I have good contacts within FedEx, and as I understand it the general consensus there is that while losing the Amazon contract hurt, UPS is doing it so cheaply there's no way they're even close to breaking even on it. What's more, it's a substantial part of their network volume - so when Amazon pulls their business to go it alone, UPS is going to end up cash poor and having to deal with aging infrastructure and inflated costs from overcapacity.
> UPS is doing it so cheaply there's no way they're even close to breaking even on it
That doesn't make sense to me... why would UPS sign a contract with Amazon that it wouldn't make money on?
I can see accepting a relatively low profit, but not negative. Even as some kind of strategic defensive move. There's no winning scenario for them to lose money on delivering packages for Amazon.
FedEx and UPS live and die by volume. The more packages they move in total, the cheaper it is to move each individual package. They can then make their profit in sales to companies and individuals with far less volume and pricing leverage than Amazon.
For the sake of argument, let’s say that Amazon makes up 50% of UPS’s business, and those packages are shipped by UPS at a 10% loss. If the other 50% of their business averages a 20% profit, then they’re averaging a 10% profit across the board.
Without the Amazon packages, let’s say UPS can cut their operating costs by 25%. Now they’re shipping 50% as many packages, though, so the per-package operating cost has increased by about ~33%. Those customers that were generating 20% profit when the network was larger are now a losing proposition. UPS then faces the choice of downsizing their operation or raising prices. Both of those options are about equally bad when you consider that their competitors are not impacted by the loss of Amazon’s business (well, to be totally correct, their competitors have already absorbed the disruption to their operations when Amazon pulled their business to move it to UPS in the first place).
To be clear, I’m not saying the above numbers are correct - or even close to being representative. I’m merely illustrating why it makes sense for transportation companies to take large-volume customers even at a loss.
