History
alive last week as Amazon the giant global online retailer is now “The
Amazon Air Force” adding Atlas into its air freight portfolio.
Amazon’s air service agreements with two U.S.
based Aircraft, Crew, Maintenance, Insurance (ACMI) operators, Atlas and
ATSG fields a combined force of 40 B767 freighters into the fourth biggest
air cargo fleet in the world.
 “We
will support package delivery to the rapidly growing number of prime members
who love ultrafast delivery,” Dave Clark, (left) Amazon’s
SVP Worldwide Operations and Customer Service told The Wall Street Journal
on May 5th.
Amazon, announcing the ACMI deal last week with Atlas
for 20 Boeing 767 freighters, doubles down its March 2016 ACMI deal with
Air Transport Services Group (ATSG) for 20 B767 freighters.
Amazon will also occupy a major equity position with
both ACMI operators.
Atlas has granted Amazon warrants to acquire up to a
30% stake in the company at a price of $37.50 a share, after the issuance
of Atlas Air’s common stock.
Amazon also gets a seat on the Atlas board when the
online retailer exercises warrants for an initial 10% stake in the air
cargo operator.
The Amazon ATSG deal announced in March includes warrants
giving it almost 20% of Air Transport Services equity and a board seat.
ATC warrants were priced at $9.73 per share over five years.
The Amazon ATSG/Atlas fleet moving into 4th place worldwide,
in terms of total dedicated freighter aircraft at one company, will trail
integrators FedEx, UPS and DHL, but position ahead of Korean Air (24).
Geoffrey
Is
Amazon securing its own supply capacity or seeking out new profit centers?
Amazon has made a number of major strategic
supply chain investments and agreements over the last year as recently
reported in FlyingTypers (link to previous article). Investing in its
supply chain operations, capacity, and services may simply be a case of
the retail giant securing capacity—and pricing—for peak seasons.
But could it also be a bold move into the logistics and forwarding market,
one many believe is ripe for plunder for a technical innovator with the
volumes to make such investments count?
If so, and if successful, other supply chain
‘disruptors’ with large volumes at their disposal could follow
in its wake.
Much of the attention has focused on what
Amazon’s supply chain ambitions might mean for the biggest integrators
such as UPS and FedEx, which currently do rather well meeting retailer’s
shipping needs.
Although initially the comparison might
not appear relevant, your correspondent was reminded to think about changes
in the commodities supply chains’ business over the last decade
and more where traditional ‘shippers’ have increasingly seen
the value of building up their own transportation capacity.
Perhaps the most well known major strategic move into supply chain management
was the decision by iron ore miner Vale to enter into ship owning. Exports
of iron ore from Brazil—located farther from buyers in China than
major rival producers such as South Africa and Australia—are at
a competitive disadvantage on freight costs. The higher the cost of freight,
the greater Vale’s disadvantage. Back in the world of peak bulk
freight markets in 2007-2008, this was a major issue.
The miner’s ingenious strategy was
to build a fleet of the world’s biggest bulk carriers supported
by a network of trucks, roads, railways, and ports. The plan behind investing
in vessels was simple—to secure its own long-term shipping freight
costs at affordable prices. But the added bonus? By adding so much capacity
to the market the company also hoped to quash freight rate volatility
and sudden price spikes.
The global financial crisis muddied the
waters, but in many ways made the plan even more effective—since
then, barring a brief rally, bulk shipping rates have been at record lows.
When your correspondent bumped into Vale’s shipping manager recently,
he said the ‘new normal’ of low freight markets was excellent
for Vale.
Vale was not the only shipper of dry bulk
commodities to follow a strategy of safeguarding its future by investing
in supply chains and disrupting incumbents. Miners and cement majors have
bought ships or set up huge brokerage arms to manage their freight costs,
but also to play the market at a profit.
Commodities trading houses have also generated vast profits by investing
in their own supply chains over the last decade; Noble Group in particular
moved from being asset-lite to a major transport player in its own right
during this period, hugely increasing its volumes and profits until commodities
prices plunged. By offering supply chain services to producers, buyers,
and other third parties, traders and commodities giants built up immense
cargo volumes, which enabled them to procure transport services at reduced
prices and generate new profit points.
Indeed, in the commodity transport sector
in many parts of the world, conglomerates now control much of the transport
superstructure and infrastructure—railways, truck fleets, ports,
barges, roads, ocean carrier capacity—from which they can generate
profits by granting access and services to third parties.
The dry bulk shipping sector is now commoditized,
fragmented, and over-supplied. Rates look like they will remain bearish
for years. Indeed, the bulk shipping business looks uncannily like the
air freight and container shipping markets right now.
So, what’s next for Amazon? It already
has its own warehouses, last-mile capacity and, now, an air freight network.
It is also entering the ocean forwarding market. Could it eventually become
a global logistics player in its own right?
The rewards of entering the vast logistics
and forwarding business could be manifold; success could simultaneously
bolster its retail business and turn supply chain costs into profits.
By offering factory-to-consumer services to its merchants and other shippers,
it would vastly increase its already immense leverage when buying in additional
capacity from airlines, integrators, and even shipping lines. It could
also put additional downward pressure on freight rates, particularly if
it was able to attract more volumes from third parties. It could also
improve the scale and flexibility of its global service offerings in the
process.
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The idea of Amazon becoming a major rival
to the likes of FedEx and UPS is, at this stage, unlikely—although
with its bottomless pockets and technical ability to simplify services
and transactions for customers, things could change very quickly. But
without a doubt, Amazon has the ability to disrupt a range of markets.
Moreover, it could enter the logistics business in a graded way by cherry
picking the most profitable parts of the business currently dominated
by integrators, such as air freight fulfillment. This would have repercussions
in many transport markets and geographies.
So it is unsurprising that integrators and
3PLs are concerned; many have struggled to adapt the latest technology
to global supply chains. It is hard to imagine Jeff Bezos making the same
mistakes should he decide Amazon could offer better services at lower
prices than incumbents. After all, as high street retailers know, he has
done it before.
SkyKing
For Part I of This Series
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