Amazon will lease 20 Boeing 767 widebody freighter jets for its own dedicated air-cargo network in a move to speed up delivery and avoid being hostage to third-party logistics hiccups.
It’s official. Amazon has completed a deal with a cargo-airline partner to run its own airfreight delivery operation flying 20 used Boeing 767 cargo jets.
And in the future it may get bigger. The online retail giant has also been talking to Boeing about potentially buying new 767 freighters, according to two reliable sources
After running a secretive trial since last summer with five Boeing 767s leased from freight carrier Air Transport Services Group (ATSG), Amazon confirmed Wednesday an agreement to let ATSG run a dedicated air-cargo network and expand the operation to four times its size.
As part of the deal, Amazon also has the right to acquire just shy of one-fifth of ATSG for more than $600 million.
That stake could potentially rise sharply in the years ahead.
A senior aviation-industry executive with knowledge of the discussions between Amazon and ATSG said the Seattle company asked for a larger stake in the airline, up to 49 percent, which would have given it effective control.
ATSG could not be reached for comment, and Amazon, asked to respond to questions sent via email Wednesday, declined further comment.
According to the deal announced Wednesday, ATSG will provide the 767s on leases running five to seven years, which is typical in the air-leasing world, and will use its base in Wilmington, Ohio, as the hub of the Amazon air-cargo operation.
Ned Laird, retired former managing director of Seattle-based consultancy Air Cargo Management Group and who remains in touch with industry players, said Amazon is acquiring the use of important facilities at the hub.
Five years ago, express package carrier DHL pulled out of the hub, 50 miles northeast of Cincinnati, after spending $200 million to build a package-sortation center and warehouses. Those facilities are sitting unused, he said.
“That’s a very clever move by Amazon to take advantage of those assets,” Laird said. “I would not be surprised to see Amazon buy ATSG outright in the next few years.”
The ATSG move represents a big step in Amazon’s drive to provide quasi-immediate gratification to shoppers.
Dave Clark, Amazon senior vice president of worldwide operations and customer service, said in a statement Wednesday,“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.”
By linking its fulfillment centers in major markets through a sizable fleet of cargo airplanes, it can speed up delivery and avoid being hostage to third-party logistics hiccups out of its control, especially during the critical holiday season.
Amazon and Boeing
Seeking to build up a cargo fleet as fast as possible, Amazon has also been in discussions with Boeing to buy new 767 freighters, according to two people with knowledge of the negotiations who spoke on condition of anonymity because of the sensitivity of the discussions.
One, the senior aviation-industry executive, said Amazon discussed with Boeing a purchase of six to 10 new 767s to supplement the fleet of used cargo aircraft acquired through the deal with ATSG.
He said those talks slowed as Amazon balked at Boeing’s asking price. New 767s could be bought for between $70 million and $80 million each, with payment spread over a number of years.
However, the other person with knowledge of the talks, who is inside Boeing, said a deal may yet happen as Amazon is “still engaged” with the jet maker on a potential purchase.
Boeing spokesman Paul Bergman declined to comment on any potential sales or customers.
The pipeline of new 767 freighters coming out of Everett is committed solely to FedEx, which has 81 of the jets on order.
However, according to employees on the 767 program, Boeing is trying to speed up the production line in Everett, which could open up some new delivery slots.
Meanwhile, there’s been speculation that as Amazon invests more in transportation it might encroach on the business of FedEx and UPS, and perhaps even emerge as a competitor to those companies by providing transportation services itself.
But in a recent earnings call, a top Amazon executive said the company sought to complement those services, not replace them.
“Today’s (ATSG) announcement is not a surprise,” said FedEx Senior Vice President Patrick Fitzgerald. “We work closely with Amazon and have been aware for some time about their need for supplemental air capacity related to inventory management.
“Amazon continues to be a valuable FedEx customer,” he said.
Amazon’s initial air-cargo fleet is a lot smaller than FedEx’s fleet of more than 650 aircraft, which includes more than 100 Boeing widebodies.
Yet for a complete newcomer to aviation, it’s an ambitious project.
Amazon’s new air force could mean big savings, according to experts.
Right now a typical shipment to an Amazon customer could be coming from three or four different warehouses in far-off corners of the country, said Marc Wulfraat, president of MWPVL International, a logistics consultancy that closely tracks Amazon.
As a result, Amazon is spending a lot of money paying FedEx and UPS to fetch that merchandise around its network.
And the cost goes up as Amazon’s sales grow, Wulfraat said. The only way to make it come down is “to set up your whole hub-and-spoke network,” centered in the Wilmington facility, which formerly belonged to DHL.
The idea is for planes to fly in and out of areas housing Amazon’s major clusters of fulfillment centers — in places such as Western Washington, Phoenix and Southern California. A plane from, say, Seattle, would fly to Ohio full of items needed by other fulfillment centers across the nation, and fly back carrying items requested by Seattle-area shoppers.
Not only does Amazon have enough volume to justify the leasing of the airplanes from a dollars-and-cents standpoint, the setup could also dramatically speed up shipments. “You can now do in two days what you did in four days,” Wulfraat said, adding that over time Amazon could expand its fleet to more than 60 planes.
“The only company in America today that could get away with this is Amazon,” Wulfraat said.
ATSG subsidiary airlines ABX Air and ATI will operate the aircraft for Amazon, and ATSG will also provide logistical services in Wilmington.
Amazon’s breakneck expansion, combined with stepped-up promises to deliver products quickly, has meant that the company’s shipping and fulfillment costs have recently outpaced revenue growth.
“Having their own shipping infrastructure and capacity will allow them to expand,” said Colin Sebastian, an analyst with Baird.
Sebastian points out that despite recent remarks about not being a replacement or a competitor to major shipping services, Amazon could develop enough expertise in the field to offer transportation to other companies.
In the months leading up to the holiday season’s package-delivery rush last year, the trial operation with ATSG — dubbed project Aerosmith — involved five leased 767 freighter jets flying from Wilmington to Amazon’s major fulfillment centers around the U.S.
According to multiple sources in the airplane-leasing world, Amazon also held separate, unsuccessful talks during that trial with at least two other air-cargo airlines: Atlas Air based in Purchase, N.Y.; and Kalitta Air, based in Ypsilanti, Mich.
Kalitta Air owner Connie Kalitta denied any talks with Amazon. Atlas could not be reached Wednesday.
The Aerosmith trial with ATSG appears to have been successful enough to persuade Amazon to make the operation permanent and scale it up, substantially raising the stakes.
“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, ATSG chief executive. “We are excited to serve Amazon customers by providing additional air cargo capacity and logistics support to ensure great shipping speeds for customers.”
ATSG’s shares closed Tuesday at $11.77 but jumped nearly 20 percent on the Amazon news to more than $14 per share in early trading Wednesday.