Amazon leases aircraft fleet in US

Amazon has taken another step in its attempt to build a worldwide logistics operation by leasing a fleet of aircraft in the US and taking a financial interest in the company it is leasing the aircraft from.

Air Transport Services Group Inc (ATSG) of Wilmington, Ohio announced yesterday, 9th March, that it had agreed to the “leasing of 20 Boeing 767 freighter aircraft to Amazon Fulfilment Services, Inc. by ATSG’s Cargo Aircraft Management (CAM)” The leases will be for 5 to 7 years, with the operational leases being for 5 years.

Crucially, ATSG will also be providing “gateway and logistics services” through its subsidiary LGSTX.

In addition to the leasing contracts, Amazon has taken ‘warrants’ in the equity of ATSG to the value of 19.9% of its share capital, a purchase which will be phased over 5 years. ATSG’s market capitalisation was estimated to be approximately US$880m on close of play 9th March.

The move is fairly obviously an attempt to further Amazon’s ambitions to create a physical asset-based logistics capability. This news comes just a few months after the internet retailer applied for a forwarding licence between the US and China, whilst another recent move is believed to be the purchase of a parcel delivery company in France.

There have been various rumours of a project within Amazon, called “Dragon Boat”, which outlines a strategy for constructing a logistics capability to gradually replace the various logistics service providers the company uses at present. The logic for this appears to be two-fold; to absorb the revenues and profits from the third party logistics providers used at present but also to provide parallel services to reduce Amazon’s dependence on such logistics providers and provide it with market bargaining power.

Of course such a strategy can be demanding both in terms of capital and management resources. Certainly Amazon is highly capitalised at present. However, the history of ATSG is cautionary for those attempting to enter the networked airfreight market. The Wilmington Ohio company was the owner of ABX Air which provided aircraft for DHL Express in its ill-fated attempt to enter the US domestic express market. To approach the cost structure of the likes of UPS and FedEx Amazon will need very large volumes of freight and will possibly need to augment LGSTX’s hub operations with its own fulfilment assets. Whilst neither unique nor illogical, it is strategy not without risk in the long-term.

Source: Transport Intelligence, 10th March 2016

Author: Thomas Cullen