BUSINESS

Is local air cargo firm hauling Amazon deliveries?

Emilie Eaton
eeaton@enquirer.com
Amazon.com founder and CEO Jeff Bezos
  • For several months, analysts have said it's likely Amazon will build its own delivery business.
  • Wilmington-based Air Transport Services Group could be helping the retailer test the idea.
  • If successful, Amazon could guarantee faster deliveries, be less reliant on UPS and FedEx.
  • It could also add hundreds of high-paying jobs to the region.

Is Aerosmith the name of Amazon's trial run in the air cargo business? And is that delivery service being tested in Cincinnati's backyard? Those are good questions that nobody's answering, although new hints of confirmation were dropped this week.

In recent months, analysts and other Amazon watchers have increasingly speculated that the e-retailer is testing such as delivery service of its own, instead of shipping through companies such as UPS or FedEx.

Air Transport Service Group, a Wilmington-based provider of air cargo transportation, could be part of Amazon's expansion into delivery services, the analysts say.

For its part, ATSG says it's running a small cargo operation called Aerosmith on a trial basis, but it won't discuss the client behind the enterprise.

"Since September we've been running a small cargo operation on a trial basis, which currently consists of five flights per day," said Paul Cunningham, a spokesperson for ATSG.

"Unfortunately, I'm unable to comment on the customer, cargo, or locations served, nor am I at liberty to discuss terms or length of the contract," he said.

Amazon did not respond to The Enquirer's request for comment.

But ATSG this week offered new details about how the venture with the customer that it won't confirm is Amazon is going.

The company revised its fourth-quarter earnings outlook with the U.S. Securities and Exchange Commission, thanks in large part to better than projected results from its arm that does business with Aerosmith.

"We are very pleased with our 2015 performance, not just from the new business we added but also for how well our teams performed for all of our customers," ATSG President and CEO Joe Hete said in a news release Tuesday. The company bumped up its projections for earnings a range of $196 million to $200 million, up from guidance it issued in November for profits of $190 million to $195 million.

"We faced extraordinary challenges in 2015 to quickly pace and operate our 767 freighters over new routes and in concert with new ground services, while continuing to provide great service to all of our other customers," he added.

The Aerosmith operation uses Boeing 767 freighters, ATSG's Cunningham confirmed to The Enquirer

The operation is still running, the company said in the filing, adding "ATSG is seeking to extend its provision of network services for this customer."

In a subsequent presentation to investors, company officials said they'd like to see the trial with the unnamed customer go past its scheduled March end date and that they could expand the service to Europe or China, if the customer wanted.

“We’d like to extend our provision of services to that customer for a longer period of time,” ATSG chief financial officer Quint Turner said at an investor conference Wednesday. Shares in ATSG rose 11 percent that day, closing near their 52-week high.

Goal: Curb reliance on UPS and FedEx

Amazon's apparently delivery gambit comes as no surprise to many observers.

"We have seen Amazon be aggressive in other areas," said Michael Jones, an economics professor at the University of Cincinnati. "They recently opened a brick-and-mortar store across from UC’s campus. Having these brick-and-mortar stores plays into the idea that Amazon may be expanding its presence elsewhere, as well.”

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Jones said he wouldn't be surprised to hear a potential Amazon venture into delivery service "in the near future."

Much has been written about Amazon's potential entry into the delivery service realm.

A November investigation by Motherboard, an online magazine launched by Vice News in 2009, found the Aerosmith operation has flights in and out of four confirmed airports: Allentown, Pennsylvania.; Ontario, California; Tampa, Florida; and Oakland, California.

Amazon has distribution centers less than 60 miles from those locations, the report said, leading analysts to believe Amazon could be behind Aerosmith.

Last week, Bloomberg News took a closer look at Amazon's probable expansion into a delivery business.

Bloomberg reporters reviewed internal Amazon documents and discovered a 2013 report to Amazon's senior management team, in which Amazon proposes an aggressive global delivery business.

"The report envisioned a global delivery network that controls the flow of goods from factories in China and India to customer doorsteps in Atlanta, New York and London," Bloomberg reported.

"Sellers will no longer book with DHL, DPS or FedEx but book directly with Amazon," the 2013 report states, according to Bloomberg. "The ease and transparency of this disintermediation will be revolutionary and sellers will flock to (Fulfillment by Amazon) given the competitive pricing."

Marc Wulfraat, president of MWPVL International, a supply chain, logistics and distribution consulting firm that provides services in strategy, facility design and technology, said he wouldn't be surprised if Amazon is looking at forming its own delivery business.

"The biggest problem for Amazon is that they have millions and millions of products available, but they can’t stock those items in every fulfillment center," he said. "That would be essentially impossible."

If a customer orders a product and it's located at a neighboring fulfillment center, then that isn't a problem. A package can be sent through the U.S. Postal Service fairly quickly and conveniently.

For orders that are farther away, though, Amazon is reliant on UPS and FedEx.

That costs money, Wulfraat said. Amazon has to pay the secondary company per carton of merchandise.

Additionally, Amazon is dependent on UPS and FedEx to deliver packages on time during peak shopping periods like Christmas.

In 2013, that backfired. UPS delivered several packages late for Christmas, caused in part by severe weather conditions and an uptick in online shopping.

Amazon was hurt by UPS' mistake. The company, which had promised customers a delivery in time for the holidays, issued an apology and offered a refund in shipping costs and gift cards.

"This is really about them eliminating their need for UPS and FedEx," Wulfraat said.

Employees work to fulfill orders at the Amazon Fulfillment Center in Hebron on Cyber Monday.

So how it would 48-hour delivery work?

Wulfraat, of MWPVL International, doesn't have any firsthand knowledge about Amazon's intentions, but he has studied the company extensively, and this is how he guesses the Aerosmith operation works.

Say a customer named Jane, who lives in Indianapolis, orders a rare book online through Amazon. The book isn't stored at every fulfillment center, and it needs to be shipped from Seattle, Amazon's headquarters.

Instead of shipping the book through a 5- or 6-day ground shipment with UPS or FedEx, Amazon would send the book overnight in a private Boeing 767 freight to Wilmington, where it would then go on a conveyer belt to be shipped through the U.S. Postal Service.

The U.S. Postal Service could probably deliver the book in another day or two. Amazon has cut down a 5- or 6-day delivery period to a 2- or 3-day delivery period.

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The company could also potentially cut down on costs. Amazon pays roughly $1.5 billion in shipping costs with other companies per year, Wulfraat said. If it flew its own packages, Amazon would no longer have to pay per carton. It would pay a flat rate by plane.

"With FedEx and UPS, the further away the shipment is, the more it costs," Wulfraat said. "You’ve gotten rid of the variability pricing."

The plane wouldn't fly back empty, either. The company could fill up the plane with products from the Midwest, and send them back to Seattle.

Wulfraat said Amazon chose Wilmington deliberately. Seventy percent of the population lives east of the Mississippi River. Additionally, UPS and FedEx have facilities in the Midwest, suggesting it works for their companies as well.

"it's central and it's available," he said. "It's the perfect place to be."

Jones, of the University of Cincinnati, agreed.

"We’re connected to so many cities with Interstate 75," he said. "It provides growth opportunities for Amazon."

Amazon already has nearly 2,000 workers at fulfillment centers in Hebron; it is building two more centers near Columbus. ATSG's operations in Wilmington, at a former Air Force base, are near Interstate 71 and roughly halfway between Cincinnati and Columbus.

High-paying jobs possible if Aerosmith succeeds

Jones said the Aerosmith operation, if expanded, could have a considerable impact on the local economy in Wilmington, which still hasn't recovered since DHL ended its domestic delivery service and closed a hub there in 2008.

Jones said not to expect the ATSG/Aerosmith operation to add thousands of jobs to the region. Logistics and transportation industries are trades that don't require a lot of workers, unlike, for example, the health care industry.

But those select jobs – maybe a couple hundred – could still have a sizable impact on the local economy. Transportation jobs are typically high-paying jobs.

“It might take away some business from UPS," he said."But as a whole, the region would benefit from the opportunity to distribute goods.”