Shipping costs outpace revenue as Amazon’s air network grows

What a difference a year makes. Following Amazon’s recent announcement in early June to lease twelve additional 767-300 freighters from CAM, ATSG’s leasing arm, we have taken a closer look at how the e-commerce giant's dedicated air network has grown in the U.S. and Europe during the last twelve months. Additional fleet growth and insourcing have the potential to yank volumes out of express networks, with UPS most at risk. Air network growth The interactive map below gives a visual overview of Amazon’s U.S. and European networks in July 2019 and June 2020. Each layer provides details on the number of flights per sector per day, as well as a breakdown of the individual operators. .embed-container {position: relative; padding-bottom: 80%; height: 0; max-width: 100%;} .embed-container iframe, .embed-container object, .embed-container iframe{position: absolute; top: 0; left: 0; width: 100%; height: 100%;} small{position: absolute; z-index: 40; bottom: 0; margin-bottom: -15px;} In the U.S., the e-tailer’s dedicated air network has grown from twenty-three to thirty-two active cities, with more to come on line this year. The number of operated sectors has grown by more than 30% to 145 flights per day. While Atlas Group flying has remained largely static, ATSG and Sun Country have picked up additional CMI contracts. By our count, the active fleet operating consisted of fifty-six units, including twelve 767-200, 34 767-300 and ten 737-800. By the end of the year, it will include sixty-eight aircraft, and by the end of 2021, eighty-one aircraft. This will include twenty 737-800s leased from Gecas and a mix of 767-200s and 767-300s. Given that none of the existing leases expires before 2023, the company will have to maintain a rather aggressive growth trajectory, position some units outside the U.S., or remove volumes from the UPS network. For 2019, we estimate that 23% of Amazon’s worldwide shipping expenditure, about $8.7 billion, was with UPS; the integrator has stated that 11.6% of its revenue came from Amazon last year. Meanwhile, Amazon's European network has also seen significant growth and, going forward, we expect the European network would be a good outlet for additional 737-800s. Within the space of a year, the Amazon dedicated European network has grown from seven to ten cities and seventeen to thirty sectors per day. Most flights are operated by ASL Group airlines on 737-400s. Europe represents the company’s main international market, with Germany and the U.K. alone accounting for 8% and 6% of company revenue, respectively. In 2019, Amazon’s European revenue increased by 15% to approximately 32.2 billion euros. Fulfillment and shipping costs vs revenue Amazon has been spending heavily on expanding its fulfillment and more recently, its shipping capabilities. In 2017 and 2018, fulfillment costs grew by 43% and 35%, respectively, while in 2019 fulfillment center costs grew in line with the increase in amount of their space (see chart below). Last year saw a large increase in shipping costs as Amazon expanded its prime delivery capabilities. Shipping costs grew by 37% in 2019 compared with North American and European revenue growth of 21% and 13%, respectively, a trend that has continued in 2020. UPS has benefited from this in terms of volume growth, but package yields have taken a hit. As Amazon expands its own network, UPS has the most to lose. In Europe, companies like Deutsche Post DHL have also seen volume growth slow as Amazon has insourced more volumes. However, in Europe the e-commerce market is more diversified than in the U.S., where Amazon is by far the most dominant player, so a loss of volume may not hurt as much there. Tom Rattray, our Vancouver based analyst contributed to this analysis and article.

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