Amazon and Atlas to partner up for air transport service arrangement

Following an early March announcement in which Amazon fulfillment services, a subsidiary of e-commerce behemoth Amazon, inked a deal with Air Transport Services Group (ATSG) in which ATSG will operate an air cargo network to serve United States-based customers, Amazon is back at it again in aligning itself with another high profile air cargo carrier.

Earlier today, Atlas Air Worldwide Holdings said it will provide air cargo services to support Amazon’s package deliveries to its customers.

Specifics of this deal includes Atlas operating 20 B767-300 converted freighters for Amazon on a CMI (crew, maintenance and insurance) basis by Atlas Air Inc., Atlas Air Worldwide’s airline subsidiary, in addition to dry leasing by its Titan Aviation leasing unit, according to Atlas officials.

They added that the dry leases will have a term of 10 years, with CMI operations will be for seven years with extension provisions for a total term of 10 years. Atlas also said that these agreements are expected to begin in the second half of this year and segue into full service through 2018.

“We are excited to begin a strategic long-term relationship with Amazon to support the continuing expansion of its e-commerce business and to enhance its customer delivery capabilities,” said President and Chief Executive Officer William J. Flynn in a statement. “We appreciate Amazon’s confidence in our capabilities, global scale and operating excellence.”

And Amazon Senior Vice President of Worldwide Operations Dave Clark said that this partnership will be key in helping to support package delivery to its expanding number of Amazon Prime customers that are leveraging the company’s “ultra-fast delivery, great prices, and vast selection from Amazon.”

The terms of this deal are somewhat similar to Amazon’s previously announced deal with ATSG in which 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.

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.”

Robert W. Baird & Co. analyst Colin Sebastian observed in a research note that between ATSG and Atlas Amazon will be operating at least 40 air freighters over the next 1-2 years, with its sights set on bigger plans for the future.

“We continue to believe that Amazon is in the early stages of building out larger-scale transportation and logistics operations to add capacity beyond existing providers, to lower logistics expenses, and ultimately, to offer specialized 3PL services to third parties.

“We believe Amazon’s ambitions in transportation and logistics are borne out of peak-period capacity constraints, and aims to alleviate some of the stresses on Amazon’s internal fulfillment/logistics network, particularly as network partners (e.g., UPS, FedEx) are unable to accommodate Amazon’s rapid growth. Over time, we continue to believe the natural step for Amazon is controlling more of its own transportation and logistics, including additional air cargo and other transportation/operations, as these are almost a necessity to continue the rapid expansion of Prime and Prime Now.”

Sebastian also noted that Amazon spent around $11.5 billion on shipping in 2015, and explained that his firm estimates a $400 billion-plus market opportunity for Amazon in delivery, freight forwarding, and contract logistics.

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 vision?

“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.”