Tuesday, December 20, 2016

Amazon plots new course for package deliveries

Christmas is always Amazon’s busiest period and this year it is gearing up to deliver an estimated 220m packages in the US alone. This time, however, the logistical challenge will be helped by something new: a huge cargo jet dubbed “Amazon One” that is painted in its trademark blue and gold colours and bears the tail number “N1997A”, a reference to the year Jeff Bezos founded the ecommerce company. 
Chartering its own planes is a sign of the lengths to which the company is going as it seeks more control over its logistics network.
An FT analysis of flight data shows that Amazon has ramped up the use of its new fleet of 767 cargo jets extremely quickly. The company has more than doubled flight activity in the past six months through its largest subcontractor, Air Transport International.
Perfecting its shipping network is key to the company’s ecommerce business, which has never generated much profit. Amazon spent a record $4.2bn on shipping in the fourth quarter of last year, and that figure is expected to grow this year. 
Partly in response, Amazon signed long-term agreements earlier this year to lease as many as 40 jets. Some 15 of those planes are already in operation, with more set to be delivered next year.
The FT’s analysis of data from FlightAware found that Amazon’s ATI flights grew from an average of eight daily flights in June to 19 a day over the past week. ATI owns eight of the 15 planes that are currently in the Amazon fleet. 
While these flights are mostly moving goods from one Amazon warehouse to another — and the company still relies on other carriers such as UPS, FedEx and the US Postal Service — the growth of its new cargo fleet underscores that Amazon is serious about becoming a big presence in air freight.
Over the past several years Amazon has expanded its logistics capabilities and taken more hands-on control, adding not only planes but also truck trailers and fleets of urban drivers. This is a costly strategy, and one that carries fresh risks if things go wrong. 
David Vernon, analyst at Bernstein, says that for Amazon, this holiday period “will be a test of new systems, new process, new relationships, and a test of the labour markets”. In previous years delayed packages could be blamed on the carriers, but that will apply less as Amazon takes matters into its own hands, he points out. 
The threat of pilot strikes has already loomed over Amazon’s plans to get presents under the tree by Christmas Eve. A strike last month at a subsidiary of parent Air Transport Services Group, which currently operates 14 planes for Amazon — including the eight of its other subsidiary ATI — saw flights suspended for several days, just ahead of Cyber Monday. 
Although that strike has ended, the Teamsters Union recently launched a fresh assault with an advertising campaign aimed at Amazon customers, warning them their orders might be delayed due to further pilot action. On a union-funded website called “Can Amazon deliver?”, the Teamsters say that the two airline companies with which Amazon has contracted are treating pilots poorly. 
“These contracted Prime Air airlines are facing significant operational disruptions,” says the website, referring to the two contractors. “The airlines don’t have enough pilots to meet the demands of Amazon because their experienced pilots are leaving for better jobs.”
A spokeswoman for Amazon said the company had “rebalanced capacity” across its network several weeks ago following the strike. “We are confident in our ability to serve customers,” she said. 
Improving its logistics network is crucial for Amazon’s profitability. In the past 12 months, Amazon’s net losses from shipping alone came to $6.4bn, and those losses have been growing faster than sales. 
In the US Amazon will ship more than 7m packages daily during the pre-Christmas rush this year, according to Satish Jindel, president of ShipMatrix, a shipping consultancy. The expected 220m packages it will move between Black Friday and Christmas Eve represent a 27 per cent increase from 2015, says Mr Jindel. 
Amazon’s package volume is growing twice as fast as US package shipments on the whole, which is one reason why it took the unusual step this year of signing long-term charter agreements for cargo jets.  Matt Castle, head of air freight at CH Robinson, a shipping company, says that part of the rationale for Amazon could be to avoid surging holiday prices for air freight. 
“There is a fixed expense to operate that aircraft, but Amazon would not be subject to the peaks and valleys of the general market,” he explains. Demand for air freight over the past six weeks has been “pretty heavy”, he noted. 
The rise of ecommerce has led to a surge in mailed packages — something that all carriers will be struggling to deal with this season, from UPS to FedEx to the US postal system. 
For the carriers, the holiday season is “giving people nightmares”, says Brandon Stanton, consultant at Transportation Impact. “They don’t yet know what volume will look like, simply because there is not enough historical evidence. We are still at the front end of a dramatic shift in the way consumers behave.”
Faced with that uncertainty, Amazon is betting that its own networks will eventually prove cheaper and more reliable than the alternatives. 

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