Weekly Wrap: A look back at the rise of Amazon Air [Video]

Jeff Lee
Hello and welcome to Cargo Facts connect the podcast and video series of Cargo Facts. The news that’s a record of the air cargo and freighter aircraft industries over 40 years. I’m your host, Associate Editor Jeff Lee, and I’m joined today by my colleague, senior editor Charles Kauffman. This is the weekly wrap of what’s happening in Cargo. Today’s Friday, September 4 2020. Before we start, I wanted to thank our sponsors 321, precision conversions, Ai, ATSG, CQ, aerospace, AEI and us cargo systems. Now, Charles, something interesting surfaced in the FAA registry this week with Amazon peering as the registered owner of a 767 300. And that’s the first time we’ve seen that. To better understand this, the potential significance of this, we thought it might be helpful to go back to the beginning. And Charles Carfax has been covering Amazon air for a very long time, relatively. Just take us back to 2015. What were the the first hints at Amazon and network?

Charles Kauffman
Hey, Jeff, good afternoon. Yeah, that’s a very that’s a good question. I’m happy to take a walk back down memory lane and reminisce about the early days of the Amazon air operation. Yeah, you mentioned 2015 and if we go back to the fall of 2015 Actually, that’s where we really started to see rumblings of a dedicated operation for Amazon. We saw a couple different things going on you know, out of Wilmington ATSG affiliates were operating a few Seven, six sevens you know, that appear to be out of character for you know, for the their typical customers at that point in time. So, this was in the early fall September so of 2015 that this, this network kind of started and then it was in in November 2015 during an earnings call when Joe Hedy, then CEO, you know, he kind of identified this trial and said, The end of the day we’re performing a trial network with with 276 sevens. And it’s in the company’s sort operation in Wilmington, and of course at SGS, who was referring to the the former airborne DHL hub in, in, in Wilmington. And at the time, he announced that this trial operation would grow to five aircraft per week 576 sevens and of course, cargo packs at the time questions, you know, what kind of customer considers five wide body freighters are in a sortation hub, a trial, you know, so that that really narrows down the options there and that’s that’s kind of when when it became clear that you know, maybe this is linked to to Amazon. at around the same time in the northwest Western corner of the United States. We saw a smaller Express operation utilizing a 737 Classic freighter operated by by northern air cargo. And this this freighter was operating along routes connecting Seattle with destinations in California and Idaho. So these were kind of the, this was this was the beginning, if you will, of what has become Amazon air.

Jeff Lee
Right, right. And then what happens to this to the beginning of this? This whole operation what came next?

Charles Kauffman
Yes. So things move very quickly. You know, if we look at Italy today, wow. It’s it’s amazing how far is has come in just a few short years. 2015 was not that long ago. So, you know, this trial operation kind of came into the picture in November and then bye By December, you know, we were we were hearing rumblings that Amazon was looking at up to looking to to acquire or lease up to 20 767 freighters. Now, it was unclear initially, if, you know the trial operation was just a kind of a test before acquiring production freighters from Boeing or from another source or if, if the plan all along was to continue the operation with freighter converted 767. So it was unclear in the beginning, how things would shape up but that’s really when we started to hear you know, figures of 27 six sevens up to 40 over a longer period of time. And so, from that point, we started to expect you know, 47 an operator That included 47 767 prayers and then you know shortly after in a few months had passed and in the in March 2016 I remember quite well ATSG announced that you know, it would be dry leasing 20 767 freighters all conversions a mix of 12 767 to hundreds and then 87673 hundreds to try these those to Amazon and then its carriers would then operate those on a CMI basis on behalf of Amazon and then it’s its gateway and logistics service provider had agreed initially to operate the the Wilmington sort facility So this was kind of a near term agreement, most of these initial agreements had a horizon of five to seven years or so. And so that was kind of the that was the first major transition, if you will, from a trial operation to something more long term. And then a very similar deal emerged in May with atmosphere worldwide. And so again, the figure was for 27,767s. These were all 767-300s ATSG of course, had the seven 617 hundreds and in his portfolio, but at the time, so whereas Atlas had to convert a number of aircraft and build his portfolio as the deal was for 20 dry leased and then operated Atlas air.

Jeff Lee
Right? And when did this whole operation start turning into more of a trial and beginning to resemble a full fledged operation?

Charles Kauffman
Yeah, so certainly after after those 220 aircraft deals were replaced that was kind of a sign that Amazon was serious about a dedicated operation. But I also remember the summer of 2016. Amazon painted its first 767 in primer livery. And you’ve been at the company is based in Seattle cocofax offices is also located in Seattle. We were actually invited out to Lake Washington for a special event that Amazon had planned and In conjunction with, with what is known in Seattle is a sea fair. There’s there’s typically an airshow and hydroplane races and whatnot, the Blue Angels fly over Seattle. And I remember being at a dock adjacent to to Lake Washington and and seeing the first 767 300 flyover in primary colors, and that was kind of that was really symbolic that, you know, this is this is an operation for for Amazon.

Jeff Lee
Yeah, I mean, that must have been quite a sight then, you know, what would the industry have been thinking at that time?

Charles Kauffman
Yeah, of course, as you can imagine. Much of the chatter quickly turned to two Amazon centric discussions. I remember a couple Months later at Cargo Facts and poziom in October 2016, we started to hear rumblings of a fleet of 100 aircraft, which is which was, you know, at the time quite, I mean, that was quite a step forward for for an operation that had gone from you know, a few aircraft to to five to 20 to 40 and then then 100

but,

Charles Kauffman
you know, not too long after, I think it was in early 2017 and in January or so, Amazon came forward with its its plans to to build a global air hub in in Cincinnati, Cincinnati, Northern Kentucky, in Hebron, Kentucky and invest an estimated $1.5 billion and looking at the capability of this this proposed facility, it became clear that you know, 100 aircraft over time certainly was not out of out of the question.

Jeff Lee
And after that announcement, how soon did commitments for more aircraft surface?

Charles Kauffman
Yeah, that’s a good question. So actually, it took a while. You know, after the the 40 aircraft agreements, those initial agreements were announced 2016 2017, though the remainder of the year, were pretty quiet and even in 2018, it was, you know, Boeing and II were working to convert and redeliver aircraft to to Atlas and ATSG. And those two companies were working to put the ramp up their operation and put the aircraft in service. For for Amazon air. It wasn’t until December December 2018 or so. Towards the end of the year, things were starting to slow down for the holiday season or so we thought. And then ATSG announced that it had secured REITs to acquire 20 767 300 yars that were slated to come out of the American air fleet over the next few years. So I think this happened on on a Thursday, and then the next day, there was an agreement for between Amazon and ATSG to lease and then for the operation of 10 additional 7673 hundreds. So, that did the original deal expanded from 49 to 50.

Jeff Lee
But then, of course, they took the next step with the order for the narrowbody project. That’s fine.

Charles Kauffman
Yeah, and that that happened rather quickly as well. Boeing had begun to work out the kinks in its 737 800 BCF conversion program and redelivered a couple of aircrafts to Europe how to program was certified and whatnot. All of their conversions were performed in in China. And in March 2019. We first quick glimpse of a 7370 100 BCF that had been converted at the state code facility in Japan and was displaying a new primaire livery slightly different from what we had seen on the seven767s. So this was this was in mid March or so and then, not too long afterwards. It was announced that To say our affiliates Southern air had an agreement with Amazon to, to lease 577 800 PCs and there was also an option for up to 15 more by May 2021, at Amazon’s discretion.

Jeff Lee
And I remember they showed that aircraft off the Paris Air Show, didn’t they?

Charles Kauffman
Yeah,

Jeff Lee
of course, this this deal with the seven three sevens wasn’t a full replica of the 767 deals that they had done.

Charles Kauffman
Yeah, no, that’s that’s right. So you know, the Seven,767s were in that that was a kind of a two party agreement. Either aircraft were leased or dry, leased and then there were separate agreements to operate the aircraft, by affiliates. have ADHD and Atlas, whereas the 737 are actually dry least from from GPS, and then they’re they’re handed back to other operators that are that are not affiliated with with GPS for CMI operation. So it’s, it’s different in the sense that you know, it’s not that those leases and operational agreements are not tied together.

Jeff Lee
Yeah. But the there was one thing that was similar in that they chose a second operator for those aircraft.

Charles Kauffman
Yeah. So it happened a few months later. And it kind of came as a surprise, if I’m honest, but there was an agreement with sun country airlines, a Minneapolis based low cost carrier. They operate a large fleet of seven 70 100 passenger aircraft So, you know the crew, the Secretary crews already familiar with the type but there was there was an agreement to to operate 10 of those converted freighters on a on a CMI basis for for Amazon. So it was a departure from its existing mix of CMI operators and then also, you know, kind of the first example of Amazon creating its own CMI partner creating an CMI operator. I don’t know. I’m not sure that some country has seen themselves as being able to provide this service but it seems to be a case of Amazon, identifying that capability and by a number of seven 317. Hundreds are currently being offered for Amazon

Jeff Lee
and the timing for that was Rather fortunate for them to because this deal with Amazon basically kept the many of their pilots flying. And I think Amazon kind of sped up the placement of these 70 sevens with some country.

Charles Kauffman
Yeah, that was interesting how the timing worked out there.

Jeff Lee
So, I mean, where does that leave us now with the Amazon athlete?

Charles Kauffman
Yeah, no, that’s a that’s a that’s a great question. So, apart from the commitments with Southern and and some country which we saw in 2019 there has been a new agreement between Amazon and and ATSG. The Amazon is truly seeing 12 additional seven, six, sevens and And those will be operated, of course by ATSG affiliates. And one of those is already in service. And the expectation is that the remaining 11 that are included as part of that deal will be operational by by the end of next year. In terms of firm commitments, you know with ATSG we’re, we’re looking at total of 40 276 sevens you know, dry leased and operated by year end 21. Again, 12 of those being seven 617 hundreds and the remainder are all 77 300. With Atlas, there is the agreement to try these 1970 673 hundreds and then if we look at the 77 800 BC, Have agreements. I think a great starting point is it’s Amazon’s agreement with GECAS, which as it stands now the Amazon has publicly announced that they will be they’re committed to 2027 three 700 VCs. And then if we look at orders and options are options to, to place the seven 370 hundreds in CMI service. Amazon has, has a mix of, of firm commitments and then options for for more. And so for Southern the original agreement was for five units. We think that that is and options for 15 more. So we think that they’re likely to take at least 10 during atlases second, second earnings, second quarter earnings. Maybe we can pause this and just re ask the question. Yeah, so if we look at developments since, since the 20 December 2019 agreement with sun country airlines, we have seen one additional incremental agreement for 4767 300. That was signed with ATSG in June of this year, and that that deal encompasses 12 additional freighter converted 7673 hundreds, which no similar to the existing agreements will be dry leased to Amazon and then leased by ATSG affiliate. carriers. And then as part of this deal, we also saw the extension of some of the early agreements between ATSG. And, and Amazon, particularly for the 7672 hundreds, which had been nearing expiration. So that’s That’s no longer the case. Those leases are now set to expire in 2023. There’s also an option to to extend those those beyond 2023. So, that may not be the end of 767 200 operations for, for Amazon. We’ll see. You know, looking at the big picture as a whole. It’s it’s somewhat murky, because there are no publicly announced options and then and commitments and then there are also, you know, a number of agreements that that may be happening behind the scenes. So, we can start with what we do know. You know, and if we look at ATSG we’re looking at 42 767 in service for Amazon by the end of next year, dry leased and operated Atlas atmospher um, you know, leases 1977 300 and we’ll, we’ll continue to do so much of the growth in recent months, and this year really has focused on the narrowbody in service fleet. And if we look at the the agreement, as it stands now between g Cass and Amazon, it’s only 427 378 hundreds. So that’s that’s their their commitment. And if we look at CMI commitment says it stands now and there are the 10 units that will be placed with some country and then five, with with Southern. And then Southern has options for 15 additional units. So CMI options currently are, are larger than the number of aircraft that Amazon has publicly dry leased. So I, during its second quarter earnings, were concurrently with those atlis announced that it would be placing a few more seven three sevens in service with with Southern air for for Amazon. They didn’t really define the figure. But we’ve we’ve already identified three of those units and we we expect, you know, at least five you know, so that would that would account for the 20 units that Amazon has, has already leased From GECAS, and then that leaves Amazon with with five outstanding options that could be exercised to place 7378 hundreds and service with Southern air by the end of May 2021. Of course that would hinge on an additional agreement with GECAS or more another less or no. And if you look at GECAS’ orderbook 477 800 conversions, you know, they’re at 6060 firm orders and they have commitments beyond that. So it’s definitely in the cards to see an additional agreement between the two or perhaps between Amazon and another lessor. So, where does that put us? You know, we’re at 86 by the end of 8016 is in the fleet by next year. You know, that’s potentially jumps to 21 if in five minutes 7070 hundreds are acquired and placed with Southern. Yeah. So that’s kind of what we know what’s on the record today. And then, you know, as you mentioned, during the beginning of this episode, there is the unit that Amazon registered earlier this week. And so that is not included in the total. And we, you know, we don’t have a clear picture of what the plans are for this aircraft or if there are other aircraft included, but yeah, that that could steer the fleet, free fleet growth moving forward. So definitely an exciting time for the conversion space. And certainly during the crisis, we’re seeing e commerce continue to surge. Really stay relevant.

Jeff Lee
Yeah, I mean, I think The one thing we can safely say is that we will continue to see the Amazon FBA grow. Which is always interesting and fascinating to follow. And yes, we will definitely be keeping an eye on that 767 that they apparently just acquired. That’s all we have time for today. Thank you everyone for joining us for the latest developments with audience all things, freighters and conversions, check out kind of x.com

Charles Kauffman
Thank you, Jeff.

Jeff Lee
Thanks, Charles.