Amazon.com, Inc. (AMZN) is not known as a lie-down-and-take-it sort of business. Generally, it brings the pain to the competition, and when it does, you better watch out. Just ask Borders. Or Circuit City … or RadioShack.
So which companies are the latest to get a target painted across their backs? Its own business partners, UPS (UPS) and FedEx (FDX). It appears that rumors of AMZN building a shipping network of its own are true, as evidenced by a major deal it just struck to operate its own fleet of aircraft.
The Seattle-based e-tailer struck a deal with Air Transport Services (ATSG) to lease 20 Boeing 767 airplanes for periods of five to seven years. It will operate those aircrafts itself for five-year periods.
The deal also gives Amazon warrants to buy up to 19.9% of ATSG’s shares over the next five years at a price of $9.73. ATSG stock jumped on the news, soaring more than 20% when it reached its intraday high near $15/share.
This announcement is just the latest move that Amazon has made in an effort to vertically integrate its business and take over shipping operations itself. Fulfillment costs are an increasingly onerous pressure on Amazon’s margins, and for AMZN stock to keep soaring in the years ahead, moves like this may be necessary.
Luckily for Amazon shareholders, it’s made plenty such moves in recent times.
Adios, UPS, FDX!
Amazon won’t completely phase out UPS and FedEx anytime soon, but it’s definitely moving in that direction and there’s not much either company can do about it. Consider a series of moves that Jeff Bezos & Co. have made recently. When considered as a whole, they paint a clear picture of AMZN and its sky-high ambitions.
In October, a logistics and supply chain management trade mag, DCVelocity, reported that Amazon was planning a global shipping network to be announced in 2016. The outlet cited an inside source as acknowledging that AMZN’s “objective is to guarantee delivery within a 90-minute-to-two-hour window.” Such a service, of course, would certainly threaten FDX and UPS.
Then, just before Cyber Monday, AMZN unveiled a plan to deliver packages via Amazon-branded drones. Of course, the service, dubbed Amazon Prime Air, would only be available to Prime subscribers, who pay $99 annually for all the perks of a subscription.
In December, its plans to take on FDX and UPS began to materialize more clearly. The e-commerce giant purchased thousands of tractor-trailer cargo trucks, branding them with the Amazon logo and making it outwardly clear of its intention to in-house big parts of the fulfillment process.
About a week later it rolled out a Manhattan booze delivery service. Okay, that’s not really going to hurt FedEx or UPS, but it’s pretty cool. And as with drone delivery, it’s only available to Amazon Prime members.
In January, news broke that AMZN was moving into the ocean shipping business, aiming to facilitate the transport of goods from China to the U.S., a move seen as an aggressive step to combat Alibaba’s (BABA) planned expansion into the American market.
As InvestorPlace contributor Greg Gambone pointed out at the time, that move hinted at Amazon’s ambition to disrupt traditional freight carriers like FedEx and UPS.
Bottom Line on AMZN
First by land, then by sea, now by air. Amazon’s assault on the behemoths of the global shipping industry is now crystal clear. And while AMZN hasn’t yet announced its intentions to develop a global shipping network of its own, it might as well have.
In doing so, it gets to control every aspect of the fulfillment process on its own, putting quality control and reliability in its own hands. And given its scale, it should be able to spread the costs of doing so to the point where it’s cheaper than using third parties.
So bravo, Amazon. Take it to The Man. As an AMZN stock owner myself, I couldn’t be happier.
As of this writing, John Divine was long AMZN stock. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
