Amazon’s next $400 billion opportunity

23 Dec 2015 | Author: | No comments yet »

Amazon in talks to lease Boeing jets to launch its own air-cargo business.

The online retail giant wants to build out its own cargo operations to avoid delays from carriers such as United Parcel Service, which have struggled to keep up with the rapid growth of e-commerce.Amazon, one of the world’s largest package shippers, may be planning to reduce its dependence on FedEx, UPS, and the US Postal Service with its own overnight freight service. The report was the latest in a series of hints that Amazon could be gearing up to create an in-house logistics department that would allow it to take full control of its fulfillment process. A senior aircraft-leasing company executive familiar with Amazon’s plans said the company has approached several cargo-aircraft lessors to line up the planes.

Amazon would be able to sidestep carriers like UPS and FedEx to avoid the shipment delays that it has previously dealt with (most notably during the 2013 holiday season, when many customers didn’t receive orders in time for Christmas). While the company obsessed for years over tax-free commerce—which required minimizing its physical footprint—it has recently expanded its distribution network to prioritize delivery speed. If Amazon’s reported negotiations with Boeing are indeed real and subsequently successful, the pivot would fly in the face of existing international cargo operators that move the company’s cargo, such as FedEx, DHL, UPS and USPS. Leasing 20 jets would be a significant expansion of an Amazon trial operation out of Wilmington, Ohio, operated by ATSG on Amazon’s behalf, sources said.

Amazon built AWS out of the infrastructure it had created to support its own operations, and now runs a business expected to pull in $8 billion in revenue this year. In the same vein, it could build a logistics network to clear up its own delivery bottlenecks, and then, eventually, offer services to other companies. “Similar to the gradual roll-out of AWS, we would expect Amazon to introduce competitive transportation and logistics services to external clients on an incremental basis, with a long-term focus,” Sebastian writes. “Amazon may be the only company with the fulfillment/distribution sophistication and scale to compete effectively with incumbent service providers (UPS, FedEx).” “Given the price-sensitive nature of parcel delivery, we note that Amazon’s investor base, which has been historically tolerant of the company’s investment in high-volume, low-margin businesses, may offer a significant advantage over competitors due to the ‘profit mandates’ of traditional Transportation & Logistics shareholders,” Sebastian writes. Yes, there are a lot of “ifs” here — Amazon hasn’t commented on the Seattle Times report or reports from Vice or Re/Code that it’s hurtling towards big logistics ambitions — but the potential effect would be enormous. CEO Joe Hete said in a November conference call that ATSG is using five 767s flown by the company’s subsidiaries Air Transport International and ABX Air for a customer he declined to name. You might recall that at the height of last year’s holiday shipping season, UPS was unsuccessful in delivering millions of its parcels on time, many of them items ordered on Amazon.

Airplane-tracker FlightAware.com shows the two carriersare flying about five times a day from Wilmington to Dallas; Tampa, Fla., Ontario, Calif.; and Allentown, Pa. More recently, Amazon has increasingly ramped up its efforts to streamline its shipping operations across the board, rolling out initiatives such as Amazon Prime Now, Amazon Flex and Amazon Fresh. Also front and center in its ambitious package delivery plans is Amazon Prime Air, an unmanned drone program that would courier small packages to customers within an hour, though it won’t deliver a thing without FAA approval first. Those delays led Amazon to refund shipping charges and offer customers a $20 gift card. “This is more of a warning shot across the bow of the express industry,” said Ned Laird, former managing director of Seattle-based consultancy Air Cargo Management Group, who is now retired. “(Amazon is saying) ‘We’re not getting what we need.

We’ll go elsewhere for now.’ ” In 2014, it debuted its first sortation center in Kent, where it sorts parcels sent from its own warehouses by ZIP code and sends them to individual U.S. post offices for delivery in that day’s mail. Delivery is often done by contract workers who ferry parcels from urban warehouses to customers’ homes. “We have a very good and longstanding commercial relationship with many carriers, but we know that there is supplemental capacity needed in the market — so we are supplementing our existing carriers with our own trailer equipment,” Mike Roth, Amazon’s vice president of North America operations, told the Chicago Tribune at the time.

Sebastian believes Amazon will eventually ship air-cargo packages for other companies as well, putting it in direct competition with UPS, FedEx and others. That would help Amazon keep the cargo planes loaded even after the holiday crush ends. “They potentially will have air-cargo vehicles with extra space,” Sebastian said. “So it makes sense to offer that space (to other companies) to fill it up.” A source said the air-cargo operation is being run by Scott Ruffin, who joined Amazon two years ago.

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