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Alaska and the Amazon Effect

Amazon Prime Air plane on tarmac in Anchorage. (Photo credit: Ted Stevens Anchorage International Airport)

Amazon Air began flights to and from Ted Stevens Anchorage International Airport (ANC) on June 27. ANC occupies a key point along the “great circle” between Asia and the Lower 48. It is 9.5 hours flying time to 90% of the industrialized world — and no other U.S. airport enjoys such a central locale. Great circles are the shortest distance between two points on a sphere. In that sense, Anchorage’s near-Arctic locale does not mean it is in some lonely spot at the top of the world. Only flat projection maps give that erroneous impression. 

As an e-commerce leader, Amazon has the information technology infrastructure to handle all of the web traffic involving buyers and sellers of millions of stock keeping units (SKUs). Now it is developing a private air fleet to boot. By leasing air freighters, Amazon can plan its fleet operations while avoiding most of the fixed costs of fleet ownership. It hopes to have dozens of freighters in place over the next couple of years. Just this past May, Amazon began developing its own air cargo hub at Cincinnati/North Kentucky International Airport (CVG). But unlike the cyber world, location is still critical in the physical world. So it makes sense to have a presence at ANC. Still, there will be challenges for Amazon.

Distance to ANC from the Lower 48 remains the same no matter which air carrier handles Amazon’s packages. For example, Amazon Prime members receive two-business-day shipping for free when transport is within the Lower 48. However, in Alaska the free shipping takes three to seven business days. For perspective, a flight from Seattle to ANC is more than 1,400 miles — almost the distance between Seattle and Los Angeles.  

FedEx maintains an air cargo distribution center at ANC. It has long provided deliveries for Amazon into Anchorage and faced the challenges of arranging for deliveries beyond Anchorage into Alaska’s vast and sparsely populated “bush.” Alaskans in these remote parts of the nation’s largest state often have little idea of the logistics involved in delivering Amazon goodies to them on a click-by-click basis. But, as I like to tell my students, you know you are doing a good job in logistics if the buyers and sellers along the supply chain do not have to think about it. They only think about logistics when something goes wrong. 

Apart from the challenge of dealing with Alaska, FedEx was careful to keep Amazon from becoming too dominant a customer. Many people are surprised to hear that FedEx derived less than 2% of its revenue from its Amazon deliveries. This past June FedEx decided to end providing Amazon with express deliveries. It may be a small price to pay to free up capacity for other large e-commerce providers in the U.S. and China, and it may be a signal to Amazon that “it should leave the flying to us.” So FedEx is meeting the Amazon Effect head-on. UPS, on the other hand, is in a different situation. It earns more than 20% of its revenue from Amazon deliveries. 

In the years ahead, we will be seeing an interesting case study in how large companies elbow each other around as Amazon continues to conglomerate and vertically integrate. Amazon starts the first mile of delivery. Will it become dominant in the last mile too? Keep watching the skies.     

Darren Prokop

Darren Prokop is a Professor of Logistics in the College of Business and Public Policy at the University of Alaska Anchorage. He received his Ph.D. in economics from the University of Manitoba in 1999. Prior to his academic career Darren Prokop worked in government as an economist and in the private sector in inventory planning.