Thursday, May 05, 2016

Amazon Partners with Atlas Air Worldwide for Cargo Services: Agreement includes lease of 20 Boeing 767 freighters to retail giant

The latest deal, this one with Atlas Air, signals the seriousness and scope of Amazon’s intention to go big in logistics, as its fast-growing shipment needs exceed the capacity of traditional carriers such as UPS and FedEx. 
A Boeing 767 arrives at Boeing Field ferrying parcels for UPS. Amazon is venturing into same territory and will lease 20 cargo planes from Atlas Air Worldwide Holdings, a deal that doubles the size of the tech and retail giant’s emerging air force. will lease 20 cargo planes from Atlas Air Worldwide Holdings, a deal that will double the size of the tech and retail giant’s emerging air force and could give it a sizable stake in a second air-freight company.

The move comes just a few months after Amazon struck a similar deal with Air Cargo Transport Services Group (ATSG).

The latest deal signals the seriousness and scope of Amazon’s intention to go big in logistics, as its fast-growing shipment needs exceed the capacity of traditional carriers such as UPS and FedEx.

The strengthening of its transportation capabilities is all the more urgent as Amazon bets on quasi-immediate delivery services to edge out brick-and-mortar retailers and other online competitors.

Amazon’s sales grew an eye-popping 28 percent in the first quarter, to $29.1 billion. Its shipping costs grew at an even faster clip of 42 percent to $3.3 billion.

In an earnings call last week, Amazon Chief Financial Officer Brian Olsavsky said the reason for the company’s logistic forays is to “serve our customers faster and faster delivery speeds.” Amazon doesn’t intend to replace its existing logistics partners FedEx and UPS, just to complement them, he said.

These are “great partners, have been and will continue to be for the future. But we see opportunities where we need to add additional capacity and we’re filling those voids,” Olsavsky said.

However, a senior air-cargo business executive familiar with discussions inside Amazon’s burgeoning air-cargo unit thinks its longer game may involve building a substantial domestic network that could carry not just its packages but those of others.

In particular, said the executive, who asked not to be identified because he is involved in aircraft-purchase negotiations with parties involved, said it could carry cargo for European freight carrier DHL, a global rival of FedEx and UPS and the largest customer of both ATSG and Atlas.

On an earnings conference call Thursday, Atlas CEO William Flynn said “DHL is very supportive of this transaction.”

An Amazon spokeswoman says the aircraft will be used to support one- and two-day delivery for the rapidly expanding Prime membership. The service costs $99 a year and offers shipping and other perks.

In a news release, Atlas Air said it would operate the 767-300 aircraft for Amazon. The deal also gives Amazon an option to acquire up to a fifth of Atlas’ common shares over five years at $37.50 per share. Half of those warrants were awarded to Amazon at the signing of the deal, Atlas executives said in an earnings call. The rest will be awarded when the program is fully ramped up.

Amazon would also get the right to buy an additional 10 percent of the shares over seven years at the same price if it increases its business with Atlas beyond the 20 aircraft.

The 10-year leases will begin this year and ramp up to full service in 2018. Amazon gets a nonvoting observer seat on Atlas’ board. If it chooses to convert its warrants into 10 percent ownership of the stock, it would gain the right to appoint a director, Atlas executives said. Amazon is expected to represent a big portion of the company’s earnings going forward, they said.

“We are excited to begin a strategic long-term relationship with Amazon to support the continuing expansion of its e-commerce business and to enhance its customer delivery capabilities,” CEO Flynn said in a statement. “We appreciate Amazon’s confidence in our capabilities, global scale and operating excellence.”

On the earnings call,Flynn said the air-cargo company operates 21 Boeing 767 freighters and plans to add 20 more 767-300s specifically for Amazon.

He said New York-based Atlas has already acquired a number of used commercial 767 passenger jets that it will convert to freighters and that it is well along in its quest to procure the rest of the 20 jets.

“We are buying them and then converting them,” Flynn said.

The slow conversion process could potentially prove a bottleneck, because only two facilities in the world are licensed by Boeing to do 767 conversions.

One is operated by Bedek, a unit of Israel Aerospace Industries in Tel Aviv. Boeing operates the other one, in Singapore, in partnership with aircraft-maintenance firm ST Aero.

The senior air-cargo executive said a top Atlas technical executive was in Singapore this week trying to finalize a conversion contract with Boeing.

And he said Boeing is far along in an approval process to open a second 767 conversion line, either at its maintenance joint venture with China Eastern Airlines in Shanghai or at Evergreen Aviation Technologies in Taipei, Taiwan.

Even with extra capacity, it would still be a challenge for the conversion shops to deliver 20 more 767 freighters beyond their prior commitments by the end of 2018, the executive said

Boeing had no immediate comment.

On the earnings call, Flynn said, “We feel very confident about our ability to deliver the converted aircraft to Amazon based on the schedule we’ve agreed with them.”

Amazon has built some flexibility into the deal. It’s leasing the 20 aircraft from Atlas initially for 10 years while contracting with Atlas to operate them — providing the pilots, maintenance and insurance — for just seven years, extendible to 10.

If Atlas’ operational performance were to fall short or prove expensive, Amazon after seven years could keep the aircraft but have another company operate them — or potentially form its own airline and operate the planes itself.

When completed, these 767 converted freighters cost about $300,000 to $325,000 per month to lease, according to people in the air-cargo business.

Flynn said Atlas will add pilots to fly the additional 20 jets and in the past quarter accelerated its pilot-training program in Miami to prepare for the fleet expansion.

In another possible wrinkle, the Atlas pilots, along with those at the other Amazon carrier, ATSG, are in intense labor negotiations.

The pilots at both companies are represented by the International Brotherhood of Teamsters airline affiliate, Local 1224, and have been stalled in negotiations.

ATSG pilots have been negotiating for an amended contract for more than two years. Atlas pilots have filed for federal mediation.

Pilots at both carriers are conducting a strike vote this week, though an actual strike is unlikely to happen before further protracted negotiation.

Local 1224 President Daniel Wells, a pilot with Atlas, said both Atlas and ATSG are losing pilots through attrition because of what they think are poor contracts.

Wells said that despite the confidence expressed by Flynn, Atlas won’t find it easy to recruit more pilots.

Atlas shares jumped 27 percent for the day after news of the Amazon deal, closing at $48.66.

Original article can be found here: Inc. announced plans Thursday to double its fleet of jets for domestic package deliveries through a deal with Atlas Air Worldwide Holdings Inc. that marks its second investment this year in an air cargo airline.

Atlas Air’s shares rose 26% to $48.39 in midday trading as Amazon edged down 0.6% to $666.90.

The move, which includes the lease of 20 Boeing Co. 767 freights to Amazon, comes after the tech company made a similar agreement in March, when it said it planned to shuttle merchandise around the U.S. using as many as 20 767s from Air Transport Services Group.

News of that deal sent the Air Transport Services’ stock soaring 24% at the time.

Atlas Air Worldwide also said it granted Amazon warrants to acquire up to a 30% stake in the company at a price of $37.50 a share, after the issuance of Atlas Air’s common stock. Amazon could acquire 20% over five years and then an additional 10% over seven years.

Atlas Air said Thursday that Amazon can take a seat on its board when Amazon exercises warrants for an initial 10% sake in the air cargo operator.

Similarly, the online retailer had said in March it would work to secure warrants giving it almost 20% of Air Transport Services equity and a board seat. Those warrants were priced at $9.73 per share over five years.

The agreement with Atlas air Worldwide includes operation of 20 Boeing Co. 767 freighters for Amazon by Atlas subsidiary Atlas Air Inc. The operation of the freighters with crew, maintenance and insurance will last for seven years. Atlas Air said Amazon agreed to a so-called dry leasing by its Titan Aviation leasing unit, which have a term of 10 years. In a dry lease agreement, only the plane is given.

Dave Clark, Amazon’s senior vice president of world-wide operations, said the agreement would “support package delivery to the rapidly growing number of Prime members who love ultrafast delivery.”

The agreement is expected to begin in the second half of the year and continue to ramp up through 2018.

The Seattle retailer has taken steps to reduce its reliance on carriers such as United Parcel Service Inc. and FedEx Corp. It has built a ground network of couriers and new warehouses near or within urban centers for faster and cheaper delivery.

The Wall Street Journal reported in December that Amazon was seeking aircraft from companies including Atlas Air and Air Transport Services.

Atlas Air, which reported better-than-expected earnings on Thursday, said the partnership with Amazon would add to its earnings and cash flows over time.

In the first quarter, Atlas said it earned $471,000, or 2 cents a share, compared with a year-earlier profit of $29.2 million, or $1.17 a share. Excluding items, Atlas Air said it earned 31 cents a share. Analysts polled by Thomson Reuters projected 25 cents a share.

Revenue fell to $418.6 million from $444.8 million. Analysts expected $420 million.

Original article can be found here:

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