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Another Day, Another FedEx-Amazon Divorce

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Another Day, Another FedEx-Amazon Divorce

FedEx Corp. (NYSE: FDX), tired of walking around bowlegged from Amazon.com, Inc.'s (NASDAQ: AMZN) pricing and service demands on its ground-delivery business, has had enough.

FedEx will effectively end its ground-delivery contract with Amazon at the end of August, according to sources. According to one source, FedEx will technically remain an Amazon vendor, but will not handle any national-account traffic, which is mostly everything it moves for Amazon.

FedEx handles about 4 percent of Amazon's ground business, according to data from consultancy SJ Consulting. Most, if not all, of that business is believed to have been concentrated during the peak delivery season.

The development itself was marred by confusing communication. FedEx issued a one-sentence statement that did not mention Amazon by name, nor described what it planned to do. Other news outlets, however, said that FedEx issued a statement saying it was severing ties with Amazon. A source close to FedEx confirmed late Wednesday morning that the relationship will indeed end.

The move comes on the heels of FedEx's announcement in June that it would end its U.S. air services contract with Amazon. FedEx's domestic ground relationship with Amazon is much larger than its air agreement. Still, it is not large enough, and certainly not compensatory enough, for FedEx to stick around.

One source, who has worked with both companies, estimated the size of the ground business to be about $300 million a year. However, the traffic flows are not stable, and the rates that Amazon demands do not justify the cost of the operational demands and pressures imposed on the FedEx network, the source said.

At the same time, Amazon has concluded that it can move its packages on its own network at much lower unit prices than FedEx could possibly match. As a result, it is unlikely to impact its business either. The one company likely to gain is UPS Inc. (NYSE: UPS), which handles far more Amazon freight and relies on Amazon's density to achieve desired operational efficiencies in its business-to-consumer traffic.

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