Amazon.com Inc. (AMZN) provided confirmation of its ambitions in logistics this week by signing a lease for 20 Boeing 767 jets from Air Transport Services Group (ATSG) for a period ranging from five to seven years. In addition, the Seattle-based retailer also bought an approximately 20% stake worth around $125 million in the air freight company.
But the company was quick to deny that it was in competition with other logistics firms, such as UPS Inc. (UPS) and FedEx Corp. (FDX). Instead, a spokeswoman was quoted as saying that the tie-up would quicken the delivery of its own products and also that of third-party sellers on its site who use its service called "Fulfilled by Amazon." (See also: Bezos' Blue Origin to Start Space Tours in 2018.)
Taking Stock of Amazon's Current Setup
Rumors of Amazon's entry into the logistics space have been rife in the last year. Per its usual policy, the company has neither commented on nor denied the rumors. Ironically enough, the company's success is a key driver for its move into logistics. UPS and FedEx were both unable to cope with an increase in Amazon's sales in the past. Given their failure and the fact that the company has been pushing more customers to its Prime service by hiking delivery charges, Amazon has no option but to invest in its own logistics operations.
Purely by the numbers, Amazon already has a pretty big logistics setup. As of October last year, it had 167 distribution facilities and 92 centers to sort out packages before they are sent through the mail. The company is also bullish about the use of drones to deliver its packages and is at the forefront of changing legislation related to it. The agreement with ATSG will help deliver Amazon's orders to the nearest fulfillment center quickly and, subsequently, drones and the company's increasing network of truck operators will shorten the delivery time between fulfillment centers and the customer's home.
Will Amazon's Entry Make A Difference To The Logistics Industry?
According to Baird Equity Research, the delivery and logistics market is worth $400 billion. In October of last year, Colin Sebastian said that even a 1% share would translate to significant revenue for Amazon. He further stated that Amazon was the “only company with the fulfillment/distribution density and scale to compete effectively with global UPS, FedEx, DHL, and with an investor base that historically is tolerant of margin volatility relative to the “profit mandates” of traditional Transportation & Logistic shareholders, a significant competitive advantage in our view.”
It is difficult to gauge the impact of Amazon's entry into the logistics space on competitors because large players, such as UPS and FedEX, have not divulged the exact share of Amazon's shipments to their business. That said, UPS has consistently stated the growing importance of e-commerce to its bottom line in successive annual reports, and the Global Small Package Delivery segment (which accounts, most probably, for Amazon's share) of its operations contributes the maximum revenue to its bottom line.
In a statement to the Seattle Times earlier this year, Frederick W. Smith, FedEX's CEO, said that FedEx was one of only two integrated global transportation networks operating at a significant scale in the United States today and only one of three major delivery networks in the U.S., the other two being UPS and the United States Postal Service. That’s not likely to change in the foreseeable future, as these networks are very capital-intensive and information-intensive.”
The Bottom Line
It is still early days to pop open the champagne bottle as far as Amazon's entry into the logistics business. However, with official confirmation of its lease, the company has made its intentions clear. Whether it is able to leverage its existing operational scale and build it out into the next generation of logistics solutions remains to be seen.