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Home»Air Cargo»Amazon Becoming a Logistics Company
Air Cargo

Amazon Becoming a Logistics Company

Once Known Only As An On-line Distribution Giant, Amazon is Now Preparing to Ship Directly to the End User
Metropolitan Airport NewsBy Metropolitan Airport NewsMarch 6, 2019No Comments6 Mins Read
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Amazon Air

Amazon is becoming a player in the logistics and shipping industry. That’s what analysts think about the recent expansion of Amazon Air to include 50 planes and several new regional hubs, including a $1.5 billion hub opening in northern Kentucky in 2021.

According to Wolfe Research, the e-commerce giant is now handling its own shipping for 26 percent of online orders. Amazon said that it can “transport hundreds of thousands of packages per day” with its new “dedicated air network” and that its fleet of planes make “two-day shipping possible almost anywhere in the U.S.”

“Amazon is looking to become a logistics company in their own right,” said Ravi Shanker, Morgan Stanley’s North American transportation analyst. “We think that Amazon will be a top logistics provider, whether it’s in trucking or in air, in the coming years. I think the question is just how quickly they will ramp that operation.”

Amazon is even acknowledging the importance of this business to investors: In its 2018 annual financial filing released earlier this month, it listed “transportation and logistics services” among its group of competitors for the first time.

Why it makes sense for Amazon to control shipping

Amazon’s shipping costs jumped 23 percent last quarter, reaching a record $9 billion. It spent $27 billion on shipping in 2018. The more of these steps Amazon can control itself, the more it can control the costs.

“We estimate that Amazon will pay about $6 a box to move this themselves on their own air network,” said Morgan Stanley’s Shanker. “Versus what we estimate Amazon paying UPS and FedEx: about $8 or $9 per box today … and given Amazon’s scale, that could be a couple of billion dollars at least in savings.”

By bringing shipping in-house, Amazon also has more control over the speed of deliveries.

“Amazon’s going to do more of its business in-house and they’re going to just outsource the costly operations that they don’t want to build capacity for, they’re going to outsource it to carriers like UPS and FedEx,” said Tarek Abdallah, Northwestern University assistant professor of operations management. “By gaining more control over their supply chain, they can make sure to provide a better service because if a customer does not receive his package on time, they’re not going to blame UPS or FedEx, they’re going to blame Amazon.”

“If they could shave any cent out of this delivery route, this can be passed out to their sellers. And this means that their sellers could offer their products at a cheaper cost. And that gives them a huge advantage in this online e-commerce space,” Abdallah said.

Inside an Amazon Air Operation

Amazon Air currently has planes at 21 U.S. airports and it’s opening new regional hubs this year in Fort Worth, Texas, Wilmington, Ohio, and expanding one in Rockford, Illinois.

Amazon will open a $1.5 billion air hub at Cincinnati/Northern Kentucky International Airport in 2021. There it will have capacity for 100 planes — double the number in its fleet now — and will plan to schedule 200 flight landings and departures each day.

One bustling Amazon Air operation is at Ontario International Airport in Southern California. It recently dethroned Atlanta as the country’s No. 1 airport for outgoing cargo. “We have about eight flights a day on Prime Air,” said Ontario International Airport Deputy Executive Director Atif Elkadi. “I know when they started here a couple of years ago it was maybe three or four flights a day and it has steadily increased.”

Some of the Amazon aircraft at Ontario International are repainted with blue Prime branding, while others still carry logos of the airlines Amazon leases the planes from: Atlas Air, ABX Air and air cargo conglomerate Air Transport Services Group.

Once Amazon packages are offloaded from Amazon planes, they’re sorted on site at the Ontario airport, loaded onto Amazon semitrucks and sent out to one of its 185 fulfillment centers. Amazon Air has gotten so busy in the region that it recently opened a new center at March Air Reserve Base in Moreno Valley, just 30 miles from Ontario International.

Amazon Is Not Just Bulking Up in the Air — It’s Taking On the Ground As Well

Amazon, UPS and FedEx all rely on the U.S. Postal Service for the especially difficult and expensive job of taking packages from fulfillment centers to individual doorsteps.

That’s why Amazon ordered 20,000 vans last year and has begun testing more advanced delivery methods like Scout sidewalk robots. In Los Angeles and London, it’s testing out a program called Shipping With Amazon. Sellers who’ve used the service say Amazon offers shipping rates at half the price of UPS.

FedEx Says It’s Not Worried

As its own shipping capacity goes up, Amazon’s reliance on FedEx, UPS and the U.S. Postal Service drops. That spells trouble for these partner organizations. After Morgan Stanley detailed Amazon Air’s expansion to investors in December, FedEx and UPS shares dropped 20 percent from recent highs. “If Amazon Air did not exist at all, we reckon that UPS and FedEx revenues would be about two percent higher than they are today,” Shanker said.

But FedEx’s senior vice president of integrated marketing, Patrick Fitzgerald, said he’s not worried at all. “We honestly don’t see a world where Amazon would be a competitor to FedEx,” Fitzgerald said, because, “there is no sensible way to compare them.”

“You can carve out some local delivery in highly dense markets. That’s in no way a competitive threat to the broad portfolio of business that FedEx does.” Fitzgerald pointed out that FedEx has 700 planes, while Amazon only has 40.

“In a given week, Amazon flies 671 flights. The FedEx number of flights per week is closer to 13,000,” Fitzgerald said. “Amazon is a revolutionary e-commerce company, but that doesn’t mean that Amazon can just suddenly decide to become competitive with FedEx in transportation.” 

He added: “The next big thing in e-commerce is who figures out how to do this one-hour delivery or same-day delivery. This is very expensive, but whoever figures it out first will get a huge advantage in this market.”

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