Amazon is now airborne.
The world’s largest online retailer says it's going to operate its own air cargo network in the US, a move that points to its larger ambitions to build out a comprehensive factory-to-doorstep delivery system to serve its customers. Amazon signed a five- to seven-year lease with Ohio-based Air Transport Services Group for twenty Boeing 767 freighter aircraft, the company says.
The move is the latest in Amazon's ongoing effort to reduce its dependence on other shippers in favor of building out its own sprawling logistical infrastructure. The company sees this streamlining as especially beneficial to its growing ranks of Prime members, folks who sign up for Amazon’s $99-a-year subscription service to get fast, free shipping and other benefits, like unlimited video streaming. Current analyst estimates put the number of Prime members at 40 million to 60 million worldwide, according toThe Wall Street Journal. In its last quarterly earnings report, meanwhile, Amazon revealed that paid Prime membership had increased 51 percent worldwide and 47 percent in the US in 2015.
“These planes provide critical capacity expansion to support the growth of Prime in the US,” says Amazon spokeswoman Kelly Cheeseman. "At our scale, supporting growth requires adding some of our own logistics capabilities."
Over the years, Amazon has poured resources into building a highly coordinated system of fulfillment centers across the US and around the world. It's strategically placed many of these warehouses closer to urban areas for even faster doorstep delivery. To get its goods to customers, Amazon relies on hundreds of thousands of warehouse workers and couriers—as well as, increasingly, robots. It also has its own trucks and an experimental drone delivery program. An Amazon subsidiary, meanwhile, is reportedly preparing to operate its own ships between China and the US.
The new planes will be used to transport customer packages from fulfillment centers closer to customers for delivery, Cheeseman says. This will include getting packages to Amazon's "sortation centers," where they're sorted out into groups by more specific zipcodes and handed off to Amazon's last-mile couriers, who bring those packages to customer doorsteps. If Amazon can do more of the sorting on its own, it can save on shipping costs. "This network helps us serve customers and we are optimistic about the efficiencies it will offer," Cheeseman says.
Some have suggested that the grand plan may be for Amazon to turn this vast delivery network into a business of its own, providing logistical services to suppliers of goods from China to India to the US, using trucks, planes, or ships. (Amazon declined to offer more details about its plans.)
Steve Gaut, vice president of public relations at UPS, says his company will continue to work with Amazon and other retailers to support their global logistics needs and expressed confidence in the reach of its delivery network. “UPS has unrivaled scope, scale, innovation and delivery density, combined with an extensive transportation network that serves more than 220 countries and territories,” Gaut says. “For these reasons, UPS provides strong customer value that is difficult for any company to replicate.”
But there’s one obvious rationale for Amazon going it alone when it comes to shipping operations: to simultaneously reduce shipping costs and improve reliability. As Amazon’s last earnings report revealed, its shipping costs grew 37 percent to $1.8 billion last year—making it one of Amazon’s biggest and fastest-growing expenses. At the same time, Amazon has sometimes struggled to deliver packages on time during surges in sales, especially around the holidays.
And though Amazon has denied in the past it would replace its shipping partners with its own delivery network, the company has admitted that it’s outgrown these partners in certain ways. “We’ve needed to add more of our own logistics to supplement our existing partners,” Amazon CFO Brian Olsavsky said while discussing the company’s latest earnings report with investors in January.
"Those carriers are just no longer able to handle all of our capacity that we need at peak. We have had to add some resources on our own."
