Can Amazon Rock the Logistics Space with Project Aerosmith?

by Zacks Equity Research   Published on December 21, 2015 |

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If rumors are to be believed, Amazon.com (AMZN - Analyst Report) is preparing to take on the package delivery giants. But is the industry ready for the mayhem that would create?

Remember the retail debacle of Christmas 2013?

Customers were left empty handed as UPS (UPS - Analyst Report) and FedEx (FDX- Analyst Report) failed to deliver goods as promised. Weather conditions, lack of logistical planning and impractical expectations set by retailers were held responsible for the fiasco.

Amazon tried its best to pacify customers by refunding the shipping costs and giving out $20 gift certificates as compensation.

To avoid any such mishaps in the future, Amazon decided to bring the delivery of its own packages as much within its control as possible.

Amazon’s Way

Since its bad experience in 2013, the online retail giant has undertaken several initiatives to enhance the fulfillment infrastructure and lessen its dependence on the “Big Two” delivery services.

Amazon has utilized the distribution centers situated across the country to bring packages closer to customers for the final-mile delivery. At the same time, it has been experimenting with drone delivery; a Uber-like app to compensate buyers for dropping a package on their way to their destination and even allow a few third-party sellers to ship the items directly. It has also tried its hand with an in-house delivery service.

Nevertheless, Amazon still relies greatly upon UPS, FedEx and the Postal Service as profitably scaling up such a logistics-intensive services is not exactly a cake walk.

According to The Motely Fool, “Amazon runs about 35% of its packages through the U.S. Postal Service, 30% through UPS, and around 17% through FedEx. Regional shippers account for around 18% of the total.”

Rumors now have it that the e-Commerce giant may actually be introducing an air cargo operation.

Codenamed “Aerosmith,” the undercover pilot program is probably working on an airborne delivery network along with Air Transport Services Group (ATSG -Snapshot Report) in Wilmington Air Park in Ohio.

As per Vice, an unidentified company contracted four Boeing 767s to run the operation. Since other carriers have clearly denied being the mysterious company, Amazon is the most probable guess.

In response to Motherboard’s query about Amazon’s plan, it said, "We've long utilized air capacity through a variety of great partners to transport packages and we expect that to continue."

The Seattle Times reported that Amazon would take the final call in 2016 about a logistical push and may make an official announcement at that time.

Will the Logistics Industry Players be Affected?

It’s definitely a big deal if Amazon launches its own logistics network. However, it might not really affect the bottom line of either UPS or FedEx. According to Motely Fool, Amazon is only responsible for about 5% of UPS' revenues and less than 4% of FedEx.

However, over the long term, if Aerosmith turns out to be an efficient delivery system, Amazon might offer the service to other shippers, thus affecting both UPS and FedEx.

In the beginning, Amazon will have to lease jets, as it does not have an Air Operator's Certificate. However, that’s not really a major problem. Rather, it would allow Amazon to work with third parties to quickly build out capacity.

Our Take

Timeliness has become one of the most important factors in the e-Commerce space. As competition intensifies, Amazon needs to keep pace.

Creating a logistics service could dramatically cut these costs. Apart from this, bringing the delivery in-house will offer three benefits to Amazon.

First, it will give direct control over delivery thus greater control over customer experience.

Secondly, in-sourcing more of its transportation logistics will help it grow. As per Colin Sebastian, Internet analyst at investment firm Robert W. Baird, “We don’t think third-party carriers are providing enough capacity for Amazon. That’s forcing Amazon’s hand, to some extent.”

Lastly, and according to us the most important —

It is not a secret that Amazon usually builds infrastructure for itself and then sells excess capacity to others at a profit (e.g. Amazon Web Services).

In short, if the Zacks Rank #2 (Buy) company goes ahead with this, it will rock the industry, just like America's greatest rock and roll band, Aerosmith.