Is Amazon Getting into the Shipping Business?

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Rising costs and two rocky holiday seasons see relations souring between UPS and its biggest customers, a report says.

The increasing popularity of online shopping is frustrating Amazon to the point that it is looking into building its own freight operation. A report drawn on interviews with current and former UPS and Amazon executives in today's Wall Street Journal has the Web retail giant in talks with air freight companies to lease planes that will allow it to ship its own goods long before its storied drone fleet is cleared for takeoff.

A separate report in the Seattle Times revealed that Amazon is discussing the lease of 20,767 cargo jets with Boeing.

Amazon, UPS's biggest customer, apparently allocated nearly 12% of its revenue to shipping costs in Q3, up markedly from just over 10% in the same quarter last year. The retailer will spend $1 billion with the shipper before the year is over, a five-fold increase since 2005, according to the report.

UPS's Louisville, KY, hub--the crisis point for late deliveries during the 2013 holidays when it was socked in by snow--was built largely to handle Amazon traffic.  Then last year, Amazon flooded UPS at Christmas crunch time with hundreds of trailers filled with last-minute orders. Both of these incidents have led to soured relations between the companies, according to WSJ.

Exacerbating the situation is the fact that the average cost to handle a parcel at UPS has risen to about $8 from $6.50 in 2000. UPS has led a policy campaign charging that the U.S. Postal Service unfairly competes with them, hiring economist Robert Shapiro to conduct a study showing that USPS subsidizes basic costs of its shipping operation with price increases in market-dominant products like First Class and Standard Mail.

Should Jeff Bezos succeed in muscling his way into shipping the way he did into retail verticals such as books and baby care, Amazon could simultaneously put more consumer experience distance between itself and e-commerce rivals and insert itself as a wild card in the competitive battle between UPS, FedEx, and the Postal Service.


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