Amazon’s Emergence as an Integrated Carrier

The growth of Amazon in the logistics space has been nothing short of phenomenal. To find out where the company is headed, Alec Gustafson of GLG’s Energy and Industrials Team spoke with industry expert Dean Maciuba. Highlights of the conversation, edited for space and clarity, follow.

Dean, would you please start by outlining Amazon’s current logistic capabilities?

Let me identify eight things they’re currently doing.

1. First, they are an ocean carrier, which means they have control over the transit of their freight coming from Asia, and primarily China.
2. They also have their own truckload brokerage, freight.amazon.com, meaning they can identify independent truckers having available space on their trucks and negotiate directly with the trucker, eliminating a third-party broker — which is typical Amazon. They’re also offering spare capacity to third parties.
3. In the air, they have over 100 jet cargo aircraft, almost all leased through ATSG or Atlas. They operate a national air hub in Covington, Kentucky, and also have a great relationship with Cargo Jet in Canada, which supplements what they have in the U.S. without having to buy or lease 20 or 30 expensive aircraft.
4. With Amazon Flex, they offer the largest on-demand, same-day delivery service available in the U.S.
5. Their drone initiative, Prime Air, which is implementing now, has been slow to develop and will be a costly service offering. Look for Amazon to focus this service on the delivery of high-value goods, like medical-related items.
6. The Ship with Amazon service, which began in 2018, was halted when COVID-19 hit. It appears to be slowly returning and will allow Amazon to act as an integrated parcel carrier, picking up and delivering parcels from third-party shippers with no relationship to their e-commerce business.
7. Fulfillment by Amazon is their business that ties fulfillment to distribution.
8. And finally, Amazon is just starting up partnerships with small businesses in rural areas in which those businesses deliver for Amazon.

Let’s look at the seas. Has Amazon been able to avoid the port bottlenecks we’ve been seeing?

Because Amazon is a non-vessel operating common carrier, or NVOCC, they control the ships they use. They don’t own them, but they control them. That means they can redirect those ships on a dime, if necessary, and go to ports having fewer delays. While they’re not now reselling excess space on their ships, largely because there is not enough capacity and every ship is packed, they probably will in the future. It all goes back to the Bezos-inspired corporate strategy of controlling distribution from end to end.

Are there any disadvantages to that approach?

The only one I could see is if there were a serious economic decline and they couldn’t fill up all their ships. Right now, there’s no problem. But they have long-term leases on their ships, and if the economy really got soft, it’s possible that their cost per container would go up because they would be moving fewer containers. Then again, as an NVOCC, they could sell that excess space. As a result, I don’t see a lot of risk for them.

How do Amazon’s air capabilities compare to those of FedEx and UPS?

Amazon is not as big, but it doesn’t have to be because they don’t do what UPS and FedEx do. Since they are not an integrated carrier that makes its services available to every potential shipper or individual, they can focus on designing an air network that supports their e-commerce business. And that they do that very well.

However, they also are laying the foundation for potentially becoming an integrated carrier on the express side. Their just-opened air hub in Covington, Kentucky, takes up more acreage than the FedEx super hub in Memphis, Tennessee, so Amazon has the capacity to grow there as more and more e-commerce shipments start going the express route to support next-day delivery.

Are there issues to overcome before that could happen? Sure. Amazon doesn’t have a pickup capability, but there are cartage agents that can do that for them. Overnight express is probably going to happen in the next two to five years, and likely on a limited basis at first, with Amazon cherry-picking certain high-volume customers whose larger packages produce a lot of revenue per package. Since Amazon already does a phenomenal job with One-Day Prime, the next step is doing that for others. It’s going to happen; we just don’t know when.

Talk about Amazon’s trucking capabilities.

Amazon loves contractor relationships because they’re cheaper than employee relationships, even if they can be a challenge to manage. But trucking is one area where they are hiring their own people and building their own tractors to pull their own trailers. I haven’t been able to see statistics on the percentage of trucking handled in-house, but it’s probably still very small, under 10% of the total; however, that will change.

For local parcel delivery, Amazon’s Delivery Service Partners (DSP) network relies on independent contractors to manage deliveries, which is a low-cost delivery solution; [it] does well in metro markets but does not service rural markets.

When do you think UPS might cut its ties to Amazon and stop delivering Amazon packages?

UPS has been slowly deemphasizing Amazon as a customer and focusing on doing less, better. It doesn’t want a lot more e-commerce packages, which have horrible metrics and are hard to deliver. At the same time, Amazon doesn’t want to give UPS as much business as it has because it prefers to keep the business in-house, except for rural shipments. For that, Amazon will still need UPS.

However, the 5,000 or so UPS stores handle a huge number of returns for Amazon and all the other major e-commerce merchants. Amazon will need that capability for a very long time because it simply doesn’t have a large enough access point network where customers can drop off a package for return to the merchant. Over the years, consumers have developed behavior patterns, and they go to UPS stores to return packages out of habit because they’ve been doing it forever, and it’s easy. Every time someone drops off an Amazon return at a UPS store, UPS gets paid. As a result, the relationship continues to be very important for both companies. The overall UPS/Amazon relationship is likely to shrink, but I don’t think it will ever go away.

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About Dean Maciuba

Currently Managing Partner, United States, at Crossroads Parcel Consultants, Dean Maciuba is responsible for managing consulting initiatives in the U.S. Previously, he was Managing Partner, North America, for Last Mile Experts. Earlier, Maciuba worked for 4Front Consulting Group, where he managed general transportation consulting and the design and implementation of cold chain and healthcare distribution solutions. He spent 37 years with UPS and FedEx in several executive positions in sales, marketing, and operations, giving him a unique perspective on the parcel transportation and e-commerce fulfillment businesses.

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This logistics industry article is adapted from the GLG webcast “Amazon’s Emergence as an Integrated Carrier.” If you would like to speak with logistics experts like Dean Maciuba, or any of our approximately 1 million Network Members, please contact us.