In a press announcement Wednesday morning, Air Transport Services Group Inc. (NASDAQ: ATSG) said it has agreed to operate a U.S. air cargo network for Amazon.com Inc. (NASDAQ: AMZN). The possibility that Amazon was testing its own delivery service was reported last December.
According to Air Transport Services, it will lease 20 Boeing 767 freighters to Amazon’s fulfillment arm on what is known as a “wet lease.” Air Transport Services will provide crews and all other services for Amazon. The length of the leases vary from five to seven years and the agreement between the two companies has a five-year term.
Amazon also has been granted warrants to acquire up to 19.9% of Air Transport Services stock for a period of five years at an exercise price of $9.73 per share, a discount of about 17% to the stock’s Tuesday closing price of $11.77.
In a statement, an Amazon executive said:
We offer Earth’s largest selection, great prices and ultra-fast delivery promises to a growing group of Prime members and we’re excited to supplement our existing delivery network with a great new provider, ATSG, by adding 20 planes to ensure air cargo capacity to support one and two-day delivery for customers.
According to a spring 2015 price list based on IBA/Ascend data, a monthly lease on a 767 can cost between $150,000 and $480,000. Lease costs are based on a particular airframe’s age. At the mid-point of that range, $315,000, Air Transport Services is paying about $6.3 million a month for the airplanes. The crews and other services will add additional costs.
Amazon’s net shipping costs rose to $5.02 billion last year (including international shipping), primarily due to the company’s “Fulfillment by Amazon” offer to its marketplace sellers. In its Form 10-K filing Amazon said:
We expect our cost of shipping to continue to increase to the extent our customers accept and use our shipping offers at an increasing rate, our product mix shifts to the electronics and other general merchandise category, we reduce shipping rates, we use more expensive shipping methods, and we offer additional services. We seek to mitigate costs of shipping over time in part through achieving higher sales volumes, optimizing placement of fulfillment centers, negotiating better terms with our suppliers, and achieving better operating efficiencies.
This is not good news for United Parcel Service (NYSE: UPS) and the U.S. Postal Service, both of which ship Amazon goods domestically. There may even be a threat to FedEx Corp. (NYSE: FDX) if Amazon finds that it can operate a successful air cargo business at the tiny profit levels the company lives with. After all, if the service is a success, what’s to stop Amazon from hauling freight for any shipper?
Air Transport Services saw its stock up more than 22% Wednesday morning at $14.45, above the current 52-week range of $7.60 to $12.10. The consensus price target is $10.92.
Amazon shares traded up 0.7% Wednesday morning, at $564.33 in a 52-week range of $365.65 to $696.44.
UPS shares traded down 1.6%, at $99.00 in a 52-week range of $87.30 to $107.32, and FedEx shares were down 0.7%, at $141.50 in a 52-week range of $119.71 to $185.19.
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