Air Transport: Amazon Airlines

  Not much seems to change for the air cargo industry. Last month, the International Air Transport Association said it as plain as day: 2016 will be another difficult year for air cargo. The difficulties in 2016 follow those experienced by the industry in 2015, 2014 and… well, you get the picture.
   IATA’s latest worldwide figures, for March, showed a 2 percent, year-over-year decline in demand with a 6.9 percent uptick in capacity. The Asia-Pacific and Latin America markets seemed to be the hardest hit by this demand drop, seeing 5.2 percent and 5.9 percent drops, respectively. Europe and the Middle East came out of the month looking pretty good, with business reflecting 1.3 percent and 2.4 percent respective increases. In North America, demand fell 1.8 percent, while capacity rose 7.1 percent. 
   To add to these less-than-rosy numbers, the air cargo price-fixing saga continues to haunt the carriers. More than 30 airlines have settled in the global case, collectively paying out more than $1.2 billion. 
   Even with this lackluster worldwide cargo picture and ongoing litigation, online retail giant Amazon appears bullish on air cargo. 
   On May 5, Atlas Air Worldwide entered an agreement with Amazon to provide it air cargo service. The deal includes the operation of 20 Boeing 767-300 converted freighters. Operations are expected to start during the second half of the year, and everything will be running full bore in 2018. Amazon also has the option to eventually buy up to 30 percent of Atlas’ shares. 
   In a statement, William Flynn, Atlas’ president and chief executive officer, said the deal was the start of a “long-term relationship with Amazon to support the continuing expansion of its e-commerce business and to enhance its customer delivery capabilities.”  Echoing this statement, Amazon’s Dave Clark said Atlas would be used to support “the rapidly growing number of Prime members.”
   In an earnings note after the news broke, Kevin Sterling of BB&T Capital Markets referred to Atlas as “Amazon” Air Worldwide, writing that “if we read the tea leaves, the end game for Amazon is not just 20 planes with AAWW (it should come as no surprise that Amazon has grand ambitions).”
   Sterling explained that the deal allows Amazon to beef up its one-day deliveries while at the same time freeing it up from its reliance on other carriers. According to BB&T, Amazon currently spends $12 billion on transportation annually, a figure that is growing by 30 percent with each passing year. 
   On a conference call with investors, Flynn said start-up costs in the Amazon deal include investing in the aircraft, buying spare engines and parts, and increasing Atlas’ workforce. Due to these initial costs, Flynn said they will cause a negative blip for Atlas’ 2016 earnings, but the company will start seeing benefits soon after.  
   “We are looking forward to continuing to grow our company, serving Amazon and their customers, and to continue to create opportunities for everyone that’s on the team here at Atlas,” he said during the call.
   But Amazon is not Atlas’ only concern. Flynn said DHL is the company’s single largest commercial customer, and while Amazon and DHL might eventually be competitors, Flynn said DHL is “very supportive” of the deal. He sees that the agreement will make Atlas a better company, and that this improvement will benefit all of its customers. Atlas Chief Financial Officer Spencer Schwartz echoed these comments, adding that more diversification in the customer base will boost the company’s financial picture. 
   Finally, Flynn said that adding 20 freighters’ worth of capacity into a down air cargo market will not have an impact on the air freight arena because Amazon currently has demand for these planes. He also pointed out that the 20 planes aren’t coming into the market all at once; there will be a slow rollout to full capacity. 
   “The aircraft that we are talking about… would be added to serve Amazon, and to serve their e-commerce business, which isn’t, in many ways, a new market,” he said. “Predominantly, our initial operations, I anticipate will be domestic.” 
   Regardless of the current state of the market or the short- and long-term prospects for air cargo, Amazon’s movement into its own air cargo space was inevitable. As the start-up work begins for Atlas and Amazon, the two companies seem pleased to have linked up. 
   “We think it’s a great transaction for us. We hope it’s a great transaction for Amazon,” Schwartz said. “We are both really excited about it.”
   Amazon has never been bashful about shaking up the marketplace, including its transportation services providers. It has even come to view itself as a “transportation services provider,” as stated in its annual 10-K report submitted to the U.S. Securities and Exchange Commission earlier this year.
   The company’s recent moves also appear to be paying off. According to Bloomberg in early May, Amazon presented its “biggest-ever net income” quarter at $513 million. “Operating expenses rose by a quarter as Amazon pours money into projects such as expanding its network of U.S. warehouses and building new data centers that power AWS, yet the strong sales growth may help thwart any renewed concerns about profitability,” the news service said.