Amazon’s aviation plans will benefit from cargo’s rally
Amazon Air is one of the few airlines that has seen an uptick in demand amid the coronavirus pandemic as home orders for goods has increased from its namesake e-commerce website, leading analysts to debate how fast its fleet could grow through 2028.
Amazon Air tells Cirium that by 2021 it “will have a portfolio of 70 aircraft flying in our dedicated air network”, on track with the goal it announced in 2019. The carrier, which began operating as Prime Air in 2016, has a fleet of 56 aircraft all of which are leased, Cirium fleets data shows. Amazon has additional contracts with GECAS to add 12 Boeing 737 aircraft to its fleet by 2021, which would place it close to its fleet-size goal.
All aircraft the carrier leases are operated on behalf of the company by other airlines, including Sun Country Airlines, Air Transport International, Atlas Air and its subsidiary Southern Air.
Based on its current growth, the carrier is positioned to have a fleet of 200 aircraft by 2028, according to a study published on 22 May by Joseph Schwieterman and Jacob Walls, transportation analysts at the Chaddick Institute for Metropolitan Development at DePaul University.
“Amazon’s growth from 18 planes to 39 planes from 2017 to 2019 resulted in a 47% compound annual growth,” the DePaul report states. “Growth from 39 planes to 200 planes between 2019 and 2028 requires a compound annual growth rate of 20%, less than half that previously observed.”
A report published by Morgan Stanley in 2019 estimates that a combined 100 aircraft could be making flights on behalf of Amazon Air by 2025, which would require a slightly slower 17% growth rate.
This combined fleet is small compared with the fleets of FedEx, which has 463 aircraft, the 275 aircraft operated by UPS and the 77 aircraft of DHL, according to DePaul. Those cargo companies, however, operate more international routes compared with Amazon Air, which operates mainly in North America.
The mainstay of Amazon’s network is the Boeing 767 aircraft, which accounts for almost 90% of its fleet, with the remainder being Boeing 737s. Amazon’s fleet includes 48 Boeing 767 type aircraft and eight Boeing 737s, Cirium fleets data shows.
These Boeing freighters have less cargo-carrying capacity than larger aircraft used by other cargo airlines, including the 65 Airbus A300 aircraft flown by FedEx and the 52 A300s flown by UPS, Cirium fleets data shows.
A quick way for Amazon to grow its fleet could be through the acquisition of another cargo airline, according to the DePaul report. The e-commerce giant already owns a 20% stake in Air Transport Services Group, the parent of Air Transport International, and a warrant to buy 30% of Atlas Air. Schwieterman tells Cirium that Amazon could grow its fleet faster by continuing its pattern of acquiring smaller freighters than its competitors.
But not everyone agrees that Amazon will follow such an ambitious growth path as suggested by the DePaul analysts. While the study does a good analysis of the “inter-relationship of Amazon Air service points and their distribution centers”, it falls short analyzing freighters that could expand that network, says Steve Fortune, an airline consultant whose experience includes positions at FedEx and Potomac Capital Investment.
Questioning the methodology of DePaul’s projection of fleet growth to 200 aircraft by 2028, Fortune says “Amazon is in transition and very opaque as to their future fleet plans”.
Schwieterman tells Cirium that his team initially estimated Amazon’s current fleet at 42 aircraft using media reports and secondhand sources, noting “we assumed our estimate was low”. That estimate was lower than the 56 aircraft listed in Cirium’s database. Carriers do not report data to federal agencies about how much Amazon Air traffic they handle, so DePaul relied on several sources, including passenger and cargo traffic at airports on its network to determine the potential for its operations to grow.
There is clear incentive for Amazon to expand its fleet and provide “much more control over their own logistics chain”, says Cirium head of market analysis Chris Seymour. The looming buyers’ market for aircraft could also help Amazon rapidly expand its fleet as passenger carriers consider whether to shed their own aircraft during the travel downturn.
“With availability of 767s and 737-800s from the passenger fleet increasing in the post-Covid demand situation, there is clearly opportunity for expanding both those fleets,” Seymour says.
Whether Amazon will decide to rapidly grow a portfolio of smaller aircraft, including potentially Cessna turboprops used by FedEx, “will depend on whether they want faster delivery to small towns in the USA than trucks can deliver from major cities” he says.
Operators are pivoting away from large widebody freighters as the growth of e-commerce and changes in consumer expectations drive demand for smaller freighters that can make more frequent stops, according to a report published on 12 May by Kroll Bond Rating Agency.
AMAZON DELIVERY DEMAND
Demand for air freight has been a bright spot for carriers amid the coronavirus pandemic that has devastated passenger travel. The removal of passenger airliners from service, however, has led to a shortage of air freight capacity that is typically carried by those aircraft. The most recent data from IATA shows that air cargo traffic fell 15% year-over-year in March, and capacity was down 23% overall and 25% in international markets.
Home deliveries from the e-commerce giant have boomed while Americans shelter in place and avoid brick and mortar shopping during the coronavirus pandemic. To process the increased online orders, Amazon announced on 28 May that it will hire full-time 125,000 of the 175,000 workers the company hired on a temporary basis will be converted to permanent full-time employees starting in June.
As demand for Amazon home delivery grows “contracting allows it to grow without the risk of massively expanding its workforce,” Schwieterman says of leasing aircraft flown by other carriers on its behalf.
“Business to business shipments are soft during this crisis but home delivery is exploding. The low price of fuel is giving a boost to air cargo as well.”
Amazon and its contractors operate around 100 flights per day, DePaul estimates, with plans to add cargo routes to new hubs including San Bernardino International and Lakeland Linder International near Tampa. The company broke ground in May 2019 on its $1.5 billion megahub at Cincinnati/Northern Kentucky international, but it is unclear how fast operations there could come online.
The challenge for Amazon’s expansion is to both compete with cargo companies including UPS and FedEx while maintaining relationships with them to complement their home delivery logistics chain.
“It’s somewhat murky what they are doing in Europe, but the world market is enormous and Amazon is vulnerable to its reliance on third-party shippers,” Schwieterman says. “It would seem prudent to become more self-sufficient while not trying to replicate the breadth of UPS.”
Whether or not Amazon’s fleet includes 200 aircraft by 2028, the growth of home delivery gives it plenty of room to grow with an entrenched position among cargo carriers with fleets much larger than its nascent air freight operation.
S: FLIGHT GLOBAL