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Can Amazon Stand Up to the US Postal Service Challenge?

The move to hike shipping prices could severely hit online retailers.

President Donald Trump wants the United States Postal Service (“USPS”) to raise the price for shipping packages. A task force appointed by Trump earlier this year, has released recommendations for the rate hike on Dec 4. Understandably, such a move could affect the likes of Amazon.com, Inc. AMZN and other online retailers.

That said, Amazon too has been trying to add muscle to its already-existing strong delivery arm. The company, reportedly, is planning to build up its air freight service, which could eventually hurt freight and cargo companies like FedEx Corporation FDX and United Parcel Service, Inc. UPS.

Will USPS Hike Shipping Price?

According to recommendations from a task force appointed by Trump, the USPS should have more flexibility in raising price rates for shipping packages.  The task force was commissioned by Trump in April to find ways to help stem the financial losses by the USPS. In the report released on Dec 4, the task force said that USPS should price packages with profitability in mind.

The move to hike shipping prices could severely hit online retailers like Amazon and eBay, Inc. EBAY. Trump has often taken criticized Amazon by tweeting that the USPS is losing billions of dollars by charging Amazon and others very little. Earlier this year, Trump alleged Amazon of “costing the United States Post Office massive amounts of money for being their Delivery Boy.”

The already-ailing USPS lost almost $4 billion in fiscal 2018, which ended on Sep 30, despite an increase in package deliveries. Higher prices could hit the likes of Amazon, which according to Morgan Stanley, relies on the USPS to deliver up to 45% of its packages.

Moreover, this could also hit the likes of FedEx and UPS, which often use USPS for the last mile delivery. This saw shares of Amazon and eBay declining 5.9% and 3.1%, respectively on Tuesday amid a broad stock market selloff. Amazon, eBay, FedEx and UPS each carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.

Can Amazon Take Up the Challenge?

A price hike in package shipping will definitely affect the profits of Amazon and other retailers. However, Amazon too has been aggressively trying to strengthen its own delivery arm. In September the e-commerce giant announced that it has ordered 20,000 delivery vans from Mercedes-Benz, which the company will lease to third-party partners, which will use them for “last-mile” delivery.

Moreover, according to a report by Morgan Stanley, Amazon is likely to continue expanding its air fleet beyond the fortieth 767-300F delivered in November. This definitely would strengthen Amazon’s delivery service and at the same time significantly cut into the market share of FedEx and UPS.

Per the report, Amazon’s air-delivery service could result in 2% of potential revenue loss for UPS and FedEx in 2019. The report which states "the market is missing the risk Amazon Air poses," eventually saw shares of UPS and FedEx closing in bear territory on Tuesday. Shares of UPS and FedEx plummeted 7.4% and 6.3%, respectively.

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Amazon.com, Inc. (AMZN) : Free Stock Analysis Report
 
eBay Inc. (EBAY) : Free Stock Analysis Report
 
FedEx Corporation (FDX) : Free Stock Analysis Report
 
United Parcel Service, Inc. (UPS) : Free Stock Analysis Report
 
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