Amazon’s relationships with FedEx and UPS will contrast even further once June ends, and there are challenges in both strategies for the delivery giants, according to analysts.

Memphis-based FedEx said Friday it is letting its U.S. Express contract with Amazon expire on June 30 to “focus on serving the broader e-commerce market.” Some experts think other contracts could end between the two, shifting more Amazon volume to UPS or keeping it in-house.

For FedEx, the decision will create “near-term pain for long-term gain,” Thomas Wadewitz, a FedEx analyst at financial services firm UBS, said in a research note. FedEx can fill its capacity with other shippers, but that will take time, he added.

An estimated 80% of FedEx’s business with Amazon is tied to Express, totaling some $716 million, according to UBS. The firm estimates 7.7% of FedEx Express packages in the U.S. come from Amazon and 5.4% of FedEx Express' domestic revenue comes from business with Amazon.

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Will UPS take FedEx's Amazon volume?

Most of the Amazon volume that has been moving through Express would probably need to go through UPS if slower delivery times aren’t an option, Wadewitz said.

UPS already dwarfs FedEx when it comes to business with Amazon. About 1.3% of FedEx’s 2018 revenue was linked to Amazon. Morgan Stanley estimates Amazon makes up about 10% of revenue and 15% to 20% of volume at UPS.

Dean Maciuba, director of consulting services at Logistics Trends & Insights LLC, said in a post Saturday that UPS is likely a better deal for Amazon since it already moves more volume for it. FedEx used to be more closely tied to Amazon, he said.

“The relationship between the two companies soured about 3 years ago when Amazon demanded improved discounts from both UPS and FedEx,” Maciuba wrote. “UPS responded to Amazon with increased discounts, FedEx balked, and more than half of FedEx’s Amazon business was awarded to UPS.”

UPS and the U.S. Postal Service may be able to land more favorable contracts with Amazon as a result of the fast-approaching contract expiration, but that's not guaranteed, said Keith Schoonmaker, a FedEx analyst at Morningstar.

Amazon could also elect to use in-house options instead to fill the void left by FedEx Express. Amazon may have enough capacity to keep Amazon Prime needs in-house “and potentially open up to third-party packages as well,” said Morgan Stanley analyst Ravi Shanker in a note.

Amazon has already shown a willingness to move many of its own items. XPO Logistics, another big transportation company, may lose hundreds of millions in revenue this year after a customer widely believed to be Amazon scaled back its business with XPO, Reuters reported in February.

If Amazon’s business with UPS shrinks as it did for FedEx and XPO, UPS would be hit hard, Shanker said.

"Pulling that amount of volume out of a unionized, integrated, fixed-cost network like UPS’s could be an unprecedented headwind,” he said.

Amazon 'one of FedEx's least profitable customers'

FedEx Express severing its domestic ties with Amazon makes sense beyond preparing for Amazon’s solo shipping ambitions, some analysts said in notes.

Although Amazon provides a high amount of volume for FedEx, the average Amazon package likely brings in less revenue than other parcels going through Express. Amazon packages shipping through FedEx see an average revenue of $15 per package, $3.50 less than the overall average, Moody’s analyst Jonathan Root estimates.

“We believe Amazon … 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,” said Root, who considers the move a long-term positive for FedEx.

FedEx still has Amazon packages running through FedEx Ground, but it doesn’t want to flood its networks with too many discounted packages, Schoonmaker said. Residential deliveries, like those for Amazon products, can strain yields as couriers may go a long way to deliver one item.

Kevin Sterling, an analyst at Seaport Global, said FedEx will ultimately benefit from ending the contract as it can grow its market share with smaller e-commerce operations and “not be beholden to Amazon.”

FedEx’s strategic decision might not pay off immediately, though.

Although Shanker called the news “a watershed moment” in the parcel industry, he added it could hurt FedEx’s future margins more than it could help elsewhere.

FedEx’s 2020 fiscal year is shaping up to be a rough one, Wadewitz believes, and walking away from domestic Amazon business “would make it even worse,” he said.

The company's 2019 fiscal year, hobbled by a global economic slowdown and troubles with the TNT Express integration, ended May 31. Full-year and fourth-quarter earnings will be revealed June 25.

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Max Garland covers FedEx, logistics and health care for The Commercial Appeal. Reach him at max.garland@commercialappeal.com or 901-529-2651 and on Twitter @MaxGarlandTypes.