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Amazon’s air cargo deal with Air Transport takes off

March 9, 2016 11:05 AM
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(Bloomberg)—Amazon.com Inc. is stepping up plans to build its own air delivery network, saying it will lease 20 Boeing Co. 767 freighters from Air Transport Services Group.

The agreement shows Amazon’s commitment to building out its own logistics network as it seeks to make an increasing amount of deliveries faster and more efficient. The Seattle-based online retailer wants to free itself from its dependence on the shippers it relies on now, United Parcel Service Inc. and Federal Express Corp., which have sometimes run into delays during the busy holiday season.

The commercial agreements will include the leasing of 20 Boeing 767 freighter aircraft to Amazon Fulfillment Services Inc. by ATSG’s Cargo Aircraft Management, the operation of the aircraft by ATSG’s airlines, ABX Air and Air Transport International, and gateway and logistics services provided by ATSG’s LGSTX Services. The 20 leases will be for five to seven years, and the agreement covering operation of the aircraft will be for five years, according to a statement released by ATSG.

“This is the first formal confirmation from Amazon that they are in fact pursing an air transportation network and more logistics services,” said Colin Sebastian, an analyst at Robert W Baird & Co. “We can dispense with all the speculation and actually look at something that’s real and happening.”

“We offer Earth’s largest selection, great prices and ultra-fast delivery promises to a growing group of Prime members and we’re excited to supplement our existing delivery network with a great new provider, ATSG, by adding 20 planes to ensure air cargo capacity to support one and two-day delivery for customers,” said Dave Clark, Amazon’s senior vice president of worldwide operations and customer service. Amazon is No. 1 in the Internet Retailer 2015 Top 500 Guide.

“Since last summer, we have been working closely with Amazon to demonstrate that a dedicated, fully customized air cargo network can be a strong supplement to existing transportation and distribution resources,” said Joe Hete, president and CEO of ATSG. “We are excited to serve Amazon customers by providing additional air cargo capacity and logistics support to ensure great shipping speeds for customers.”

Shares of Air Transport Services surged the most in six years, rising as much as 27% Wednesday morning. As part of the deal announced Wednesday, Amazon also has the right to buy as much as 19.9% of Air Transport Services common shares over five years at $9.73 per share, based on its Feb. 9 closing price.

By taking a small stake to begin with, Amazon gets a chance to test progress on its long-term goals and see if it likes how it works before committing to a purchase outright.

Amazon has been quietly building out its strategy for years. A 2013 report to Amazon’s senior management team proposed an aggressive global expansion of the company’s Fulfillment By Amazon service, which provides storage, packing and shipping for independent merchants selling products on the company’s website. The project, called Dragon Boat, envisioned a global delivery network that controls the flow of goods from factories in China and India to customer doorsteps in Atlanta, New York and London, according to a person familiar with the initiative, who asked not to be identified because the information isn’t public.

FedEx said the announcement wasn’t a surprise.

“We work closely with Amazon and have been aware for some time about their need for supplemental air capacity related to inventory management,” said Patrick Fitzgerald, senior vice president, integrated marketing and communications. “Amazon continues to be a valuable FedEx customer.”

"It gives you a sense of the scale at which they are operating and the scale at which the plan on operating in the future," said Steven Weinstein, an analyst at ITG. "To take on something this ambitious really requires a great deal of confidence that you are going to be moving significant volumes for a long period of time."

While the deal allows Amazon to add growth capacity, Sebastian said, over time it could also allow the company to compete more directly with firms like DHL Worldwide Express and FedEx in offering shipping and logistics services to third parties.

“In 20 years, Amazon will have its own delivery fleet,” said Michael Pachter, an analyst at Wedbush Securities Inc. “This is a baby step toward that goal.”



 

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