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6/22/2017 - AMAZON - The Elephant in the Room

Just about every day there is either news or speculation regarding what Amazon is going to do next. And there is good reason to watch Amazon closely because things – big market altering, game changing things – are indeed happening. As we ponder what markets Amazon may enter next, keep in mind the credo of Amazon’s CEO Jeff Bezos, which is “Your profit margin is our opportunity”.

We will take a closer look at Amazon’s entry into air cargo transportation logistics in a moment, but first let’s examine the company’s ever-improving bottom line.

For a long time, Amazon was an innovative, highly valued company that was not making a profit. Those days are now gone.

Amazon reported a rise in net income during the first quarter of 2017, to $724 million, or $1.48 a share. Sales were $35.7 billion, a 24 percent increase from a year ago, excluding a one-time charge. The company forecasts sales of between $35.25 billion and $37.75 billion for the second quarter, which would represent growth of 16 percent to 24 percent from year-ago figures.
The key to Amazon's dominance has been growth in its Prime membership, which has doubled to more than 80 million members in the past two years -- 38 percent above March 2016 figures, according to Consumer Intelligence Research Partners.

Prime members spend on average $1,300 per year on Amazon purchases compared to other customers who average about $700 per year, according to CIRP.
Much of Amazon's retail strength in recent months is reflected in the continued growth of its digital assistant products.

For instance, about 10.7 million U.S. consumers have purchased an Amazon Echo device since the line's 2014 launch, CIRP reported earlier this month. Those figures cover sales of the original Echo, the Echo Dot and the Amazon Tap.

Amazon sold more than 2.5 million Echo devices between January and March of this year.

While Amazon is widely known for its e-commerce business, an increasing share of its profitability stems from Amazon Web Services, its cloud computing operations. That segment accounted for $3.66 billion in sales -- a 43 percent increase from $2.57 billion in the year-ago quarter, according to the company's 10-Q report filed with the Securities and Exchange Commission.

All the while Amazon has been creating high growth and profitable new business opportunities, including ambient computing capabilities like Echo smart systems.
While Amazon continues to dominate the e-commerce space, the company cannot assume its competitors will walk away from the fight. Walmart, which acquired rival e-commerce site, Jet.com, in 2016, reported robust e-commerce growth of 63 percent during the quarter -- a much faster pace than Amazon's e-commerce surge over the same period.

The growth was fueled by the introduction of a new two-day free shipping program for customers spending $35 or more, as well as discounts to customers who purchased certain goods online and picked them up at Walmart stores, thus saving costs on last-mile delivery.

But Amazon is not content to stand pat as evidenced by its recent $13.7 billion acquisition of Whole Foods. Most observers expect Amazon will transform the $750 billion-dollar grocery industry and migrate the consumer experience towards Amazon’s core strengths of lower costs and faster delivery options.

And all along Amazon’s stock price continues to rise exponentially pleasing investors.

Now let’s take a look closer to home with Amazon’s recent transportation logistics efforts particularly regarding air cargo shipments.

Amazon is investing $1.49 billion for its new air cargo hub in the Cincinnati/Northern Kentucky area. They now have a 50-year lease on 900 acres of property at the local airport – pretty much in line with the global hubs of cargo airlines. And nearby is a large Deutsche Post (DHL) facility that would allow Amazon to easily transfer some international shipments.
Amazon also bought minority stakes in Atlas Cargo and ATSG and now has a fleet of over 20 767 airplanes with no doubt greater expansion coming as time goes on.

Most industry veterans would agree that sooner rather than later, Amazon will be “all in” on the $400 billion express delivery, freight forwarding and contract logistics market.

Amazon officially insists that all these air cargo infrastructure investments are intended to “supplement” shipping logistics particularly during the holiday season. But make no mistake about it, Amazon is in the game big time and even industry giants – such as FedEx and UPS –have taken notice and are planning long range competitive strategies to hold their respective market shares.
For the express courier side of air cargo there are ample reasons to be concerned as well as some potential opportunities.

Amazon does gobble up competitors as well as market share but it also will need to utilize vendors for logistics services where it makes bottom line sense. Obviously that is the side of the fence that could be advantageous for Indirect Air Carriers. A present example can be found in the role that IACs play within Amazon’s logistics fulfillment for e-commerce shipments going outbound US particularly to the Latin and Mideast consumer markets.

And certain express segments – such as transport of critical life science shipments, film, high tech, spare parts – are simply not in Amazon’s ambitions for the foreseeable future.

For everyone who is competing within the express air cargo logistics market place, you will no doubt be watching Amazon‘s efforts within air transport logistics very carefully. You should do so. And so will the integrators (FedEx, UPS, and DHL) as well as everyone within our industry going forward because there is a lot more to come from Amazon and it’s going to change the air cargo market dramatically.
 


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