with Amazon — the speediest option FedEx offers for shipping via air — which ends June 30. The decision does not affect its international services or any last-mile contracts.

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Amazon accounted for less than 1.3 percent of FedEx’s revenue last year, the company said. That’s $850 million to $900 million, according to an estimate from Sanford C. Bernstein & Co. analyst David Vernon. FedEx highlighted in its statement the growing need for e-commerce shipping, which is expected to double to 100 million packages a day domestically by 2026.

Amazon spokeswoman Rena Lunak said in a statement the company respected FedEx’s decision. (Amazon chief executive and founder Jeff Bezos owns The Washington Post.)

Amazon announced June 5 it would start delivering products using drones in just months. Amazon chief executive Jeff Bezos owns The Washington Post. (Video: Amazon)

Amazon relies less heavily on FedEx as compared with most of its shipping partners, including the U.S. Postal Service and UPS. Its need for the fastest method of shipping has decreased as the company has built warehouses closer to population centers around the country.

But package volumes can be difficult to predict as holiday shoppers turn out in droves online, and the lack of an air contract with FedEx could hurt Amazon if it sees a flood in last-minute orders and needs extra capacity.

Amazon started building its logistics operation in earnest following the 2013 holiday season, when a surge in sales flooded UPS and FedEx networks and caused some deliveries to be late. Since then, the delivery giants have worked to expand their networks to flex for peak season and have set stricter rules with retailers like Amazon to help prevent that problem.

In the meantime, Amazon has leased a fleet of planes, purchased thousands of truck trailers and enlisted entrepreneurs to build out delivery networks across major metro areas. Roughly half of its shipments go to the U.S. Postal Service, which delivers the last miles of the package’s journey along with the mail. UPS and FedEx pick up the remainder.

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Amazon has ambitions to build a logistics network that will one day rival UPS and FedEx, although it’s a long way off from that point, according to people familiar with the company’s plans who aren’t authorized to speak publicly. FedEx and UPS stock prices have suffered when news surfaces of Amazon logistics initiatives, something that has prompted frustration among the logistics executives.

In the meantime, though, the move by FedEx gives it the upper hand in the debate and may save it money in the long run. Amazon drives a hard bargain with its delivery partners, and the FedEx Express contract probably wasn’t very lucrative for the company.

FedEx previously walked away from a contract with Amazon to do last-mile deliveries via its no-frills Smartpost delivery service about five years ago. Smartpost, which used the U.S. Postal Service for final delivery, was viewed as poaching from its higher-priced Ground network.

“FedEx has a history of walking away from contracts when the economics don’t work out for them,” Vernon said.

While the loss of Amazon packages could create pressure on FedEx as it adjusts to lower volumes in its network, Vernon said the move also removes some risk that inevitably hurt its shares on any news of Amazon’s encroachment into the shipping business.

A video at Amazon's conference showed the company's newest package delivery drone. Amazon chief executive Jeff Bezos owns The Washington Post. (Video: Amazon)