Amazon moves into 737 freighter operations under lease with Atlas Air

Amazon.com, Inc. (NASDAQ:AMZN) has made its move into Boeing 737-800 air freighter operations after agreeing to a seven-year lease of five of the narrow-bodied airplanes from Atlas Air Worldwide Holdings, Inc. (NASDAQ:AAWW), one of its flying partners, with the possibility of adding 15 more.

In addition, Atlas has granted Amazon warrants that would allow it to acquire up to 39.9 percent of Atlas’ common shares, up from a potential ceiling of 30 percent. Under a 2016 agreement between the two companies that called for Amazon to lease 20 Boeing 767 freighters, Amazon was granted warrants to buy up to 20 percent of Atlas’ common shares. Amazon was also given the opportunity to buy up to an additional 10 percent of Atlas’ common shares. The first tranche of warrants, which Amazon can exercise through May 4, 2021, has already vested. The second tranche can be exercised through May 4, 2023.

Amazon will lease five 737s from GE Capital Aviation Services (GECAS), an Amazon spokeswoman said today. The aircraft will then be subleased to Southern Air, one of Atlas’ subsidiaries, under a “CMI” agreement in which Southern Air provides the crew, maintenance and insurance. The aircraft will enter service within the next 12 months, according to a March 27 filing with the Securities and Exchange Commission. Amazon has the option of extending the seven-year agreement for another three years.

The additional 15 airplanes must be leased by May 31, 2021, should Amazon decide to add them to its fleet, according to the filing.

At about the same time it had announced the 2016 deal with Atlas, Amazon also agreed to lease 20 B-767 freighters from Air Transport Services Group (NASDAQ:ATSG), an Atlas rival. Both agreements included the leasing of the planes as well as the CMI services.

The first of the 737-800BCFs, which Boeing had converted from passenger configuration, was delivered in April 2018 with GECAS as the launch customer. It has a 47,800-pound maximum payload at a full range of 3,700 miles. It is considered a suitable plane for Amazon’s package-delivery needs, and is expected to be deployed in markets that don’t require the 187,000-pound payload capacity of the 767 model. The company’s “Amazon Air” network supports the company fast-growing “Prime” delivery service, in which the company guarantees two-day deliveries on millions of items on its site.

“It makes sense that Amazon doesn’t want to exclusively rely on the 767, especially in smaller U.S. markets where a 737 is more efficient,” said Jesse Cohen, FreightWaves’ air cargo market expert.

Seldon Clarke, transport analyst for Deutsche Bank, said in a note today that the updated agreement “gives us confidence that (Atlas) will continue to be a partner of choice in Amazon’s ambitions to grow its aircraft fleet and capabilities longer-term.” Clarke added that the agreement “puts Atlas in a strong position to continue growing and diversifying its revenue base towards faster growing air freight such as e-commerce.”

Word of Amazon’s interest in the 737 model leaked out earlier this month after an air cargo industry publication, Cargo Facts, published a photo of the plane with the “Amazon Prime” logo at a Chinese airport.