Amazon: customer, predator, or saviour?

posted on 4th April 2018

Amid much speculation, the e-retail giant has unveiled two air network partnerships in the US, with ATSG and now Atlas Air. Stuart Todd and Will Waters investigate the extent of its air logistics ambitions and the implications for carriers, intermediaries, and airports

Speculation on just how deeply Amazon plans to participate in logistics and air cargo transport has reached fever pitch in recent months, and in March this year the online retail giant confirmed that its supply chain ambitions lie well beyond local warehousing and distribution by signing a series of agreements with aviation company Air Transport Services Group (ATSG), which will operate an air cargo network to serve Amazon’s customers in the US.

The agreements focus on the multi-year lease of a fleet of 20 B767 freighters flying on behalf of Amazon Fulfillment Services, but provision is also made for Amazon to take a stake of almost 20% in ATSG, whose biggest customer is DHL. The duration of the 20 aircraft leases will be five to seven years, while the agreement covering operation of the aircraft is for five years.

Although the announcement confirmed rumours about the network that had circulated since last October, it left plenty of questions unanswered about the internet retail giant’s ultimate logistics ambitions and the ultimate aims of its alliance with ATSG – as well as how the network will work, operationally.

But before the air freight sector had fully absorbed the implications of the ATSG deal, a second 20-aircraft deal was unveiled. Under a 10-year lease agreement, Atlas Air Worldwide Holdings (AAWW) will supply Amazon with 20 B767-300 freighter aircraft and the right to acquire a stake of up to 30% in the US airline and aircraft-leasing group. Operations under the agreements are expected to begin in the second half of 2016 and ramp up to full service through 2018.

At the time of writing, AAWW had not yet received specific schedule details from Amazon, but it expects that the aircraft will be mostly or exclusively deployed within North America. Indeed, the deal was unveiled just before this issue of CAAS went to press, and therefore most of the analysis in this article is based upon what was known prior to the Atlas agreement. Nevertheless, initial analysis of the Atlas deal suggests that it is, essentially, more of the same: similar to the ATSG agreement in the sense of using similar aircraft on long-term leases to serve Amazon customers in North America – and also including the rights to take a significant stake in the airline group at pre-announcement prices.

Amazon’s senior vice president of worldwide operations, Dave Clark, says the deal with Atlas Air is “to support package delivery to the rapidly growing number of Prime members, who love ultra-fast delivery, great prices, and vast selection from Amazon”.

Commenting prior to the AAWW announcement, Brian Clancy, managing director of US-based transport consultants Logistics Strategy & Capital, says he believes Amazon’s underlying objective is procuring and controlling network resources. “They want to know more about the economics of air freight line haul, handling, and delivery operations than their service providers,” he says. “They are hiring former FedEx and UPS employees to build up the intellectual capital base. They do not seek to operate airlines and delivery fleets unless absolutely necessary, which is not the case at this point. They have the buying power for services and will use this knowledge to get the best price.”

Opportunistic experimenter

He describes Amazon as “an opportunistic experimenter” that seeks to understand all dimensions – operational and economic – of the air freight ecosystem so it can improve its position as the ultimate general contractor and 4PL for e-commerce delivery. “It is opportunistic because it targets distressed freighter and hub assets; for example, a former DHL hub at the former Wilmington, Ohio air force base,” he explains, noting that Amazon was also reportedly interested in Germany’s Hahn airport, also a former air force base.

“It (Amazon) is an experimenter because it takes small-scale versions of the larger network problem and operates it to see how it behaves. It also has very patient capital in the form of long-term shareholders that understand the trade-off of forgoing profits today in order to build the ‘moat’ around the future franchise and attendant profit streams.

“One of the most important experiments it will conduct is how to manage peak season in the US, which occurs over a two-week period and creates the largest, absolute amplitude of parcel demand. Access to ATSG aircraft and DHL’s former Wilmington, Ohio hub will enable the experiment and a future platform to operate a java-script network to augment FedEx, USPS, and UPS. It could use Hahn as a similar platform for Europe,” Clancy adds.

Amazon Germany declined to comment on the company’s possible interest in Hahn airport, which is up for sale and is located close to Amazon’s logistics centre in Koblenz. A spokeswoman for Hahn airport authority said media reports claiming Amazon was planning to set up a base at the airport or even potentially acquire it were “all rumours” and that there had been no talks between the two parties.

But she said Hahn Airport “would offer several benefits for a company like Amazon”, including its location in the middle of Germany, and – “unlike its larger competitors” – the airport’s “quite simple and therefore quick logistics processes”, with short distances from landside to airside.

Last winter, Amazon reportedly chartered a B737 freighter in the run-up to Christmas, which carried out six-times weekly flights between mainland Europe and the UK, although Hahn is not thought to have been one of the airports used.

It remains unclear whether the charter was a move to test out the potential for Amazon to operate its own-controlled European air operation or simply the provision of extra capacity in the run-up to the festive break.

European plans

However, Amazon does have plans to further develop its logistics presence in Europe and offer its network to other retailers, in May launching its Pan-European Fulfilment by Amazon (FBA) programme. The online retailer said this would enable sellers to deliver their inventory to a local fulfilment centre for Amazon to take care of the logistics, automatically shipping sellers’ products across its European Fulfilment Network according to the anticipated local customer demand. Amazon will then pick, pack and ship orders to customers from the closest fulfilment centre where the product is available, as well as handling all customer service inquiries for the seller, creating a highly integrated, value-added logistics offering.

Returning to the US operation, in March ATSG’s president and CEO, Joe Hete, said the 20 B767 freighters leased to Amazon will be delivered by mid-2017, revealing that ATSG was already operating five of the aircraft for the retailer. Asked if the 20 aircraft for Amazon may be increased over time, Hete said: “If the network is successful, we would hope that there would be some additional expansion opportunities there. But we would defer that question to Amazon.”

These statements by Amazon and ATSG about the partnership largely confirmed reports late last year that Amazon was trialling its own flights out of Wilmington, ATSG’s main operational base, using infrastructure formerly used by DHL Express, as the cornerstone of a project to develop its own air cargo operation, reportedly to avoid delays caused by integrators systems that had struggled to keep up with the rapid growth of e-commerce.

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

Contacted by CAAS, ATSG declined to comment further on the operational elements of the agreements such as the airports that were currently and projected to be part of the network, the handling and distribution infrastructure used, and the projected volume of shipments, while Amazon also declined to respond to questions.

Nevertheless, CAAS understands that the initial network, operating since last September, involves a hub-and-spoke air freight operation out of Wilmington, with four flights a day to and from four other airports: Allentown, PA (ABE); Ontario, CA (ONT); Tampa (TPA); and Oakland (OAK). Amazon is understood to have distribution centres about 30 km from ABE and ONT and within 100 km of TPA and OAK.

Adriana Diener, global lead and managing director for Freight & Logistics at consulting firm Accenture, argues that the agreement with ATSG “very much aligns with Amazon’s earlier decision to obtain ‘NVOCC’ (non-vessel-operating common carrier) status to facilitate ocean transportation between China and the US”. Amazon is understood to have registered a Chinese subsidiary as a freight forwarder with China’s transport ministry, obtaining a licence to ship cargo out of the country as well as filing an application with the Shanghai Shipping Exchange to serve as a shipping broker for 12 trade routes, including Shanghai to Los Angeles and Shanghai to Hamburg.

Diener observes: “The freighter lease agreement (with ATSG) is a further step for Amazon to not only further control its supply chain, but also to position itself to sell additional services related to the transportation process.”

Third-party capacity

On the question of whether Amazon will offer up spare capacity to other shippers, she says: “It’s a possibility. As Amazon moves into the area of asset-based transportation, a key competency it needs to have is to optimize the capacity to ensure costs are covered. This means that in order to ensure capacity is maximized on certain routes or departures, Amazon may seek to take an opportunistic approach with other shippers to increase the overall load factor of the aircraft.”

However, she underlines that moving into the transport provider space would mean Amazon having to invest in other capabilities that it can provide to other shippers to ensure a more end-to-end solution that is competitive with other carriers. “This includes having land-side transportation options to facilitate pick-up and delivery to and from the aircraft, booking and capacity management capabilities to ensure that other shippers loads are appropriately prioritized, and customer service functions are in place to manage disruptions and other customer inquiries. This will take time for Amazon to extend these processes to manage customers of a transportation solution, but it is definitely within Amazon’s reach.”

At the IATA World Cargo Symposium in Berlin in March, the secretary general of the Global Shippers’ Forum, Chris Welsh, said: “The announcement by Amazon that it plans to save over US$1 billion annually in its air freight bill by starting its ‘own account’ air freight operations is a wake-up call for the air cargo market that it needs to speed up and demonstrate that air cargo is a premium service by adding real value to customers. It is a clear indication that the air cargo industry must be more innovative and customer-focused.”

So, can Amazon’s move into freighters have a transformative effect on an industry often taken to task for struggling to find systems to manage complex bookings and track shipments that can jump between several carriers on a journey?

“Amazon’s investment (in air freight) does improve its supply chain control and will contribute to Amazon’s capability to have a better end-to-end view of the flow of goods from manufacturer to final customer,” says Denier. “That said, the investment by Amazon may not fully address the challenges with tracking as there are still likely to be many different carriers and partners involved to complete a journey from origin to destination.

“Amazon’s initiative will provide a good proof-of-concept for this approach, but more work needs to be done by the industry overall to standardize communication standards and protocols, modernize technology for electronic communication, and improve real-time tracking capabilities.”

Regional focus

Panalpina’s Lucas Kuehner told April’s Nordic Air Cargo Symposium in Stockholm that he believes Amazon’s involvement in air freight is likely to remain more focused on regional or domestic networks rather then intercontinental movements. And in an interview (pages 20-26) in this issue of CAAS, Cathay Pacific’s Mark Sutch says he does not believe Amazon wants to be flying intercontinental B747 aircraft and would much rather let those whose core business it is do that. But what Amazon does want is complete control over its capacity, he says, which is natural as e-commerce grows and customers become more and more demanding – particularly in terms of visibility. He believes forwarders will continue to retain their vital role as an intermediary and grow in strength, but believes they need to allow airlines to have more contact with, the shippers, to understand their needs better.

Also in an interview article in this issue of CAAS, Kuehne + Nagel’s Tim Scharwath says he believes that the heavy cargo business is too complicated a business for a pure tech player to easily take control of. “The big disruptor who has a network which he manages himself: I don’t see that on the market,” he says. “We’re 126 years old, have 800 offices in a hundred countries, and we manage a network – and the customer needs someone to manage a network.”

In late April, Amazon’s CFO Brian Olsavsky was questioned by analysts about Amazon’s logistics plans and whether the company would consider delivering items for other logistics or delivery companies. He replied: “The reason we add logistics capability and transportation capability is so we can serve our customers faster, and we’ve needed to add more of our own capacity to supplement our carriers and our partners. They are still great partners and will continue to be for the future, but we see opportunities where we need to add additional capacity, and we’re filling those voids.”

A bolder plan

Nevertheless, logistics and forwarding companies remain wary of the online retail giant’s logistics ambitions after Amazon documents reported by Bloomberg News earlier this year revealed an apparently far bolder plan that would place ‘Global Supply Chain by Amazon’ at the centre of a logistics industry that would amass inventory from thousands of merchants around the world and then buy space on trucks, aircraft and ships at reduced rates. According to the report, Amazon would partner with third-party carriers to build the global enterprise and then gradually squeeze them out once the business reaches sufficient volume and Amazon learns enough to run the networks on its own.

Whether its deals with ATSG and Atlas ultimately end up merely supplementing the capacity provided by its delivery partners during peak periods for shipments such as Christmas or replaces them may depend on how complicated it finds air freight to be, and whether it finds a way to simplify the business. But the desire by Amazon and other e-retailers to deliver their products ever faster to customers suggests some kind of role for air cargo on behalf of this hugely rapidly growing line of business. That is probably at the very least good news for certain cargo airports. Which other players within the current air logistics chain will also benefit will emerge in due course, according to what works best for this ‘opportunistic experimenter’.

But airport consultant Michael Webber, president of Webber Air Cargo, warns US cargo airports not to be misled into expecting a new golden era on the back of Amazon’s plans. Commenting prior to the AAWW announcement, he says: “That Amazon was able to move into an already-vacant air cargo hub points to the surplus capacity that exists in a system that absorbed the consolidation of Airborne Express’s network into DHL’s and then DHL’s exit from the US domestic market, as well as the losses of BAX Global, Emery Worldwide and Kitty Hawk.

No ‘gold rush’

“Amazon’s development of a US freighter network may backfill a few surplus facilities left from all those carriers and could be particularly helpful to the Wilmington, Ohio community abandoned when DHL moved its hub back to Cincinnati. I wouldn’t dismiss any of those benefits to the small number of airports affected, but it hardly portends an air cargo ‘gold rush’.”

He says Amazon’s actions to date largely suggest a diversion of packages from FedEx and UPS “and, therefore, a cannibalization of existing business”, leading to a broadly neutral outcome for airport operators, rather than much of a stimulus.

“At most, this looks like a potentially helpful partial recovery for the former DHL hub and perhaps a minor positive impact on already high-density routes to feed a regional hub system similar to what FedEx and UPS have, but on a far smaller basis,” he says. “Beyond the top 25 US airports in annual cargo tonnage, FedEx and UPS have combined market shares routinely in excess of 90%.

“It wouldn’t surprise me if some of those airports, ‘aided’ by consultants, already entertain unrealistic notions of Amazon-fuelled growth,” he notes.

But while it may be unwise to expect an air cargo ‘gold rush’ from Amazon, its commitment to a second set of 20 freighters via the Atlas agreement – and on a 10-year lease – indicate that this is not a short-term experiment, and it appears to be an expanding one. Whether it continues to further increase in scale is unclear, for now. But with Amazon and e-retail expanding at such a rapid rate, so is the need for express distribution. Few had predicted these initial moves, and so who would now bet against it?