Priming the Pump: Amazon steamrolls its way toward more control of Prime delivery network

It began a while ago. (Photo:Shutterstock)

The mosaic that is Inc.’s (NASDAQ:AMZN) transportation and logistics strategy has added some color over the past 17 days.

On Nov. 12, reports circulated that the Seattle-based giant had tapped the Wilmington, Ohio, AirPark, once the home of express giant DHL Express and the company that DHL acquired in 2002, Airborne Express, as the site of an air cargo gateway and package-sortation facility. The operation, the launch date of which is unknown, compliments Amazon’s $1.5 billion air cargo hub development in nearby Cincinnati, expected to open for partial operations in 2020. It is also a shot-in-the-arm for Wilmington, which was devastated when DHL Express shut down its hub operations there after withdrawing from the domestic U.S. market in 2009, and which, despite fits-and-starts, has not exactly been a beehive of activity since then.

Meanwhile, a report published at around the same time said Amazon was looking for more Boeing (NYSE:BA) 767 freighter aircraft after maxing out the 40 767s it had leased in 20-plane increments each from Atlas Air (NASDAQ:AAWW) and Air Transport Services Group (NASDAQ:ATSG), both of whom fly the planes for Amazon. Earlier this year, Amazon put out a request for proposal for six additional planes, according to the Seattle Times. However, if a tight market continues for 767 freighters due to the lack of passenger models available for freighter conversion, Amazon may turn to Airbus Industrie, the European manufacturing consortium and Boeing’s arch-rival, according to the article.

As it happens, Amazon took delivery of its 20th and final plane with Atlas on Nov. 12, according to Kevin Sterling, transport analyst with investment firm Seaport Global Securities. Sterling, in a note published that day, said Amazon is far from finished building out its air fleet. The company has expanded its aircraft portfolio every year since 2015, and given the demands of its two-day delivery commitments for the avalanche of Prime traffic coming its way—Prime now has more than 101 million subscribers and studies have shown they order about twice as much on Amazon’s site as do non-subscribers—it’s hard to believe that it will stop now, Sterling said. Besides, the Cincinnati hub will be built to accommodate more than 100 planes, meaning Amazon has a lot more physical room to run with its air fleet, he noted.

There is action on the ground as well. Amazon is easing the U.S. Postal Service out of its traditional role as a final-mile delivery provider in density-populated urban areas where it already has sufficient shipment density, and is assigning USPS more rural areas, according to Marc Wulfraat, head of MWPVL International, a consultancy that has closely tracked Amazon’s logistics strategy for about 13 years. The move reflects Amazon’s desire to control more of its final-mile operations, as well as some dissatisfaction with USPS’ service reliability, according to Wulfraat. USPS declined comment, while Amazon said it was happy with the partnership and plans to maintain it for years to come.

Amazon is making noise in the less-than-truckload area as well. Last December, it began a pilot in Los Angeles and Orange County, Calif. to offer nationwide two-day deliveries primarily for the company’s third-party merchants but also for shipments tendered by non-Amazon customers. According to one source, the service today focuses on small package deliveries from merchant locations to Amazon’s southern California warehouses. But Amazon is also testing an LTL service as part of the pilot, the source said. Amazon is offering significant price discounts as part of the LTL operation, according to the source.

A successful LTL network requires cubing out trailers, mixing shipments from multiple customers in each trailer, and then loading them high and tight. Amazon has the customers, the volumes, and is building the knowledge base to execute as efficiently in transportation as it has in e-commerce, according to the source. At the same time, though, Amazon’s physical distribution network is designed to serve as fulfillment centers and local delivery points, and whether the company wants to bother with commingling LTL consolidations is another matter. Amazon has 357 facilities across the U.S. performing different functions, with 48 more facilities planned as of this month, according to MWPVL data.

Charles W. Clowdis, a long-time trucking executive and consultant, said although buying a top-tier LTL carrier like Old Dominion Freight Lines Inc. or Estes Truck Lines would be costly, so would building an in-house operation. The best in-house approach, Clowdis said today in an e-mail, would be to select major markets in specified geographies and expand from there. “But that takes time,” Clowdis said. “You need to find facilities and people, and the start up costs would likely rival” that of buying an established LTL player. An Amazon spokesperson didn’t respond to a phone query as this story was posted.

Third parties still handle the lion’s share of Amazon’s deliveries, mainly because its volumes are growing so rapidly that it can’t meet its two-day delivery guarantees on its own. As a result, it appears unlikely that Amazon will ever completely cut ties with its delivery partners. Yet with worldwide shipping costs hitting $6.56 billion in the third quarter, up 22 percent, from the 2017 period, Amazon is shelling out a lot of money for their services. Whether it saves money by taking more of the shipping in-house is an unanswered question. The real question, though, is whether Amazon can better manage customer expectations by doing more of the work itself.

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Mark Solomon

Formerly the Executive Editor at DC Velocity, Mark Solomon joined FreightWaves as Managing Editor of Freight Markets. Solomon began his journalistic career in 1982 at Traffic World magazine, ran his own public relations firm (Media Based Solutions) from 1994 to 2008, and has been at DC Velocity since then. Over the course of his career, Solomon has covered nearly the whole gamut of the transportation and logistics industry, including trucking, railroads, maritime, 3PLs, and regulatory issues. Solomon witnessed and narrated the rise of Amazon and XPO Logistics and the shift of the U.S. Postal Service from a mail-focused service to parcel, as well as the exponential, e-commerce-driven growth of warehouse square footage and omnichannel fulfillment.