Does Amazon Need Its Own Air Operation?
A report from Barclays investment group questions the wisdom of Amazon.com’s possible investment in an air cargo network.
The report, obtained and reported on by various media outlets, argues that expansion of Amazon’s warehousing and local fulfilment network would provide better bang for the buck.
Press reports at the end of 2015 indicated that Amazon.com is in talks to lease 20 Boeing 767 jets and that it intends to launch its own air cargo wing so it can be less dependent on carriers like UPS and Fedex. Some media outlets also reported that Amazon conducted tests in 2014 of a potential air delivery system, centered in Wilmington, North Carolina. Amazon has consistently refused to comment on these reports.
The report by Barclays Equity Research, published earlier this month, questioned “the need for Amazon to devote the significant capital required to operate a standalone time-definite air network.”
The report went on to say that Amazon’s reported operations in Wilmington, a former DHL hub, “as a likely…small network designed to meet very specific high value product inventory requirements for the company.”
Barclays doesn’t believe Amazon is out to displace UPS and FedEx because operating a full-blown air cargo operations would yield “only limited financial returns” and that, with “plenty of existing air capacity during non-peak periods” such an investment would be “less impactful in the long run relative to local fulfilment network build out”.
Barclays estimates that by the end of this year, Amazon will be operating over 100 fulfilment and distribution centers in the U.S., designed to position inventory closer to consumers in many metropolitan areas.
This is all part of a plan, according to Barclays, for Amazon to skip FedEx and UPS sortation and linehaul operations and to lower the costs of delivering packages to consumers. With Amazon’s network of fulfillment centers, the retailer could then rely on lower-cost last-mile delivery carriers, a move which would reduce the costs of deliveries by three to five dollars for ground delivery and by seven to eight dollars for second-day air service.
“We think future lower cost delivery solutions which do not require the overhead of national distribution and sortation could lead to a proliferation of alternative final mile options,” Barclays concluded.