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Amazon vs carriers – battle for the skies (part two)


In the first part of this feature, which you can find here, we discussed some of the industry speculation regarding Amazon leasing aircraft and its supposed ambitions to make waves in the air freight business.
Amazon is not a company that has ever rested on its laurels; it is constantly in motion. But will that motion take it into the skies?

Well, it certainly looks that way. Although Amazon won’t be drawn, there are plenty of other sources discussing the plane plan in sufficient detail to suggest that, yes, something is indeed going on. But the idea that the carrier sector en masse ought to be worried now, in 2016, begs a closer look.

First, some numbers.

Amazon, as everyone is inescapably aware, is huge. In 2014 it recorded revenues of $88.99bn. How does that stack up against the carrier sector? And given that we’re talking about air freight in this instance, we’ve restricted ourselves to looking at the big names in the international market, who currently operate their own fleets of aircraft.

Latest recorded revenues for each:

  • FedEx – $47.45bn
  • UPS – $58.2bn
  • DHL – $61.48 (converted from €)

In terms of fleet size, we’re led to believe by the speculation originating from Seattle that Amazon may have as many as five planes in operation currently, via a trial service based in Ohio and operated by Air Transport Services Group, and one in Europe. There may be 20 more added in the US.

Fleet size of big three carriers:

  • FedEx – 390
  • UPS – 238
  • DHL – 25

Numbers alone can be crude weapons of comprehension, but they can also provide some useful perspective.

Flying a fully laden Boeing 747 from New York to London – one of the shorter trans-Atlantic routes – costs more than $50,000 in fuel alone. The smaller 737 planes, one of which is believed to be the subject of the European service Amazon is running, cost upward of $10,000 to refuel. Leasing a Boeing 767 can cost around $300,000 per month for a used plane, and double that for a new one.

You could argue those numbers are chicken-feed to the likes of Amazon, perhaps. But grab a calculator or a pencil and paper and work out the running costs of a fleet large enough to represent a significant threat to either UPS or FedEx, both of which have fleets of aircraft large enough to put them in the global top 10 airline rankings.

It’s also worth bearing in mind that, at the moment, fuel prices are very low in relative terms – as much as 30% lower now than in recent years. The likelihood of that cost increasing at some point in the future, given the volatility in much of the world’s oil producing regions, should not be ignored.

Of course all of this is within Amazon’s means, but equally it is no small undertaking. Amazon’s current approach to warehouses and DCs, here in the UK at least, is one of bringing in contracted or sub-contracted resources to supplement a very lean Amazon-owned part of the operation; is that a model that will work in the event it decided to go head-to-head with FedEx and/or UPS in the skies above our heads?

The UPS comparison garnered a great deal of interest in the US from people watching this story ferment. Some of the comments we have seen online are as follows:

» “I have seen several reports … of Amazon shipping items in boxes 3-4 times the size needed … it’s important for Amazon to cap down on these types of issue to prevent overages in shipping charges.”

» “UPS has revenue of $58bn. This means Amazon accounts for less than 2% of revenue.”

» “Amazon will still find itself at the mercy of driver shortages and rising industry costs…”

» “To take on a transportation company as good as UPS will cost them (Amazon) more on DOT (US Department of Transport) laws, insurance … not to mention the labor (sic) costs to all the drivers. Let’s face facts, they would have to take on their own shipping costs.”

None of which, is likely to come as news to anyone at Amazon currently planning the evolution of a stand-alone carrier and air-cargo business.

AMAZONIt does however, serve as a reminder that the barriers to entry in the carrier sector are very high and present a complex set of challenges. By no means insurmountable, but you have to ask why, if cost and service levels are such a problem, Amazon would want to spend many years and many millions of Dollars developing a service to go head-to-head with the likes of FedEx or UPS, or DHL. What would the opportunity cost of that kind of investment – in terms of money, time and resources – be? How would it not succumb to all the same problems that plague every other carrier, from fuel costs to labour shortages, from capacity to coping with peak?

There’s an argument for building a service that just provides additional capacity, or a safety-net – something that would make sense as a way of avoiding over-reliance on carriers, rather than trying to become one of them. Yet the cost of the investment required in a service that might never be fully utilised makes that speculation look shaky too.

Is Amazon up to something? It may only be the personal opinion of the editor of an online retail logistics title in the UK, but yes – in all likelihood they are. What Amazon is up to tends to be far less apparent to the outside world, right up to the point at which the retailer chooses to make its intentions known. You could even speculate that running trials involving planes and air freight is an exercise in getting under the skin of carriers, keeping them on their toes, and at the same time gaining some useful inside knowledge – all of which might be put to use ensuring Amazon gets great service and competitive prices at times of negotiation.

But that way paranoia lies, surely.

Main image: FedEx Boeing 767 freighter N107FE photographed by Chad Slattery at KPAE, and from Wolfe Air Aviation’s Learjet 25B over Washington State, on 26 September 2014. Reproduced courtesy of FedEx press office image library, for media use only.

Amazon images courtesy of Amazon press office image library, for media use only.

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