Air Cargo Deal Gives Amazon More Control Over Deliveries

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Amazon has entered a 10-year lease agreement with Atlas Air Worldwide Holdings, the aircraft company announced last week. Under the agreement, Amazon has the right to buy up to 30 percent of Atlas Air.

Amazon will lease a fleet of 20 Boeing 767-300 converted freighters -- including crew, maintenance and insurance -- for seven years, with extensions to 10 years. Amazon also will dry lease from Atlas Air's Titan Aviation unit for 10 years. The dry lease operation calls for Atlas Air to provide the aircraft but no crew.

The lease terms are set to begin in the second half of 2016.

"We are excited to welcome a great provider, Atlas Air, to support package delivery to the rapidly growing number of Prime members who love ultra-fast delivery, great prices and vast selection from Amazon," said Dave Clark, senior vice president of worldwide operations at Amazon.

The planes will be used to supplement and secure additional capacity to support one- and two-day delivery for Prime members, Amazon spokesperson Kelly Cheeseman said.

Amazon uses a variety of distribution partners and will continue to do so, she told the E-Commerce Times.

Under the agreement, Atlas Air granted Amazon warrants to buy up to 20 percent of its common shares at a price of US$37.50 per share for a period of five years. Vesting is subject to the commencement of operations of the 767 aircraft as well as other conditions.

It granted Amazon another 10 percent of common stock at the same price over a period of seven years. Vesting in this case will be tied to payments Amazon makes in connection with the business.

Amazon, which relies heavily on on-time delivery to grow its customer base, has faced bottlenecks during recent holiday shopping seasons, when it was dependent on its relationship with the U.S. Postal Service and UPS, each of which had to ship packages for millions of other customers at the same time.

"Amazon has a unique position," said Wayne Plucker, aerospace and defense director at Frost & Sullivan. "Their business is more about shipping cost and timeliness than almost any other business. Yet in many senses, they are at the mercy of the shippers."

Amazon can continue to play the various shipping partners off one another, but there are limits to that strategy, he told the E-Commerce Times. Every time the company renegotiates a deal, it's faced with limited options.

Amazon in March entered an agreement with Air Transport Services Group that called for the leasing of 20 Boeing 767 freighters. Amazon also got warrants to buy up to 19.9 percent of the company's common stock over a five-year period at $9.73 a share.

"I'm rather amazed at how aggressive Amazon is about building its long-haul distribution network, especially with fairly expensive planes," said Jim McGregor, principal analyst at Tirias Research.

"However, as long as Amazon can utilize the resources, this should reduce their transportation costs over time and continue to make Amazon even more profitable," he told the E-Commerce Times.

Atlas Air has been in a growth mode to compete more effectively in the package delivery space. It completed the $110 million acquisition of Southern Air Holdings last month -- a move that gives Atlas an additional fleet of 777 and 737 aircraft.

Southern Air is the parent of Worldwide Air Logistics Group, which includes Southern Air and Florida West International Airways.

David Jones is a freelance writer based in Essex County, New Jersey. He has written for Reuters, Bloomberg, Crain's New York Business and The New York Times.

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