March 17, 2016 11:50 AM, EDT

FedEx CEO Calls Amazon Challenge Reports 'Fantastical'

FedEx CEO Fred Smith by Aaron M. Sprecher/Bloomberg

When FedEx Corp. CEO Fred Smith looks at, he sees a valuable customer — not a mortal danger.

A major competitive threat from Amazon to FedEx or UPS Inc. is unlikely because the online retailer would have to invest tens of billions of dollars and years of effort to build a delivery network, Smith said March 16. Instead, Amazon is seeking better control of its inventory and “last-mile” shipments to customers, FedEx said.

“Concerns about industry disruption continue to be fueled by fantastical — and I chose this word carefully — articles and reports,” Smith said on a conference call with analysts and investors. “In all likelihood, the primary deliverers of e-commerce shipments for the foreseeable future will be UPS, the U.S. Postal Service and FedEx.”

Amazon last week said it would lease 20 Boeing Co. 767 freighters, building on the more than 70 fulfillment centers and 23 sorting facilities it has developed. The company’s leasing plans have spurred some analysts to speculate that it would seek to build its own delivery network.

Amazon spokeswoman Kelly Cheeseman declined to comment.

FedEx and its rivals hold advantages in the density of their networks and the revenue they earn per stop, Smith said. On that basis, Amazon won’t be able to compete.

“We’re not delivering from 50 fulfillment centers or 100 stores,” Smith said. “We have the capability to pick up, transport and deliver an item from 95% of the human beings on the planet, much less every business in the world, within one to two business days, door to door, customs cleared.”

Amazon has been a FedEx customer for years, and the shipping company expects that to remain the case “for many years to come,” said Mike Glenn, a FedEx executive vice president. The companies are in constant dialogue, he said, and FedEx is well aware of Amazon’s desire for more capacity to manage inventory. Other major retailers have long held that ability, he said.

No single FedEx customer accounts for more than 3% of the company’s revenue, or more than 3% of revenue for its air, ground or freight units, Glenn said. FedEx operates the world’s largest cargo airline as well as a fleet of package delivery trucks and a freight operation.

Amazon is leasing the Boeing 767 freighters from Air Transport Services Group Inc. and holds the right to buy as much as 19.9% of that company’s shares over five years. After having leased five freighters last year for a trial network, it will get 15 more by the end of this year, Air Transport Services said on a call with analysts. Amazon will hold the leases for five to seven years.

FedEx attributed the improved outlook on the success of a $1.6 billion, multiyear cost reduction plan at FedEx Express, its cargo airline, and said it would turn its attention to making improvements at its ground transportation division, which makes deliveries by trucks and vans. Moderate U.S. economic growth will support demand for shipments, the company said.

Smith forecast Express margins of about 12% in the current quarter, 16% for FedEx Ground and about 15% for FedEx Freight and supply chain.