Thursday, April 7, 2016

Amazon’s Airfreight Move Raises Hopes in Cargo Business: Beleaguered freight operators say e-commerce giant may jump start demand and capacity growth

The Wall Street Journal
Updated April 7, 2016 4:52 p.m. ET Inc.’s recent deal to lease a small fleet of cargo planes to shuttle merchandise in the U.S. is raising hopes for a revival in the sputtering airfreight sector.

Since the retailer’s March announcement, some in the airfreight business say they’ve been working to arrange meetings with Amazon, offering up their services and capacity to try to snag a piece of what they believe could be a lucrative business.

“From the perspective of the industry, everybody is excited about this,” said Derek Jones, director of London-based freight marketing firm Pilot Marketing.

A spokeswoman for Amazon declined to comment on whether the company was meeting with aircraft owners or air cargo services providers.

Global airfreight volumes have been weak for several years, averaging 1.7% annual growth since 2011, according to the International Air Transport Association.

In the U.S., FedEx Corp. and United Parcel Service Inc. dominate the sector, with a handful of smaller carriers and a network of freight forwarders—companies that coordinate shipping for retailers and manufacturers—competing for the remaining business.

But demand for expedited freight hauls within the U.S. is dwindling as truck and rail companies have improved their services and enhanced supply chain technology has helped retailers and manufacturers better map out their distribution plans. A smaller share of shipments move at the last minute, requiring speedy air service, and shippers are opting more often for cheaper transport.

While demand in the passenger airline business has improved steadily since the recession, cargo has remained relatively flat and dozens of freighter aircraft remain in storage. In a forecast published last month, the Federal Aviation Administration said the trend is likely to continue, with domestic air cargo volume projected to grow at an average of just 0.4% a year between 2016 and 2036.

Some companies believe Amazon’s entry into the market, although relatively small in scale, could drive increased demand for airfreight services over time as the retailer’s competitors scramble to keep up with the company’s rapid fulfillment pace.

Under a deal with Air Transport Services Group Inc., announced last month, Amazon will lease as many as 20 Boeing Co. 767 aircraft, boosting its independence from UPS and FedEx. ATSG’s stock price, which started 2016 below $10 a share, has jumped more than 50% this year, although it fell 2.9% in trading on Thursday to $14.47 a share.

But whether Amazon can push the rest of the airfreight industry into a growth spiral depends on how far the retailer goes in building up its own distribution network, said Adriana Diener, a freight and logistics consultant with Accenture. For now, Amazon will be carrying its own merchandise aboard the small fleet of ATSG planes. But, Ms. Diener said, if the company offers up spare capacity to other shippers, using better technology and with low rates, “that might generate more airfreight in the industry.”

Over time, Amazon may turn its delivery network into a business in its own right, charging other shippers to ferry packages and drop off merchandise. The retailer recently registered with the Federal Maritime Commission, which will allow it to offer freight forwarding services to suppliers shipping cargo in or out of the U.S.

One advantage Amazon has is its technological savvy. In an industry that has struggled to find systems to manage complex reservations and track shipments that can jump between several carriers on a journey, the tech outsider could drive big changes.

Still, Amazon’s capability also may present a competitive threat to smaller freight forwarders, said Brandon Fried, director of the Airforwarders Association, an industry group. “They could probably force us as an industry to up our game, improve our processes, be sharper and improve our service to the customer,” Mr. Fried said.

Rob Britton, a senior adviser at freight software firm SmartKargo said Amazon’s announcement has “driven so much speculative frenzy,” but the company’s full plans remain unclear. “OK, you’ve got people’s attention—what comes next?”

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