Amazon Prime Day is the first big test of the Prime Air fleet

Key Points
  • On Prime Day III, Amazon has added a new piece to its shipping puzzle: airplanes.
  • Prime Air is the air cargo service Amazon officially introduced last summer.
  • Amazon has been plowing billions of dollars into steadily building its own transportation and logistics network.
Amazon ramps up transportation ahead of 'Prime Day'
Amazon ramps up transportation ahead of 'Prime Day'

Amazon's third annual Prime Day has a new piece to its shipping puzzle: airplanes.

The new Prime Air fleet will help deliver the Echo devices, flat-screen TVs and countless other marked-down goods expected to lure consumers' dollars with the easy swipe of a tab. The 30-hour Black Friday-like sales event is marketed to Prime members, meaning the millions of projected shipments destined for doorsteps will have two days or less to get there.

Enter Prime Air — the air cargo service Amazon officially introduced last summer.

"These planes are predominantly focused on our two-day network," said Dave Clark, Amazon's senior vice president of worldwide operations and customer service, a role that includes oversight of the supply chain and transportation network. "What it does is it allows us to make the [shipping] cut-off later, so you can order later and later and still get that in the two-day promise with our own air network."

Standing in front a Boeing 767 fitted for freight and emblazoned in blue and white branding including the Prime swish logo, Clark said the fleet of 24 planes allows Amazon to fly to cargo hubs, but also from "point to point." Sixteen planes will be added by mid-2018.

Traditional cargo flights typically involve hub stops; flying point to point means flying direct to a final distribution area from where a shipment will depart on a vehicle on the so-called last mile of delivery to a residence.

Clark estimated that the direct option can shave 12 to 15 hours off of a cross-country journey — a crucial reduction when the turnaround is a tight 48 hours or less.

The planes are evenly leased out by and operated by two cargo airlines: Air Transport Services Group and Atlas Air Worldwide. Since announcing their deals with the e-commerce giant last year, the two lessors have seen their stocks soar. Shares of both jumped more than 2 percent apiece on Monday ahead of Prime Day, as well. boxes are shown stacked near a Boeing 767 Amazon "Prime Air" cargo plane on display in a Boeing hangar in Seattle.
Ted S. Warren | AP

For now Clark is not commenting on whether Amazon will expand its fleet beyond the 40 767s already contracted. It does have warrants to buy at least a 20 percent share of each company over the next several years, and it is investing $1.5 billion into an air cargo hub at Cincinnati-Northern Kentucky Airport, where package carrier DHL has operations.

But the shipping strategy stretches far beyond jetliners. Amazon has been plowing billions of dollars into steadily building its own transportation and logistics network — one that included 5,000 branded semi trailers hauled by contracted truckers, container shipping for Asian sellers importing goods to be sold through the Amazon platform, tens of millions of square feet of automated warehouse space, apps for last-mile and middle-mile delivery services, and of course eventually drones (which also falls under the Prime Air umbrella).

The investments have stirred questions in the shipping industry and on Wall Street: Is Amazon really looking to move all of its shipments in-house? Is it looking to eventually compete against the carriers like United Parcel Service and FedEx, which it currently relies upon? Or is this simply a necessary move to be able to keep pace with the aggressive growth of Prime membership?

"There are really two reasons we do this. First and foremost, I think it's innovation for customers. So whether it be planes enabling us to do later cut-offs for two-day deliveries, or 'flex' — which enables us to do one-hour delivery and things like our Prime Now business — creating new delivery services for customers is a big deal for us," Clark said from the tarmac at Sea-Tac Airport, a 20-minute drive from Amazon headquarters in downtown Seattle. "Second is supplying incremental capacity to support the growth in Prime customers."

In other words, Amazon is not looking to directly compete with its current shipping partners. At least, not yet.

Rather, it's building out capacity because it needs it, beyond the long-term contracts with UPS, FedEx, the U.S. Postal Service, and others. It's something all involved have been asserting for years in interviews and on earnings calls, as e-commerce growth continues to outpace capacity and the pace at which shippers have been able to expand their networks to better meet that demand.

Some analysts surmise the major carriers don't make much money on that business anyway since the sheer scale of the Amazon operation has enabled it to negotiate rock-bottom shipping rates that translate into razor-thin margins for the companies involved.

Additionally, many are skeptical Amazon could successfully get into the game of transporting goods for other shippers since so many are retailers and consumer-oriented businesses that now view the tech behemoth as a serious threat.

For Amazon, bringing more transportation capabilities in-house could help rein in ballooning shipping costs — a metric it only just recently began breaking out in quarterly earnings. In the first quarter, worldwide shipping revenue grew 37 percent year on year to $2.5 billion; worldwide shipping costs grew 34 percent to $4.4 billion. It could also help give the company famous for its fixation on customer service more control, after delivery misses by UPS and FedEx during Christmas seasons past.

As for Prime Air, the next few days will prove to be the fledgling fleet's biggest delivery test yet — and one coming as some pilots look to negotiate their union contracts with the lessors.

As for UPS, FedEx and the Postal Service, they all insist they're ready to deliver for all of their customers this week.

"We have a great group of core carriers around the world that do work for us and we continue to partner with them, and then we're about enabling a ton of small businesses — whether that be in the last-mile space; the middle-mile, providing power for the over 5,000 trailers we operate; or working with Atlas and ATSG," said Clark. "What we think we're doing is stitching together a great group of small businesses that are enabling fast delivery for Prime customers."

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