For Amazon, the sky's the limit

A rendering of Amazon Air’s processing centre, which is scheduled to open this autumn, at the Cincinnati/Northern Kentucky International Airport in the United States.
A rendering of Amazon Air’s processing centre, which is scheduled to open this autumn, at the Cincinnati/Northern Kentucky International Airport in the United States. PHOTO: AMAZON

(BLOOMBERG) - Amazon.com is opening warehouses and shipping hubs in the United States at the rate of about one every 24 hours. The ultimate aim is to ensure that virtually every product the company sells is a van ride - and eventually a drone flight - away from customers' homes.

And yet, Amazon announced this month it was buying 11 Boeing 767-300 jets for its air cargo division, mostly to get products to Prime subscribers.

Despite creating algorithms to anticipate shoppers' needs and opening all those warehouses, Amazon cannot meet its one- and two-day shipping pledge to customers without an ever-expanding fleet of jets.

That reality has become clearer since the pandemic fuelled a surge in online shopping that has strained the resources of United Parcel Service (UPS), FedEx and the US Postal Service (USPS), forcing Amazon to pick up the slack.

Inside the company, Amazon Air is sometimes considered more of an expensive necessity than an asset. An organisation bent on delivering orders quickly and efficiently would rather move products by lorry than plane, which costs as much as seven times more.

Employees have internalised this fact with a typically Amazonian mantra: "Air is a defect." It does not help that many of the planes Amazon flies are older models that spew more greenhouse gases than newer, more fuel-efficient planes.

The same day it announced the 767 order, Amazon flew 153 flights - the equivalent of one take-off every nine minutes - among 40 airports stretching from Germany to southern California.

Flying parcels and not people

When the 11 newly purchased jets have entered service by the end of next year, Amazon Air will have a fleet of 85 planes. The expanded air cargo operation will add billions of dollars to already hefty shipping costs that amounted to US$52 billion (S$69 billion) in the 12 months ended last September.

Though Amazon is one of the wealthiest and most valuable companies in the world, it has historically operated on razor-thin margins and ploughed cash back into the business, sometimes to the consternation of investors who would rather see the firm focus on profitability. For many years, Amazon was a kind of logistical middleman, receiving bottles of shampoo or crates of books from suppliers, storing them and, when a customer clicked Buy Now, handing the packages off to UPS, USPS or FedEx.

Then, in December 2013, a combination of bad weather and logistical bottlenecks derailed holiday deliveries and forced Amazon to issue refunds to irate shoppers.

It was an unprecedented setback for a company that puts customers at the centre of everything. Not long after, Amazon began expanding its supply chain and building its own transportation network.

A handful of warehouses grew to hundreds, and Amazon established relationships with small trucking firms and air cargo operators. In 2015, the company began chartering its own regular cargo flights, under a veil of secrecy that featured code names and packages wrapped in black plastic to obscure Amazon's identity, from a little used airport in southern Ohio.

Called Prime Air when the company introduced its first branded jet in 2016, then renamed to avoid confusion with the yet-to-launch drone fleet, Amazon Air is led by Ms Sarah Rhoads.

She is a former US Navy F-18 pilot who flew combat missions during the Iraq War before starting a second career managing workers who pack and ship items in one of Amazon's warehouses. She went on to oversee Amazon's warehouse network in Britain, before being tapped to lead Amazon Air a year after its formal launch.

Amazon does not operate its planes, relying on contractors to fly and maintain them and negotiate with the pilots' unions, a task that union-averse Amazon would likely prefer to avoid. Much of Wall Street believes Amazon will eventually fly packages for other companies to defray investments in Amazon Air and generate new revenue streams, much the way it did with other logistics services and its cloud-computing division.

But for now, Amazon Air ships items already in its warehouses, typically bound for customers. The shoppers on the receiving end likely ordered the items using one of Amazon's quick-delivery options, but not same-day delivery.

The fleet operates almost exclusively in the US. But Amazon, which has operated charter flights between European cities for years, started building its own network on the continent last year with leased planes flown by ASL Airlines, and a hub at Leipzig/Halle Airport in Germany.

New 767 freighters carry a list price of about US$200 million, though airlines typically receive discounts. Aviation consultants estimate Amazon may have paid as little as $10 million apiece for its latest planes. Converting them to cargo use - ripping out the seats, reinforcing the flooring, installing cargo doors - costs about $14 million per plane, according to Dr Laurent Rouaud, co-founder of Avworks Partners, an aviation consulting firm. Amazon, Delta Air Lines and WestJet Airlines declined to disclose the purchase prices.

Even as Amazon expands its air cargo division, its chief executive Jeff Bezos remains fixated on his ultimate dream: building a network so sophisticated it can get just about anything to a customer's doorstep in 30 minutes or less.

One day his vision will bring another air carrier to life, the Prime Now drone fleet that, along with autonomous vehicles and electric vans, could make it less necessary to fly stuffed giraffes across the country.