Cargo aircrafts from UPS, FedEx and West Air Europe are parked at Cargo City at Arlanda airport in Stockholm.

Shares of FedEx and UPS closed in bear territory on Tuesday after Morgan Stanley said "the market is missing the risk Amazon Air poses" to the growth of the delivery service companies.

"For now, investors are focusing on Amazon's last-mile efforts but we believe the challenge in Air is just as relevant," Morgan Stanley's Ravi Shanker said in a note to investors. "But given Amazon's plans to take delivery of 40 planes and build an air hub that could potentially handle 100 planes, we've taken a closer look at the impact of Amazon Air (its in-house Express Air network) on UPS/FedEx Air volumes."

UPS stock closed down 7.4 percent in trading at $106.77 a share, while FedEx dropped 6.3 percent to $215.52 a share. The companies' shares have fallen 21.2 percent and 21.5 percent respectively from recent highs. Wall Street defines a bear market as a fall of 20 percent or more from a stock's 52-week high.

Morgan Stanley believes Amazon Air represents 2 percent of potential revenue lost for UPS and FedEx this year. The firm sees that revenue loss accelerating to more than 10 percent by 2025.

"We expect this drag to intensify once Amazon Air has all 40 planes in the air (and potentially 100 planes if it runs its planned air hub at capacity) and as its utilization improves to UPS/FedEx levels," Shanker said.

Morgan Stanley lowered its price targets accordingly, dropping UPS to $87 a share from $92 a share and FedEx to $230 a share from $240 a share.

Amazon also also may "see meaningful gross cost savings," Shanker said. By bringing express shipping costs in house, Morgan Stanley estimates Amazon will pay about $6 a unit — rather than about $8 a unit for UPS and $10 a unit at FedEx.

"This implies that in 2019, the ~$2-4 savings per package could result in [$1 billion to $2 billion] savings for Amazon, or [3 percent to 6 percent] of its global shipping costs," Shanker said.

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