(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 Inc., sending shares in the lessor up the most in almost two years.
The agreement shows Amazon’s commitment to expanding its own logistics network to make deliveries faster and more efficient. The Seattle-based company wants to lessen its dependence on United Parcel Service Inc. and FedEx Corp., which have sometimes run into delays during the busy holiday season.
“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. who rates the stock outperform. “We can dispense with all the speculation and actually look at something that’s real and happening.”
Amazon’s air-delivery operation will bring it several advantages, though some may take a while to materialize, experts say.
Jeff McRitchie, vice president of marketing for MyBinding.com, a company that sells equipment and materials for producing books and bound portfolios, says the new air-delivery services will enable Amazon to better address an increasing demand among businesses that prefer to buy and sell products through Fulfillment by Amazon, or FBA, the shipping service Amazon offers to third-party sellers on its marketplace as well as uses to fulfill its own orders.
“We are seeing more and more customers on Amazon who really only consider buying FBA items,” McRitchie says. “This decision to expand their air network makes a ton of sense.”
McRitchie says he expects Amazon’s air-delivery network to have a dual long-term effect of making Amazon more profitable and more efficient at operating its network of FBA warehouses and distribution centers. “It will most likely allow Amazon to be more profitable with their air shipments, and will ultimately allow it to further expand their FBA shipping options without as much reliance on traditional package carriers such as UPS and FedEx.”
Scot Wingo, executive chairman of ChannelAdvisor Corp., a company that helps companies sell through Amazon.com and other e-marketplaces, says one likely benefit Amazon will derive from its air delivery network will be the ability to more easily and quickly shift products among its fulfillment centers.
McRitchie agrees. “It will allow Amazon to manage its fulfillment locations, so that FBA items can be better fulfilled to the whole country without having to duplicate inventory across multiple distribution centers,” he says.
Wingo adds that Amazon will also likely use its air delivery for inbound shipments from manufacturers into its warehouses. Over the longer term, perhaps within two to five years, Wingo adds, Amazon is also likely to offer transportation and logistics services, including air shipments, to other client businesses outside of its FBA services.
Shares of Air Transport Services surged the most since May 2014, rising 17 % to $13.73 at the close in New York. As part of the deal announced Wednesday, Amazon also has the right to buy as much as 19.9 percent of Air Transport Services common shares over five years at $9.73 per share, based on its Feb. 9 closing price. Amazon shares were little changed at $559.47.
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.”
Glenn Zaccara, director of corporate public relations at UPS, said the company has a “good relationship” with Amazon. “We continue to work with Amazon to support their global logistics needs,” he said.
Amazon’s plans are now progressing rapidly. 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. Under terms of the deal, Amazon will hold the leases for five to seven years.
“It gives you a sense of the scale at which they are operating and the scale at which they 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.”
As Amazon is expanding its Prime members, who pay an annual fee and get free, expedited shipping on millions of products, the agreement with Air Transport will “ensure air cargo capacity to support one and two-day delivery for customers,” said Dave Clark, Amazon senior vice president of worldwide operations and customer service, in a statement.
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. who rates the stock outperform. “This is a baby step toward that goal.”
Amazon’s agreement with Air Transport Services follows several other steps it has taken of late to build out its delivery network on the ground as well in the air, expanding the delivery services it can offer to companies that sell through Amazon Business and Amazon Marketplace on Amazon.com as well as for its own direct shipments to customers. In January, Amazon’s China-based Beijing Century JOYO Courier Service Co. Ltd. registered with the U.S. Federal Maritime Commission as a non-vessel operating common carrier, or NVOCC, authorizing it to provide freight-forwarding services for goods shipped from China. That will enable Amazon to expedite and cut the costs of shipping from China Amazon warehouses products to be sold to businesses and consumers through Amazon’s e-commerce sites. Amazon also has purchased long-haul truck trailers, branded with its Amazon Prime loyalty program on the side, to move goods between its roughly 100 U.S. warehouses, the company disclosed in December. On a more local level, Amazon has also been rolling out a service it calls Amazon Flex, an Uber-like service for making local deliveries of various types of products to customers.
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