Rising Package Volumes and Costs Have Strained Amazon's Relations with UPS

Well, online retailing is bigger than ever, so no surprise at the tension between Amazon and UPS.

At the Wall Street Journal, "Amazon Seeks to Ease Ties With UPS":

As the clock counts down to Christmas, workers at United Parcel Service Inc. are busy hustling packages along loading docks and conveyor belts at its Louisville, Ky., hub—part of a costly, intricate system built in part to cater to Amazon.com Inc., its biggest customer.

But the symbiotic relationship between the two giants has come under increasing strain, according to interviews with more than a dozen current and former UPS and Amazon executives.

Rising package volumes and costs have Amazon seeking alternative delivery routes—shifting the online retailer’s role from key ally to a potentially disruptive competitor.

Amazon has held talks with air-cargo companies to lease airplanes and build its own freight operation. The company is already using its own trucks, drivers and a fleet of couriers for the final and most-expensive leg of an order’s trip.

It has been making its own deliveries in certain high-density regions and relying more heavily on the U.S. Postal Service. Eventually, it hopes to get drones to drop packages into backyards.

Such steps are part of a much broader plan at Amazon, which counts shipping costs as one of its fastest-growing expenses, totaling 11.7% of revenue in the third quarter, up from 10.4% a year ago. The goal is to reduce its reliance on carriers like UPS, according to people familiar with the matter.

“Amazon’s interest is not in doing what may be good for UPS,” said Satish Jindel, a parcel-industry analyst with SJ Consulting Inc. “Their interest is in getting control over logistics.”

Amazon declined to comment. A spokesman for UPS said “we will continue to work closely with Amazon and all our customers to help them solve their growth and customer service challenges.”

There is more than loyalty at stake for Atlanta-based UPS. This year, its Amazon account exceeds $1 billion, say former Amazon and UPS executives. That is roughly a fivefold increase since 2005, according to an estimate by a former executive with direct knowledge of the company’s spending.

While UPS investors generally view growing volumes as a sign of health, the company’s cost-per-package has actually risen since more than a decade ago, putting margins under pressure.

The average cost to handle a parcel was about $8 last year, up from roughly $6.50 in 2000, according to the company. Much of the increase was attributed to a growth in e-commerce, as UPS has invested more than $11 billion over the past five years to upgrade and expand its network.

It hasn’t helped relations that Amazon was a factor in UPS’s last two back-to-back Christmas snafus—each of which cost UPS an unexpected $200 million. Two years ago, Amazon overwhelmed UPS with hundreds of trailers of last-minute Christmas orders. It later got UPS to help underwrite millions in customer refunds.

Last year, UPS increased capital spending by 10% to be ready for a prolonged holiday surge that never came.

This year, the company is expecting record volumes and has already seen parts of its network strained from a surge of online holiday spending over the days before and after Thanksgiving...

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