Does Amazon need its own air cargo operation?

Discussion
Dec 21, 2015

Amazon is reportedly in negotiations to lease nearly two dozen cargo planes to establish its own air freight operations.

Sources told The Wall Street Journal and The Seatle Times that Amazon is looking to lease jets from Atlas Air Worldwide Holdings Inc. and Air Transport Services Group Inc.

The leasing of the estimated 20 to 25 jets would mark a significant expansion on a smaller trial Amazon has been reportedly conducting out of Wilmington, OH with Air Transport Services Group since September. The jets Amazon is negotiating to lease would likely operate out of Wilmington Air Park, which previously served as a major facility for DHL until 2008.

The reason Amazon wants to build its own cargo operation is to lower its reliance on third-party carriers, which have been challenged meeting the growing demands of e-commerce. Delays in 2014 caused holiday shipments to arrive late.

While more efficiently moving packages, Amazon would still more than likely use UPS, FedEx and the USPS for deliveries to doors, at least initially. But an analyst told The Seattle Times that Amazon could open up extra space on its jets to other companies to become competition to third-party carriers.

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With Amazon Prime’s allure tied to free shipping, another incentive for Amazon is to gain further control over shipping costs. The company has introduced its own fleet of trucks and couriers, is testing drones, and recently rolled out thousands of truck trailers to ship merchandise between distribution facilities to better control the last mile of delivery.

A final decision on the cargo operation is expected by the end of January, The Seattle Times reported. Noting that it takes months to convert older passenger planes to freighters, the Journal said Amazon hopes to phase the planes into operation over the next three years.

What are the pros and cons of Amazon developing its own air cargo operation? Should Amazon be looking to supplement or replace third-party carriers?

Please practice The RetailWire Golden Rule when submitting your comments.
Braintrust
"Amazon doesn’t need its own air fleet, but it knows that owning its supply chain gives it more economic leverage and control of customers’ experience."
"The pros would first be ownership, which they can control and move planes around where demand is highest. The initial cost of the planes would be huge, but Amazon is growing, and the cash will be there."
"On the surface, this may make sense. But, is this a business Amazon wants to be in? Are they a retailer or a shipping company? We all know Amazon has become much more than a typical retailer."

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21 Comments on "Does Amazon need its own air cargo operation?"


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Keith Anderson
Guest
5 years 6 months ago

Amazon doesn’t need its own air fleet, but it knows that owning its supply chain gives it more economic leverage and control of customers’ experience.

Amazon will likely always rely on third parties (held accountable through world class performance analytics), but it will also continue to invest in its own infrastructure and capabilities, which it knows how to run at maximal capacity.

Paula Rosenblum
Guest
5 years 6 months ago

This is a very complicated question. I don’t think Amazon is paying excessive rates to its carriers. As I’ve said many times, the problem with the company’s shipping costs is the volume of air it ships. That’s not going to change by buying a fleet of planes. It will distract us from the core problem for a while, though. Whether it is their own planes, or the planes of others, there will be a lot of air in those containers and fewer orders will be in every delivery.

Having said that, gas is currently very cheap (and should be cheaper by rights) so if they are ever going to do it, I suppose now would be a good time.

I’m old enough to think that retailers should be good at retailing — not at flying planes, drones, and whatever. There are some things we just should not try at home. But Amazon is Amazon …

Frank Riso
Guest
5 years 6 months ago

The pros are obvious: all deliveries on time during the holidays. And the cons are taking on FedEx, UPS and USPS as a competitor. Either way it is a challenge to Amazon since for at least nine months out of any year they would be experiencing a huge cost. So the right move, if any, is to supplement their third-party providers during the three months of the holiday season. Another thought is to secure a portion of the fleet of one of their partners for that time period, giving Amazon a big competitive advantage. Do we think there is room for another delivery company that only deals with online retail, so that all packages are on time?

Mohamed Amer
Guest
Mohamed Amer
5 years 6 months ago

Pros: greater direct control over order deliveries, customer service, flex capacity during peak season, business risk reduction. Cons: initial increased costs, transition from pilot to scale and from supplement to replacement model for third-party carriers, and the inherent risk of any new business model.

The phase-in timeline is sufficiently long (article states three years) that much can change as Amazon works through the trade-offs in delivered value between cost increase and greater control.

Tony Orlando
Guest
5 years 6 months ago

The pros would first be ownership, which they can control and move planes around where demand is highest. The initial cost of the planes would be huge, but Amazon is growing, and the cash will be there.

The cons would be developing a trained staff of pilots, who would demand steady work and excellent pay w/ benefits. Negotiating with the airports to allow planes to land and get serviced properly will need to be done. They are quite good at logistics, so adding in-flight logistics to their deliveries will take some time, as this piece is critical to get the inventory quickly to the warehouses that need it the most. I’m sure there are other barriers, as well as some benefits, but these to me are some of the obvious up-front issues to address first.

Steve Montgomery
Guest
5 years 6 months ago

The upside appears to be further vertical integration. However, the cost savings are unknown. While the company is known for many things I doubt that it can compete with FedEx, UPS, etc., on logistical expertise.

On the other hand, none of the carriers are going to say they don’t want Amazon’s business nor is the initial volume going to cause any of them to raise their rates to Amazon so the downside is pretty small.

Ryan Mathews
Guest
5 years 6 months ago

This is economic blackmail — “Keep our rates low and our service levels high or we will buy our own force and truck fleet!”

Sure, it’s easy to say this gives them more control, but it really doesn’t. Their planes are subject to all the same problems as FedEx’s and UPS’ fleet. Ditto for the trucks. What they clearly want is to transfer the infrastructure operating costs to the third-party carriers while extracting priority handling. So at the very most Amazon might want to look at supplementing existing vendors, but no more.

They don’t want to take on all that cost, pressure and problems. Besides, this way when a package is late they can blame their vendors. If it is just them, big customer service issues start to surface.

Tom Martin
Guest
Tom Martin
5 years 6 months ago

Amazon admittedly tried pilot programs before on offering certain services and products and pulled back when they haven’t performed as expected. It’s an entirely different ballgame when we’re talking about building their own cargo shipping resources. This won’t be an endeavor that they can abandon if things start to go sideways. Their commitment to owning the planes shows that they are willing to take on the shipping giants in the U.S. They would retain more control over the timeliness of their product deliveries and in our current retail environment, that is one of the most important aspects of the business. Their Prime delivery service and seamless returns have been a differentiator for the brand and this move will allow them to be even more effective. There are risks, but they are outweighed by the benefits of having more control over the shipping process.

Anne Howe
Guest
5 years 6 months ago

This level of control over the shipping pipeline will come at a huge cost, but Amazon has access to one of four American households via Prime, and is quite clearly making an effort to make sure they deliver on the brand promise without undue reliance on the other freight carriers. But are they making too much of a back-end investment?

I’m most interested to see what Amazon will do in the future with the last point of contact the Prime customer sees or experiences. I’ve had experiences with third-party deliverers that leave packages in plain sight on my porch where they get wet in the rain. Not a “Prime” kind of brand experience, to be sure.

So at what point is the risk higher?

Peter J. Charness
Guest
5 years 6 months ago

Somehow I think Amazon did a reasonable cost/benefit analysis on this one. They’ve been vertically integrating since they starting supporting authors directly.

James Tenser
Guest
5 years 6 months ago

The number one pro is leverage over the third-party carriers: “Give us priority handling and low rates, or we’ll skim off the highest-volume routes and move the product ourselves.”

The number one con is loss of leverage: “Go ahead and take away those shipping routes, but good luck asking us for economical surge coverage during the holiday peak.”

Amazon is likely to uncover mad complexity operating a hybrid air delivery system, but it certainly knows that already. “Leaks” like this one are calculated to keep competitors and vendors guessing while Amazon decides at which disciplines it can afford to excel.

Kenneth Leung
Guest
5 years 6 months ago

It is about control and costs. Having your own airfreight fleet allows it to have some better control over the distribution channel especially given the volume of mixed packages it needs to move around. This could be a short-term test to see if it can do better than third-party carriers (after all, it is a lease) in terms of visibility, cost and reliability, and also can be used as part of rate negotiations.

Al McClain
Guest
Al McClain
5 years 6 months ago

As much as I admire Amazon, it appears to me that they should decide what they want to be, as they can’t be everything. FedEx, UPS and the USPS all have some major issues, but Amazon would be better off with one as a primary partner and the other two as secondary partners, rather than trying to reinvent the wheel and creating new enemies in the process. Hard to see how Amazon can juggle as many balls as they are trying to without dropping some, and shipping would be a big ball to drop.

Ed Rosenbaum
Guest
5 years 6 months ago

The smart move would be to use their own fleet as a negotiating ploy to ensure lower costs. I can’t see investing in a fleet of planes, pilots, crew, maintenance down time and insurance to do something they can do just as well by having a strong relationship with the carriers they are currently using rather than becoming a competitor.

Shep Hyken
Guest
5 years 6 months ago

On the surface, this may make sense. But, is this a business Amazon wants to be in? Are they a retailer or a shipping company? We all know Amazon has become much more than a typical retailer. This seems to be a natural extension of their business, yet there comes a point where a company must choose what lane they want to play in. We’ve seen companies grow like this, only to divest and spin off businesses that drag down the profitability of the company.

I’ve said it before and I’ll say it again, the Amazon people are pretty darn smart. If anyone has thought this through, they have. They made very few bad decisions compared to the many, many good ones they’ve made. Let’s hope this is one of the good ones.

Ralph Jacobson
Guest
5 years 6 months ago

It all comes down to cost, of course. If the numbers work out to do this, then go for it. Shipping costs are going up, however, the one exception to that is fuel prices. And fuel is the largest controllable expense for airlines, so this may indeed be something to try on the scale we’re talking about.

Lee Kent
Guest
5 years 6 months ago

While having more control over the entire supply chain is a plus to maintaining top service ratings, It is far more important to understand your core competencies and create an infrastructure that plays to them.

Owning an air cargo operation would not be doing that. Amazon should be working closely with their suppliers and seeking out new alternatives while making sure that they maintain as much control as possible.

For my 2 cents.

Gordon Arnold
Guest
5 years 6 months ago

The time is right for this replacement expansion because of the abundance of people and materials to make it happen at bargain prices. A move like this will put the competition from both aspects of retail, e-commerce and B&M, a lap or two behind in the race to grow market share. If they can pull this off, the opportunities for worldwide expansion and domination ahead of even the government subsidized competition will be most obvious in as short amount of time as in 3-5 years. This is very exciting stuff and will be a true revelation of Amazon’s executive skills.

Dave Wendland
Guest
5 years 6 months ago

This is the very essence of “vertical integration” and Amazon is becoming masterful at that. End-to-end customer experiences may require this. Time will tell what shape it will finally take as the piloting and tweaking provide valuable lessons.

Arie Shpanya
Guest
5 years 6 months ago

This is an ambitious plan, but nothing out of the ordinary for Amazon. Developing their own air cargo operation speaks to a few different points: 1. Amazon has vast resources. 2. They are forever committed to fast delivery and exceeding customer expectations.

Amazon has learned how to dominate the online retail game and this plan would help them control more of the process at a lower cost.

Naomi K. Shapiro
Guest
Naomi K. Shapiro
5 years 5 months ago

There’s nothing like vertical management for retail products, but Amazon shouldn’t throw out the baby with the bath water, for it will need the other services (if it doesn’t put them out of business)! It would be typical Amazon to have its own air cargo operation for the reasons listed above — more control, better timing, less dependence on others, savings, etc.

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Braintrust
"Amazon doesn’t need its own air fleet, but it knows that owning its supply chain gives it more economic leverage and control of customers’ experience."
"The pros would first be ownership, which they can control and move planes around where demand is highest. The initial cost of the planes would be huge, but Amazon is growing, and the cash will be there."
"On the surface, this may make sense. But, is this a business Amazon wants to be in? Are they a retailer or a shipping company? We all know Amazon has become much more than a typical retailer."

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