Delivery Services Are Set to Be Amazon's Next Billion-Dollar Business

Amazon CEO Jeff Bezos is not one to pass up a good deal—or leave anything to chance. In fact, former Amazon engineer Steve Yegge made headlines in 2011 when he said Bezos “makes ordinary control freaks look like stoned hippies.” And so it was perhaps no surprise in early January when Amazon announced its purchase of 11 passenger aircraft, which are currently undergoing conversion into cargo planes and are expected to join the Amazon Air fleet in 2021 and 2022. In a statement, Sarah Rhoads, vice president of Amazon Global Air, said the new aircraft will help the ecommerce giant “continue delivering for customers across the U.S. in the way that they expect from Amazon.” The travel industry’s well-documented woes have created a buyer’s market for planes. Per figures from Thomas O’Connor, senior director and analyst for Gartner’s supply chain strategies team, the value of used Boeing 767 aircraft plunged about 15% last year, putting Amazon’s overall investment at a relative bargain of about $140 million to $150 million. In addition, Tom Mouhsian, principal analyst at Forrester Research, noted that aircraft prices will continue to drop because airlines no longer want to shoulder maintenance and storage costs for older planes in grounded fleets, so this may not be the last we’ve heard of Amazon Air’s expansion. But analysts also said this continued expansion was inevitable because traditional carriers like FedEx, UPS and USPS have struggled to meet Amazon’s lofty expectations. Two-thirds capacity already That's in part because Prime members expect one- or two-day shipping—at least, prior to the pandemic. “They have grown so quickly in the last three years while UPS, FedEx [and] USPS have simply not kept up,” said James Thomson, a former Amazon manager who is now chief strategy officer at Amazon agency Buy Box Experts. And with no sign of its ecommerce business slowing down, Amazon is increasingly taking matters into its own hands. In fact, as of July, the platform was reportedly delivering 66% of Prime orders in the U.S. via its own network. “The reality is as ecommerce continues to grow, Amazon must be in charge of its own destiny,” Thomson added. “Working with partners like the Postal Service … that's just not going to cut it because they can't keep up with Amazon's demands.” ‘Neither snow nor rain nor heat’ Bringing delivery in-house also potentially insulates Amazon from fulfillment challenges like "shipageddon," which delayed online orders during the 2020 holiday season when an uptick in orders maxed out carrier capacity. O’Connor pointed to a similar situation in 2013 when Amazon had egg on its face after failing to deliver by Christmas—even for some Prime members. “It looks like that may have been the trigger point for them to start to build out their own logistics network where they recognized that the capacity of the existing providers wasn't growing quickly enough, and they had an opportunity to create a competitive moat for themselves and start to build out their own delivery capabilities,” O’Connor added. “And we've seen that steadily grow.” That includes 20,000 Mercedes vans, which joined Amazon’s fleet about six months before the ecommerce platform announced its intent to pivot to one-day delivery. And Amazon’s ability to fulfill the USPS motto—"Neither snow nor rain nor heat nor gloom of night stays these couriers from the swift completion of their appointed rounds”—arguably better than USPS makes a compelling offering for consumers in an increasingly competitive ecommerce environment. “They have more options than their competitors if they have their own delivery network,” O’Connor said. “That's the competitive advantage they've created.” Thomson agreed no other retailer is in a position to simply not lean on outside carriers. ‘A formidable air freight operation’ But, Amazon being Amazon, its ambition likely doesn’t end there. In fact, the new planes are what O’Connor called a signpost “they will be trying to more directly compete with FedEx, UPS, etc.” Mouhsian agreed that Amazon’s appetite for aircraft, along with its new hubs in the U.S. and Europe, “definitely affirm Amazon’s desire to stand up a formidable air freight operation that would rival FedEx, UPS [and] DHL as not only an exclusive logistical provider for its own platform, but as a full-fledged [third-]party logistics company, serving other clients.” We’ve seen this before with business units like Amazon Web Services (AWS). Per Thomson, Amazon initially built the cloud platform to support its own site traffic until eventually AWS had enough capacity for outside clients. It’s now a $400 billion business. “So at some point, just as they've done with other parts of the organization, they build out capability internally, see their own business as their first customer and then they look to sell that capability to others,” O’Connor said. “And this, I would suggest, is another perfect example, with the planes being an extrapolation of exactly that.” As a result, O’Connor said he’d be “very surprised” if Amazon is not competing directly with UPS and FedEx in five years. But Thomson was quick to point out that Amazon is acting out of necessity, looking out for No. 1. “Nobody sat down in Amazon's office and said, ‘It's time for us to destroy FedEx,'" he said. “If UPS had been able to keep up with Amazon … we wouldn't be having [this conversation]." Another advantage: The additional capacity could help Amazon capitalize on ecommerce transactions that take place on other platforms, including Shopify. Thomson said: "If they can figure out how to build excess shipping capacity and become the carrier of choice because they're more efficient or it's just plain more convenient for sellers to say, ‘Hey, pick up my Amazon orders and my non-Amazon orders when you bring your truck to my warehouse,’ that's a great way for Amazon to grow."