It’s official. Amazon.com, Inc. (NASDAQ:AMZN) is now in the delivery business … sort of. The first eleven of what could be a fleet of as many as 40 air cargo jets have already taken flight, with the first one — Amazon One — participating in this year’s Seafair Air Show in Seattle with the words “Prime Air” boldly painted on the fuselage.
So far, the fleet is only carrying Amazon’s packages, but the company hasn’t ruled out the possibility of eventually doing third-party deliveries.
AMZN stock didn’t move much on the news. Then again, in that the market knew this development was coming months ago, it was already factored into the value of AMZN shares. The thing is, the Amazon Prime Air program may end up being a bigger win for Amazon than most investors fully appreciate.
Introducing Amazon Prime Air
It was a process more than a milestone, starting in December of last year when news surfaced that Amazon was looking to lease 20 Boeing 767 jets so it could be a little less reliant on not-so-reliable delivery services from the likes of FedEx Corporation (NYSE:FDX) and United Parcel Service, Inc. (NYSE:UPS).
In March, that leasing deal was officially inked with Air Transport Services Group Inc. (NASDAQ:ATSG), and the enthusiasm surrounding the idea has only grown since then … so much so that another 20 jets have been added to the plan.
Worldwide Operations Senior Vice President Dave Clark said in a company statement, “Creating an air transportation network is expanding our capacity to ensure great delivery speeds for our Prime members for years to come.”
He’s right about that, though it may not have been the company’s primary motivation for getting into the air-delivery game. Last year, Amazon spent $11.5 billion to ship the goods it sold at its e-commerce venues, or about 10.7% of revenue. The year before, it spent roughly $8.7 billion on delivery expenses, or about 9.8% of revenue. The year before that shipping cost the company $6.6 billion, or 8.9% of revenue.
The trend is alarming, though perhaps even more so than owners of AMZN stock may appreciate … for two reasons.
One of those reasons is that a big part of Amazon’s revenue growth stems from sales of digital goods and services. Amazon Web Services, for instance, doesn’t incur any sort of shipping costs as it’s purchased and delivered entirely online. Had AWS not come into existence, Amazon’s relative shipping costs would have grown to an even greater portion of the company’s revenue.
The other reason the rise in delivery expenses is concerning is the fact that gasoline, diesel fuel and jet fuel costs have all gone down since 2014’s peak; it arguably should have become cheaper for Amazon to ship goods from point A to point B.
With that as the backdrop, it’s not tough to conclude delivery partners FedEx and UPS haven’t exactly been consistent or competitive with their pricing plans. Amazon made the right move, even if the only reason it has started doing its own deliveries was to keep UPS and FedEx honest and working hard.
Even beyond that though, Amazon.com is now in perfect control of how it handles its deliveries … a scenario most companies would prefer if it were logistically feasible. Clark also said:
“You can almost think about the difference between commercial flight and private flight. We have the ability, with our own planes, to create connections between one point and another point that are exactly tailored to our needs, and exactly tailored to the timing of when we want to put packages on those routes — versus other peoples’ networks which are optimized to run their entire network. We add capacity, we add flexibility, and it gives us cost-control capability as well.”
Bottom Line for AMZN Stock
I’ve not been shy in the past about criticizing Amazon for pointless or even wasteful decisions. Case in point? I think delivery-drones will never get past the testing phase, and if it does, it will be downright dangerous. They do fail from time to time, and when one fails over a busy road or over a playground, someone could get hurt if not killed.
On the other hand, I’ve also lauded the company for coming up with clever, fruitful ideas. Amazon’s entry into the retail arena now makes sense, even as most brick-and-mortar retails are fighting a losing battle. Amazon has access to an eclectic mix of goods to sell, as well as services to offer at a retail establishment.
Amazon Prime Air is one of the latter … a brilliant strategy that should in time ultimately boost the value of Amazon stock by boosting margins. It also gives the company plenty more revenue-bearing opportunities and flexibility. There’s not a lot to not to like about it.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.