E-commerce and freighters part I: In balance or imbalance?

In part I of our feature on e-commerce and freighters, we explore the rise of the own-operated network for e-commerce fulfillment in the United States. Check back later this week for part II, where we consider how e-tailers in the Asia-Pacific region are utilizing partner capacity to fulfill growing e-commerce demand in the region. If you follow Cargo Facts coverage of US-based e-tail giant Amazon , which is growing its fleet of 767 freighters, breaking ground at its Cincinnati/North Kentucky Airport ( CVG ) mega-hub, and adding narrowbody freighters to the mix through a deal to lease at least five and up to twenty 737-800 freighters, it seems that e-commerce‘s impact on air freight has been nothing but a boon. Certainly, many lessors, including Air Transport Services Group ’s Cargo Aircraft Management , Atlas Air Worldwide ’s Titan Aviation Holdings, and GECAS have benefited tremendously from the shrinking delivery window e-commerce companies continue to target, as have the conversion houses supplying passenger-to-freighter converted aircraft to support e-commerce networks. However, when considering e-commerce‘s impact on air freight, it’s important to note that operations on either side of the Pacific vary tremendously, and that not every e-commerce market depends on freighters for its airlift. Given the normal low-density, high-volume composition of e-commerce goods transported by air, conditions have to be just right to support higher cost of freighter operations compared to cargo moving in bellies of passenger aircraft. [caption id="attachment_16031" align="alignright" width="450"] Hard-to-define "e-commerce traffic" can be palletized or containerized.[/caption] Own-Operated in the USA In the United States, Amazon relies on a mix of express and postal capacity and its own-operated freighter network to support its domestic operations. Cargo Facts Consulting estimates Amazon accounts for about 50% of all e-commerce sales in the US, and in 2018, its shipping cost – covering sortation, delivery centers, and transportation costs for North America and international operations – stood at US$27.7 billion, or 12.6% of its total operating expenses. Of that total, Cargo Facts Consulting expects that about $18 billion is for North American shipping, specifically. That $18 billion goes a long way in North America. Traditionally, Amazon has depended heavily on US express giants FedEx and UPS, alongside the US Postal Service, for most of its US deliveries, both via air transport and last-mile delivery. All three still deliver a significant share of Amazon’s packages. In recent earnings calls or statements, leadership at FedEx and UPS stated that Amazon accounted for under 1.3% and under 10% of total revenue, respectively, while USPS suggested that Amazon accounted for 8.3% of its 2018 revenue. While those percentages are relatively small, the substantial revenues reported by FedEx and UPS – $69 billion and $72 billion – illustrate that Amazon makes up small pieces of some very large pies. A majority of the costs go to ground and last-mile transportation, rather than air freight, however. Turning to air freight, since 2015, the structure of Amazon’s US delivery network has changed drastically with the launch of Amazon Air, Amazon’s own-controlled freighter network that launched with five 767 freighters operated by and on-lease from ATSG. Since then, Amazon Air’s network has grown to include more than forty freighters. Most of those are operated by affiliate carriers of either ATSG or Atlas, which last year had twenty 767-200Fs or -300Fs each in service with Amazon through ATSG’s subsidiaries ATI and ABX, and through Atlas’ Southern Air subsidiary. Once the final Atlas 767-300F (28865), and fortieth overall 767F, was put into operation for Amazon in November 2018, industry observers eagerly awaited further announcements signaling Amazon intended to continue growing its air freight operation. They didn’t have long to wait – shortly before Christmas, Amazon announced an agreement with ATSG to lease ten additional 767-300Fs. Coast-To-Coast Hubs Of course, with a rapidly growing fleet supporting e-commerce demand in the US, airport infrastructure as it currently exists would likely face substantial challenges, were it not for a similarly ambitious effort from Amazon to develop its own system of cargo hubs. Only last month, Amazon broke ground on its massive new $1.5 billion cargo hub at Cincinnati/North Kentucky International Airport (CVG). At a smaller scale, Amazon is also making investments into developing regional airports. In November 2018, Amazon announced it was more than doubling its footprint at Chicago Rockford Airport (RFD), increasing its current capacity of a 72,000-square-foot facility at RFD with a 120,000 square-foot addition, and increasing the number of cargo flights it operates per day from the airport. Most recently, city officials in Lakeland, Florida, approved a proposal between Lakeland Linder Airport ( LAL ) and Amazon for a $100 million investment from Amazon towards the construction of a 225,000-square-foot air cargo facility and a seven-jet cargo hangar at LAL. Since the beginning of 2018, Amazon has also opened new cargo “gateways” in Denver; Hartford; Miami; Minneapolis; Portland, Oregon; Honolulu; and Riverside, California, with operations expected to re-launch in Wilmington, Ohio, at any day. If all of these hubs and gateways seem to support a much larger fleet than fifty 767Fs, it should come as no surprise that Amazon Air has already begun to grow its fleet again, with the addition of its first narrowbody freighters – 737-800BCFs, on lease from GECAS and operated by Southern Air . At least five of the narrowbodies will join Amazon’s fleet in 2019, and Amazon has the option to add up to fifteen more 737-800Fs by May 2021 as part of its agreement with Atlas. Cargo Facts would not be surprised if all twenty 737-800Fs are flying for Amazon in two years’ time.

E-commerce and freighters part I: In balance or imbalance?

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