The U.S. transportation industry hasn't seen such a mutually agreeable divorce in years.

To virtually no one's shock, FedEx Corp. (NYSE:FDX) continued late on June 7 its multi-year process of untethering from Amazon.com, Inc. (NASDAQ:AMZN), announcing it would not renew Seattle-based Amazon's U.S. domestic flying contract with its FedEx Express unit, which operates domestic and international services through an integrated air-ground network. The action does not affect Amazon's relationship with FedEx Ground, FedEx's ground parcel unit. Nor does it affect Amazon's U.S. last-mile and international business with Memphis-based FedEx.

FedEx Express generated $280 million in revenue from Amazon over the last four reporting quarters, according to data from consultancy ShipMatrix. That was about one-third of FedEx's total revenue from Amazon over that same period, according to ShipMatrix data. Amazon accounted for just 1.3 percent of FedEx's total revenue for the 2018 calendar year, according to FedEx data. FedEx, which operates on a fiscal year that runs from June 1 to the following May 31, generated $69 billion in total revenue in its last fiscal year.

In a statement, FedEx said it made the move to focus more of its resources on the broader e-commerce sector. Businesses other than Amazon will account for more than half of the expected parcel revenue growth over the next five years, said Amit Mehrotra, analyst for Deutsche Bank. FedEx has said that annual U.S. parcel volumes will double from current levels by 2026 to 100 billion parcels a year.

FedEx has been pivoting from Amazon for years, tired of offering significant price discounts that compressed the carrier's margins. Press releases announcing FedEx's quarterly financial results would make mention of lost volume from a large unnamed customer that most in the industry assumed was Amazon. Top FedEx executives, while stating their admiration for Amazon as a company, have taken a dim view of its efforts to develop a competing transportation network, claiming it would be near-impossible to replicate a model that took FedEx decades and billions of dollars to build.

Jonathan Root, who follows FedEx for Moody's Investor Services, said in a note late on June 7 that the decision "implies that Amazon would not agree to financial terms that would meet FedEx's needs." FedEx, Root said, will achieve higher margins and better returns on its investments in its Express network by re-deploying capacity to customers other than Amazon," which the analyst called one of FedEx's least profitable customers.

No one should expect Amazon Founder, Chairman and CEO Jeff Bezos and his team to lose sleep over FedEx's move, either. Amazon continues to build out its air and ground delivery network, and will likely have no problem diverting the traffic carried by FedEx. The next step in Amazon's air odyssey is expected to occur June 27 when it launches night-time flights to and from its hub in Wilmington, Ohio, once the hub of DHL Express and the former Airborne Express, to support next-day delivery of products ordered through its Prime service. Amazon recently began its previously announced one-day deliveries for Prime members. The Wilmington flights will be operated by Atlas Air Worldwide Holdings (NASDAQ:AAWW) and Air Transport Services Group (NASDAQ:ATSG), both of which fly freighters for Amazon Air, the company's air unit.

With Amazon taking more of its next-day air service, considered a premium-priced product, in-house, Fedex may have chosen not to renew the contract because it "doesn't want much less business from Amazon for the prices previously negotiated for higher anticipated volumes," said Jerry Hempstead, an industry consultant who for decades held top U.S. posts at Airborne and DHL, which acquired Airborne in 2002.

Mehrotra urged UPS and FedEx to take a "tougher stance with Amazon," noting the prospects for robust e-commerce growth and the relevance of other businesses, virtually none of which get the same deep discounts afforded to Amazon.

Image sourced from Pixabay