Amazon Exerts More Control Over Delivery Network As Profits Falter

Even as it dominates ecommerce, Amazon continues to have a hard time generating a profit in that business. As the holiday shopping and shipping season peaks, it is attempting to cut costs while speeding delivery.

The question is whether more 'control' will really lead to a better return on investment - or just be another cost sink. JL


Leslie Hook and Claire Manibog report in the Financial Times:

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. 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.
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 took the ecommerce company public.

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 few 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.”