Amazon to Lease 20 Boeing 767s to Build Its Own Delivery Network (BW)

• Amazon had quietly tested plan last year with five freighters
• ATSG shares rise most in six years; Amazon stock slips

Amazon.com Inc. is stepping up plans to build its own air delivery network, saying it will lease 20 Boeing Co. 767 freighters from Air Transport Services Group Inc., sending shares in the lessor up the most in almost two years.

The agreement shows Amazon’s commitment to expanding its own logistics network to make deliveries faster and more efficient. The Seattle-based company wants to lessen its dependence on United Parcel Service Inc. and FedEx Corp., which have sometimes run into delays during the busy holiday season.

“This is the first formal confirmation from Amazon that they are in fact pursing an air transportation network and more logistics services,” said Colin Sebastian, an analyst at Robert W Baird & Co. who rates the stock outperform. “We can dispense with all the speculation and actually look at something that’s real and happening.”

Shares of Air Transport Services surged the most since May 2014, rising 17 percent to $13.73 at the close in New York. As part of the deal announced Wednesday, Amazon also has the right to buy as much as 19.9 percent of Air Transport Services common shares over five years at $9.73 per share, based on its Feb. 9 closing price. Amazon shares were little changed at $559.47.

By taking a small stake to begin with, Amazon gets a chance to test progress on its long-term goals and see if it likes how it works before committing to a purchase outright.

Amazon has been quietly building out its strategy for years. A 2013 report to Amazon’s senior management team proposed an aggressive global expansion of the company’s Fulfillment By Amazon service, which provides storage, packing and shipping for independent merchants selling products on the company’s website. The project, called Dragon Boat, envisioned a global delivery network that controls the flow of goods from factories in China and India to customer doorsteps in Atlanta, New York and London, according to a person familiar with the initiative, who asked not to be identified because the information isn’t public.

FedEx said the announcement wasn’t a surprise.

“We work closely with Amazon and have been aware for some time about their need for supplemental air capacity related to inventory management,” said Patrick Fitzgerald, senior vice president, integrated marketing and communications. “Amazon continues to be a valuable FedEx customer.”

Glenn Zaccara, director of corporate public relations at UPS, said the company has a “good relationship” with Amazon. “We continue to work with Amazon to support their global logistics needs,” he said.

Amazon’s plans are now progressing rapidly. After having leased five freighters last year for a trial network, it will get 15 more by the end of this year, Air Transport Services said on a call with analysts. Under terms of the deal, Amazon will hold the leases for five to seven years. 

"It gives you a sense of the scale at which they are operating and the scale at which they plan on operating in the future," said Steven Weinstein, an analyst at ITG. "To take on something this ambitious really requires a great deal of confidence that you are going to be moving significant volumes for a long period of time."

As Amazon is expanding its Prime members, who pay an annual fee and get free, expedited shipping on millions of products, the agreement with Air Transport will “ensure air cargo capacity to support one and two-day delivery for customers,” said Dave Clark, Amazon senior vice president of worldwide operations and customer service, in a statement.

While the deal allows Amazon to add growth capacity, Sebastian said, over time it could also allow the company to compete more directly with firms like DHL Worldwide Express and FedEx in offering shipping and logistics services to third parties.

“In 20 years, Amazon will have its own delivery fleet,” said Michael Pachter, an analyst at Wedbush Securities Inc. who rates the stock outperform. “This is a baby step toward that goal.”