As if third-party shipping carriers weren’t already worried enough about Amazon.
The e-commerce giant has quietly been building an air service over the last few years. Today, Amazon has a fleet of as many as 40 aircrafts. The company is creating a central “air hub” at Cincinnati/Northern Kentucky International Airport. It was hard to say how significant Amazon Air’s impact would be.
Then in early December, a Morgan Stanley analyst predicted that UPS and FedEx could lose as much as 10 percent of their total revenues to Amazon Air by 2025.
The prediction pushed UPS and FedEx stocks down 6 percent that day. The analyst, Ravi Shanker, predicted that Amazon Air’s 40-jet fleet could easily grow to 100 planes within five years. Further, Amazon’s routes could overlap with about two-thirds of those currently operated by UPS and FedEx.
Air shipping makes up about 20 percent of business for both UPS and FedEx.
In other words, Shanker predicted that Amazon could cut that in half in about six years.
Resource: How “The Amazon Effect” and Changing Customer Behavior are Shaping the Parcel Landscape
Amazon’s Current Air Situation
Amazon has been eyeing its own air service for several years. It owns stakes in Air Transport Services Group and Atlas Air Worldwide Holdings, which are both freight delivery airlines.
The company took out a lease on 900 acres of land near the Cincinnati/Northern Kentucky International Airport, and bought 210 more acres in 2018. It’s in the process of building an Amazon Air hub there, which is a $1.5 billion investment.
According to Shanker’s analysis, if Amazon were to handle more of its own air deliveries, it could cut costs by $1 billion to $2 billion per year. That means the Cincinnati investment could pay for itself in as little as a year of Amazon Air service. $1 billion is only 3 percent of Amazon’s global shipping costs, but it’s still $1 billion.
Amazon Air is also leasing 40 cargo jets, a fleet that it could more than double in the coming years.
Amazon Air is a distinct branch of the company, but makes news at a time when Amazon is actively expanding its shipping capabilities. In 2018, news broke of Shipping with Amazon, a third-party service whose couriers would pick up products from businesses that sell on Amazon, deliver them to Amazon warehouses and distribute to Amazon customers using the company’s existing shipping infrastructure. The company is already making strides with drones and storage lockers, faster than any of its competitors in the shipping space.
If Amazon could provide its own air service too, it would be one step closer to eliminating its reliance on other carriers altogether.
Amazon Air Hubs in Cincinnati and Fort Worth
Amazon announced its Cincinnati/Northern Kentucky “Prime Air hub” in 2017, trumpeting plans to hire 2,700 workers in the region.
Now, it’s adding a regional air hub at Alliance Airport in Fort Worth. In December, Amazon announced that construction had begun and it expected operations to begin in 2019. The Fort Worth hub will support “multiple daily flights,” and include package sorting and processing infrastructure the company said.
The same airport already houses FedEx, which makes as many as 30 daily flights to deliver packages. This makes up about 10 percent of the airport’s total traffic.
The Regional Air Hub is the first of its kind the company said, and it “will be tailored specifically to Amazon Air’s larger scale regional needs…constructed with the future in mind to include sortation capability and infrastructure to handle multiple flights daily.”
How Amazon Air Affects Carriers
It’s not hard to see why the major shipping carriers, such as UPS and FedEx see Amazon Air as a threat.
Initially, Amazon was a boon to both services as consumers ordered more parcels online. But then the retailer began to replace them, creating one link at a time in the shipping chain. An air network is one more critical link in that chain.
It’s also a lucrative one. Amazon Prime promises two-day shipping to its members, no matter where they are in the country. To fulfill that promise, they often need to turn to air service—a service that is currently provided by UPS and FedEx. We know that UPS and FedEx each generate about 20 percent of their revenues from U.S. air deliveries. However, there’s no way to know how many of those deliveries are for Amazon. If Amazon were to provide even a fraction of that service for itself, it would mean a significant hit to UPS and FedEx.
What’s bad for UPS and FedEx can often be good for the businesses shipping packages. Traditional carriers may need to lower their prices (or at least slow rate increases) to compete with Amazon Air. Because of their dominance over the industry, that could lower shipping costs for all their customers—not just those who sell products through Amazon.
It’ll be a few months before Amazon Air is up and running. But if it’s anything like the rest of Amazon’s services, we’ll forget we ever lived—or shipped—without it after a few years.
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