Amazon and ATSG ink air transport network deal

By Jeff Berman, Group News Editor
March 09, 2016

In a deal with potentially wide-ranging implications, Amazon fulfillment services, a subsidiary or e-commerce behemoth Amazon, has inked a deal with Air Transport Services Group (ATSG) in which ATSG will operate an air cargo network to serve United States-based customers.

Under the terms of the agreement, Amazon Fulfillment Services will lease 20 Boeing 767 freighter aircraft from ATSG’s Cargo Aircraft Management, with the aircraft operated by ABX Air and Air Transport International, ATSG’s airlines, with gateway and logistics services provided by ATSG’s LGSTX Services. ATSG said the leases for the aircraft will range from five-to-seven years, and the agreement covering operation of the aircraft is for five years.

“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, in a statement. “We are excited to serve Amazon customers by providing additional air cargo capacity and logistics support to ensure great shipping speeds for customers.”

And Dave Clark, Amazon senior vice president of worldwide operations and customer service, said Amazon is excited to supplement its existing network through this deal with ATSG to use these 20 aircraft to ensure air cargo capacity to support one and two-day delivery for customers.

This news comes at a time when Amazon has been front and center in regards to various reports suggesting it may increase its logistics and supply chain operations presence to meet high levels of demand as e-commerce activity continues to increase.

As previously reported in LM, UPS and FedEx handle the bulk of Amazon’s deliveries, but Amazon has attempted to take more control over its supply chain after a mixture of bad weather and a last-minute surge in e-commerce orders delayed deliveries during the crucial holiday season two years ago.

A Wall Street Journal report explained that while it would likely take years for Amazon to establish its own delivery network, Amazon is a “major customer for both UPS and FedEx, helping drive volume growth at the delivery giants. Nonetheless, investors also fear Amazon might have ambitions to someday become a competitor in the market, poaching customers from the delivery giants.”

Shipware LLC President Rob Martinez said that The announcement quadruples the number of 767 aircraft that ATSG has been operating for Amazon since the initial deal was announced last autumn. 

“The ramp from five to twenty 767 freighters by mid-2017 is faster and more aggressive than most pundits anticipated,” he said. “The added capacity enables Amazon to continue move towards its long term goal of greater self-sufficiency and relentless focus on serving its customers.  The Achilles heel in Amazon’s business model has long been its struggle to control shipping costs and the fact it relies on a limited number of delivery providers.  Amazon’s business would be harmed should shipping costs spiral out of control, or if shipping companies provided poor service.  Given delivery performance challenges during peak in recent years, it only makes sense for Amazon to attempt to control more of its own destiny.

Making multiple assumptions regarding the size and quantity of packages, Martinez said the combined airlift could support as many as half a million packages per day, which, he noted is a drop in the bucket compared to Amazon’s estimated daily shipment count of 4+ million pieces, while still a significant start.
Stifel analyst Dave Ross recently told LM that while his firm does not think Amazon will be a global integrator and offer its parcel delivery services broadly to others like UPS, FedEx, and DHL, it does believe Amazon will look to do more and more in-house each year, as its density grows.

What’s more, Jerry Hempstead, president of Hempstead Consulting, said that the increasing pressure of the delivery commitment time has also put pressure of the integrators to devote significant air lift to Amazon to the point where the integrators don’t want or desire to devote their resources to satisfy the needs of one, demanding deeply discounted customer.

“The reality is that Amazon has needs, and they also have cost issues,” he said. “The integrators may no longer desire to add operational costs at the price Amazon is willing to pay, (this is especially true for aircraft lift) and that leaves Amazon to build out their own network. Could they then offer some of those services to other companies who need transport? Perhaps, but the question becomes, would the integrators allow Amazon to try to cannibalize their current customers. Would Amazon want other company’s packages compete for sales that Amazon could have achieved? Would offering service to third parties be a distraction to Amazon’s core vison? The good news for shippers is that the possibility of another service provider, even if it’s in the niche area of deferred residential deliveries is a good thing for everyone.”