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  • ANALYSIS: How US air cargo players embraced e-commerce

ANALYSIS: How US air cargo players embraced e-commerce

It seems possible 2016 could mark a major turning point by North American air cargo companies as they begin to embrace the booming business of e-commerce.

The evidence lies in deals signed this year by Atlas Air Worldwide Holdings and Air Transport Services Group to operate Boeing 767s for Amazon.

And while the agreements establish Amazon as a bona fide player in the air cargo market, they also suggest that the industry, which has long struggled with anaemic growth, has made a course adjustment.

"This might be a bellwether,” Andrew Schmahl, transportation and logistics partner at consultancy PwC, tells FlightGlobal. "If nothing else, this is a wake-up call to the industry."

He notes that although e-commerce has been a rapidly-expanding component of global commerce in recent years, air freight companies have not been fully on board.

"Air cargo, to date, has not really been leveraging it as a centrepiece of its strategy," Schmahl says.

"With Amazon, it really solidifies those companies in the direction of e-commerce," Cowen and Company managing director Helane Becker tells FlightGlobal. "It's an extension of an existing business model, but it gets them more involved in e-commerce."

Roughly a year ago news spread that Amazon had interest in establishing an air shipping arm. Then in March this year, Wilmington, Ohio-based ATSG announced a major agreement under which it would establish an Amazon-dedicated air freight operation, carrying cargo between Amazon fulfilment centres.

The agreement calls for ATSG subsidiary Cargo Aircraft Management to lease 20 Boeing 767s (comprising 12 767-200Fs and eight 767-300Fs) to Amazon, while ATSG units ABX Air and Air Transport International will operate the aircraft for at least five years.

In May New York-based Atlas announced a similar arrangement under which subsidiary Titan Aviation Holdings would lease 20 767-300Fs to Amazon. Under the deal Atlas Air would operate the aircraft for up to 10 years.

More than operating aircraft, the agreements grant Amazon rights to purchase 19.9% of ATSG's stock and 20% of Atlas stock - with an option to increase its Atlas holdings to 30% if the companies expand their relations.

Amazon has already bought millions of shares of each company, financial filings show.

In addition, Amazon can place a director on both companies' boards, which could give Amazon sway over management decisions.

Still, observers caution against overplaying Amazon's hand; the retailer has not bought the aircraft – at least not yet – and the freight companies still operate the flights.

And those operations are up and running.

At the beginning of December, ATSG operated 14 767s for Amazon, with plans to have all 20 aircraft flying in 2017, the company tells FlightGlobal.

ATSG reported that Amazon-related revenue accounted for almost a quarter of total revenue in the first nine months of 2016.

Atlas has just one aircraft in Amazon service. But Amazon made a splash with that aircraft, releasing last summer a time-lapse marketing video showing the 767 being painted in the colours of "Prime Air".

Atlas has said it expects that all 20 767s will be flying for Amazon in 2018.

Amazon video of first Prime Air-branded 767, an Atlas aircraft

In addition to Atlas and ATSG, news also broke in 2016 that Canadian cargo airline CargoJet had also signed a similar deal with Amazon.

The Prime Air deals came amid ongoing weakness in the global air freight market.

Atlas' chief financial officer Spencer Schwartz noted in November that the traditional heavy air freight market grew just 2.4% in 2015, while the international express air freight market grew 4.9% and the e-commerce air freight business surged 20.4%.

Traditional air freight demand has recently improved, with IATA reporting that demand, measured in freight tonne kilometres, jumped 6.1% year on year in September – the fastest pace since February 2015.

"We have seen that demand has been strong week over week," Atlas's Schwartz said in November. "Yields continue to strengthen week over week."

But IATA's September report makes it clear the industry faces an uphill climb.

"Underlying weakness of world trade" continues hampering air freight volume growth, and trade agreements that bolstered worldwide air freight in previous years appear to be under threat, it says.

That language comes as the USA elected as its next president Donald Trump, who has criticised free trade deals, and after the UK's referendum vote earlier this year to exit the EU, the trade effect of which remains unknown.

"Global trade growth has slowed almost to a standstill," IATA's September report says. "Given the current political environment, any immediate impetus to reinvigorate the stagnation in world trade volumes appears unlikely."

TRANSFORMING AIR CARGO?

Amid those factors, some air cargo executives say they are transforming their businesses.

"We are becoming a different company," Atlas chief executive William Flynn said in June. He also called attention to Atlas's April acquisition of Southern Air Holdings, which gave the company more aircraft and additional contract work with DHL.

"We are entering an era of significant business growth," Atlas's Schwartz said during an investors' conference in November. "From traditional heavy air freight, we are moving more deeply into the much faster growing integrator, express and e-commerce markets."

"Our acquisition of Southern Air and our long-term strategic relationship with Amazon are truly transformative for our business," Schwartz added.

But some observers describe the Prime Air deals as more of a pivot than a transformation.

Atlas and ATSG already carry some e-commerce by operating aircraft for express shipper DHL, Cowen's Becker notes, and the bulk of both companies' fleets continue serving other customers.

"It's not as though they are abandoning the rest of their customers," Becker says of Atlas and ATSG.

With about 60 freighters each, Atlas and ATSG (and their subsidiaries) operate the two largest air freighter fleets in the USA, excluding fleets of express package delivery giants FedEx and UPS, according to securities filings and Flight Fleets Analyzer.

Observers describe the Prime Air development as unsurprising, but also novel.

Retailers have long sought to manage shipping as a means to improve service and cut costs, Schmahl says, noting that Walmart has operated a fleet of trucks for years.

He says the recent air cargo deals are, in many ways, a "natural extension" by Amazon. The company has had problems with existing shipping partners in recent years and saw its shipping costs skyrocket to $5 billion in 2015.

But the deals are also unique because they involve aircraft, not trucks.

"It has been done on the ground for decades," Schmahl says. "But this seems to be the first air movement."

Some people suspect Amazon may have another goal in mind: to bring its technology expertise to bear on air freight.

Broadly speaking, transportation companies have been slow to adopt new technology and related customer service improvements, Schmahl says.

But Amazon is a technology company, and may seek to help air freight carriers "build a better mousetrap", he says.

He can envision streamlined transfers of packages at airports, inflight package labelling and sorting, and better package location monitoring.

Amazon could perhaps use Prime Air to help make "predictive" shipping a reality, one observer suggests.

Predictive or "anticipatory" shipping, explained in a 2013 Amazon patent, is a process of using analytics to predict orders, and then shipping products to customers before they actually place an order.

Regardless of Amazon's motives, Schmahl says e-commerce is the way of the future, and air cargo companies should work to become an efficient link in the e-commerce chain.

"There is an old world and a new world. This is just representative of what business will be like in the future," says Schmahl. "You have to move on from thinking of yourself as a transportation company… and more of an integrated partner."

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